In early May of this year, the White House released its 2024 fiscal year budget, which includes one proposal called the Digital Asset Mining Energy (DAME) excise tax. The DAME proposal is to levy a tax on crypto mining firms for the electricity they use (up to 30% of the electricity’s cost). The tax is intended to force these firms to pay for the “harms they impose on society.”
(As of publishing, the DAME proposal was abandoned in Congress during debt ceiling negotiations.)
The proposal focuses on gross energy use, with no differentiation between clean and dirty sources. So a TWh of energy consumed will be taxed at the same rate regardless of whether it was generated by coal or wind. The rationale for this choice is elucidated in the following clause:
“The environmental impacts of crypto mining exist even when miners use existing clean power. For example, in the case of communities with hydropower where crypto mining operations are often located, increased electricity consumption by crypto miners reduces the amount of clean power available for other uses, raising prices and increasing overall reliance on dirtier sources of electricity.”
As this administration is well-aware, there is a world of difference between crypto mining firms that use fossil fuels and those that use hydropower or other renewable sources.
Choosing not to differentiate for the sake of making a political point (about the “purpose” of crypto mining) distorts incentives and distracts from what should be the headline point — that the world needs to be rapidly divesting from fossil fuels.
It is worth examining the critique of miners that use clean sources of energy.
The first argument cited is basic economics. Supply is finite, and when demand increases, prices rise. It is indeed possible that introducing a new industry into an area will raise the average price of electricity for everyone. The proposal calls attention to a 2019 piece that examines the emergence of crypto mining pools in the Mid-Columbia Basin in Washington State from 2012 to 2019. According to that article:
“Most of the surplus energy is exported at higher prices, enabling public utilities to keep electricity prices significantly low… However, as crypto-mining facilities began consuming large amounts of energy within a district, exports of energy surpluses decreased, significantly raising the cost of residential electricity prices.”
There will always be exceptional cases, and the Mid-Columbia Basin is one of them. But as a general rule, crypto miners are highly incentivized to use non-rival sources of energy (energy that would otherwise be stranded or wasted, not used) to power their operations.
Once again, this is basic economics. These operations are motivated to turn a profit, and non-rival sources of energy are almost always cheaper than the market rate.
Levying a tax against an industry to make it pay for the “costs [it] impose on others” could be a useful policy if it was implemented consistently and without bias. There are many industries that negatively impact the larger society in the U.S. — and globally.
The oil industry earned record profits last year, despite geopolitical concerns and general global instability. Oil prices, which skyrocketed last spring following the invasion of Ukraine, have remained high, and the outlook for the industry over the next decade, despite pressure to transition to renewable sources, remains positive.
Meanwhile, the externalities of the oil industry are devastating. Last December saw the biggest U.S. oil spill in a decade, and the cleanup will likely take years. And, of course, the oil industry accounts for nearly a third of the world’s total carbon emissions.
And those are just the headlines. Despite this overwhelming reality, there are no proposals coming out of this administration (or any administration) suggesting levying a tax against the oil industry. In fact, the opposite has happened over and over again. There is no clear consensus on how much Big Oil is subsidized by taxpayer dollars, but estimates range from $10 to $50 billion a year. Instead of paying for the costs imposed on others, the oil industry is getting paid. (In defense of the Biden Administration, they have proposed cracking down on these subsidies, but have not gone so far as to suggest levying taxes on the industry as a whole.)
If the primary purpose of the DAME tax is the greater good, there should be similar taxes levied against industries like Big Oil that cause even greater harm to society. The crux of the proposal’s argument, however, lies not only in the associated costs of the crypto industry but in what those costs are worth, as detailed in this section:
“Alongside these known costs and risks, crypto mining does not generate the local and national economic benefits typically associated with businesses using similar amounts of electricity. Instead, the energy is used to generate digital assets whose broader social benefits have yet to materialize, as elaborated in the Economic Report of the President. There is little evidence of benefits to local communities in the form of employment or economic opportunity, and research has found that minor increases in local tax revenue are more than offset by increased energy prices for firms and households (Benneton, Compiani, and Morse 2021).”
The administration takes issue with crypto’s associated costs and then makes the judgment that there is nothing useful being generated in exchange for those costs.
In the U.S., crypto assets are generally considered speculative investments rather than mediums of exchange. (Note: this is not the case in other parts of the world.) Given that current reality, the immediate purpose of crypto mining in the U.S. (why the machines are performing the operations and consuming energy to do so) is to make money.
The crypto industry is using energy to generate profits. It’s not alone.
The U.S. banking system consumes multiples of the energy that the crypto industry consumes. The primary purpose of both industries is to make money. They share other similarities. They both generate securities that act as a store of value and a medium of exchange. If you subscribe to the belief that there is a larger social purpose to banks (you might not subscribe to this belief, but if you do), then it follows that there is a larger social purpose to crypto firms. After all, they are just different sides of the same coin — different institutions that generate, store, and facilitate currency and wealth.
The Biden administration is trying to take a hard line on climate issues, and that is laudable and necessary. But choosing crypto as its top industry target is cause for concern. Decarbonization needs to happen across the board — including in the crypto industry — but crypto is a minor factor in the abuse of fossil fuels. The administration would be far better served to levy a tax against fossil fuel emissions — to make every industry pay for contributing to climate change — rather than levying a tax against any energy used by a single industry.