Carbon Emissions from AI and Crypto are Surging-- and Tax Policy Can Help

As the Chart of the Week shows, crypto mining and data centers together accounted for 2 percent of world electricity demand in 2022. And that share is likely to climb to 3.5 percent in three years, according to our estimates based on projections from the International Energy Agency. That would be equivalent to current consumption of Japan, the world's fifth largest electricity user.

The climate impact of these activities—irrespective of their social and economic benefits—is cause for concern. A recent IMF working paper found that crypto mining could generate 0.7 percent of global carbon dioxide emissions by 2027. Extending the analysis to data centers (based on IEA estimates), means their carbon emissions could reach 450 million tons by 2027, or 1.2 percent of the world total.

The tax system is one way to steer companies toward curbing emissions. According to IMF estimates, a direct tax of $0.047 per kilowatt hour would drive the crypto mining industry to curb its emissions in line with global goals.

If considering air pollution's impact on local health as well, that tax rate would rise to $0.089, translating into an 85 percent increase in average electricity price for miners. Such a levy would raise annual government revenue of $5.2 billion globally and reduce annual emissions by 100 million tons (around Belgium's current emissions).

For data centers, a targeted tax on their electricity use would need to be set at $0.032 per kilowatt hour, or $0.052 including air pollution costs. It is slightly lower than for crypto because data centers tend to be in locations with greener electricity. This could raise as much as $18 billion annually.

The situation today is the opposite: many data centers and crypto miners enjoy generous tax exemptions and incentives on income, consumption, and property. Considering the environmental damage, the lack of significant employment, and pressures on the electrical grid (possibly raising prices for households and reducing demand for the use of other low emissions goods, such as electric vehicles), the net benefits of these special tax regimes are unclear at best.

Policy incentives

On the flip side, AI applications could lead to smarter and more efficient power use, which some have posited could help ease electricity demand. The right policies can still incentivize developing AI applications with positive societal spillovers while addressing the environmental damage.

For policymakers, a broad carbon price coordinated across countries would be the best way to curb emissions, because it would encourage reduced fossil-fuel consumption, cleaner power sources, and improved energy efficiency. To limit global warming to 2 degrees, countries would need to introduce additional measures equivalent to a carbon price rising to $85 per ton by 2030.

In the absence of a global carbon price, targeted measures could encourage crypto miners and data centers to use more energy-efficient equipment and may even motivate the adoption of less energy intensive crypto mining. Complementing electricity taxes with credits for zero-emission, bilateral power purchase agreements, and potentially renewable energy certificates would also help.

Cross-border coordination also remains important, as stricter measures in one location could encourage relocation to jurisdictions with lower standards.

As the window of opportunity for containing rising temperatures rapidly closes, expanding renewable energy sources and adopting an appropriate carbon price are urgently needed. In the interim, targeted measures, including taxation, can help mitigate increasing emissions from crypto mining and data centers.

Source: International Monetary Fund (IMF)

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