What impact will the White House's cryptocurrency mining tax have on American miners and the environment?

The White House recently proposed a new mining tax. The 30% tax they are planning to impose is not on the mining industry, but on cryptocurrency mining. However, the proposed "DAME" (Digital Asset Mining Energy) consumption tax seems unlikely to achieve any of the goals the government has laid out to justify it. The purpose of the tax is to reduce the negative impact of cryptocurrency mining on local electricity prices and global pollution. However, while the tax could reduce cryptocurrency mining in the United States, it is still a long shot whether other goals will follow from an economic perspective.

A mining tax would probably be welcomed by economists. Minerals are pure gifts from the land, and no one has been responsible for them for the past 100,000 years. Although it takes some work to extract and transport the minerals, it is a stroke of luck to get a permit to mine a particular piece of land. The profits generated are called rents in economics. Even if the government imposes a resource rent tax, the land is likely to be mined anyway. The only difference is who gets the rents - the miners or the government - so the tax is not very popular with the miners.

It may not seem fair to compare mining to cryptocurrency mining, but there is a reason why the crypto community chooses to use the term "mining". In a proof-of-work (PoW) blockchain, what legitimizes a node (proposing and confirming a block of transactions at any given time) is that they must prove that they are behaving well and not hindering or attacking the underlying network. Satoshi Nakamoto spent considerable effort outlining the "work" of the Bitcoin blockchain and designing the blockchain in a way that would scale.

Satoshi’s concept of work is imposed on everyone who wants to help run the network by becoming a node — an entry fee, if you will. To get a chance to confirm a new block of transactions, nodes must compete to solve a simple computational puzzle. The puzzle is meaningless — no one cares about the answer — but it’s cleverly built into the blockchain itself. To win this computational race, miners must find the answer before anyone else. While they’re not guaranteed to succeed, the more resources — that is, computation — they devote to the problem, the more likely they are to win.

What do miners get for all their work? First, they get transaction fees paid by users. But more importantly, they also get new bitcoins. The profits they make vary over time, but when bitcoins started to become truly valuable, the reward for ten minutes of computing work became quite a lot. They search, dig (by providing resources and guessing the answer to the puzzle), and then "extract" (if they solve the puzzle, they receive the tokens) - that is, mining.

As with mining, the total amount of resources (computation) used to mine Bitcoin is determined by the value of the mining result. The more valuable Bitcoin is, the more intense the competition for computing becomes. If blocks are generated too quickly, the number of transactions processed by a single block will decrease. Therefore, in order to keep the average mining time per block confirmation at 10 minutes, the difficulty of the computational puzzle will be adjusted. The more computation is added to the competition, the greater the difficulty, and vice versa.

Given that Bitcoin mining competitions are open to anyone with a computer around the world, how do miners make money? After all, the wider popularity of the game is driven by free entry. If there is a profit, it will be paid to someone, somewhere, who has invested a processor and electricity in the competition. They won't win often, but on average, the rewards they receive are enough to cover their costs. In fact, Satoshi outlined a more democratic process in his white paper. But from an economic perspective, the expected profits will be low and not as predictable as mining for diamonds.

So the mining industry got bigger, and miners formed pools to provide a more certain source of income. Miners also became more professional and sophisticated, from one person with a computer in a basement to massive data centers with thousands of specialized ASIC processors dedicated to cryptocurrency mining. Of course, the electricity bills for these data centers also skyrocketed. However, power companies (and chip manufacturers) didn't complain too much, just like shovel manufacturers during the gold rush.

By some estimates, cryptocurrency mining will eventually consume as much electricity as a small country. All for what, the skeptic (or cynic) asks? To play computational games? To some, cryptocurrencies are like money in Monopoly, or worse, like casino chips. What does the rest of society gain from it, other than higher electricity bills and greater local and potentially global pollution? For the past decade or more, the crypto community—at least those focused on proof-of-work—hasn’t had a good answer to that question.

Yet, despite this, if you ask an economist, they will have a hard time condemning the electricity consumption of cryptocurrency mining relative to other electricity consumption. Yes, cryptocurrency mining may seem like a waste of resources - if there is one thing that economists don't like, it's waste of resources. For example, many people criticize Bitcoin for using electricity produced by a fairly large country like Sweden. But you know who else is using electricity produced by a fairly large country like Sweden? That's Sweden. Economists don't seem to mind Sweden particularly. The point is, people are actually paying for the electricity for cryptocurrency mining, and seemingly doing it voluntarily. Who are we to judge?

Apparently, many governments are happy to dictate what’s happening. Some countries, like China, have outright banned cryptocurrency mining (albeit citing environmental concerns). Biden’s proposal, the DAME (Digital Asset Mining Energy) excise tax, while not banning cryptocurrency mining, would raise electricity bills for U.S. cryptocurrency miners by a full 30%. On the surface, the goal is to lower electricity prices while reducing local pollution and carbon pollution, but it seems contradictory.

The tax is not expected to raise much revenue—only a few billion dollars over the next decade—because mining electricity costs aren’t actually that high, and cryptocurrency mining is globally competitive. If costs were raised that much, unlike real mining, cryptocurrency miners could just move to anywhere else with an internet or satellite connection.

Here’s the problem. If the goal of this tax is to reduce waste that is considered a sin (just as tobacco might be taxed to reduce health problems), then this is unlikely to work on a global scale. Crypto mining exists in the United States because it is cheaper to mine in the United States than anywhere else on the planet. If a tax causes some of these mines to close and others to move elsewhere, then the waste will be greater, not less.

But worse, it’s far from obvious how this move will actually reduce global pollution. Reducing local pollution in the U.S. might be possible, but pollution will follow miners elsewhere, so it’s what we call “beggar your neighbor.” As the name implies, it’s a bit selfish. Moreover, the massive climate policy passed by the U.S. government last year involves billions of dollars in investments in renewable energy and innovation to mitigate the climate damage of energy production. (Not to mention that many proof-of-work cryptocurrency miners have already been shifting their efforts to potentially more energy-efficient areas, or using more renewable energy in the mix.)

The DAME tax will cause some users of clean energy to look elsewhere, and frankly, they are unlikely to find a cleaner place.

Indeed, this seems to run counter to the push by some in the proof-of-work crypto industry to promote more clean energy. While I am personally skeptical of some of the ways advocates claim this will work, if demand for mining (a large number of potential electricity users in a region) can bring new investment in renewable energy generation, then this could be a way to push for cleaner energy in the long run. Such schemes are being proposed, and the DAME tax could threaten them. If you say to the largest customer of a renewable energy project that 30% of the bill must go to the government, then most of the cost may be borne by the renewable electricity supplier. We don't want to discourage such investment.

The point here is that the DAME tax targets cryptocurrency mining, but its reasons apply equally to many electricity users , including those who do not participate in cryptocurrency mining. Given the globally competitive nature of mining, DAME is unlikely to improve the environment and may actually harm it. A better approach would be to tax miners who rely on non-renewable energy to generate electricity. But that's exactly what it sounds like: a carbon tax. Some in the US government are reluctant to implement such a measure, even though it would undoubtedly help the environment.