Spot bitcoin ETFs and the ESG digital asset landscape: considerations for using Renewable Energy Certificates

In the fast-evolving digital assets sector, Jacobi Asset Management’s announcement of Europe’s first spot Bitcoin ETF on Euronext Amsterdam stands out. 

Powered by Zumo in collaboration with ZeroLabs.green, a company building programmable decarbonisation technologies, Jacobi has implemented a built-in Renewable Energy Certificate (REC) solution, as part of its ETF offering, that allows institutional investors to access the benefits of Bitcoin whilst also meeting ESG goals. Although the initiative has been positively received by most stakeholders, perhaps unsurprisingly this has also led to some questions and debate about the REC mechanism employed.

As with all market instruments for climate mitigation, there is a lot to unpack with RECs, and it can be easy to speak at cross-purposes when viewing different parts of the puzzle. Here, we explore and address some of the criticisms RECs have faced, and discuss the benefits of the specific use case of using RECs to account for digital asset electricity consumption. 

Dissecting the RECs conundrum

RECs are a market-based instrument that certifies the bearer owns one megawatt-hour (MWh) of electricity generated from a renewable source. Since electricity generated from renewable sources is indistinguishable from that produced by any other source once it enters the grid, some form of tagging and tracking is required, and RECs act as the globally standardised and recognised accounting or tracking mechanism for renewable electricity in the grid. They are currently the only available instrument* to allow organisations to verifiably claim that purchased electricity is renewable, as each REC is issued based on verified data that a given renewable energy facility delivered renewables to the grid. In fact, RECs are themselves a tool to combat greenwashing, as clarified in new guidance from the Council of European Energy Regulators (CEER).  

Though intended as a incentive for renewable energy generation, and recognised as a ‘market-based instrument’ under the Greenhouse Gas Protocol, RECs have faced some criticism from reputable sources, such as S&P, and respected academics Matthew Brander, Anders Bjørn et al in their Nature Climate Change article. The primary contention is whether REC purchases genuinely lead to increased renewable energy production.

However, the fact that RECs may not lead to increased renewables directly (as highlighted by the authors of the study above, there is no ‘additionality’ requirement) does not lessen the fact that RECs create an important signal to the market. They create real and certain revenue for any new renewable energy project, which helps renewable energy developers get better and faster financing. 

At their core, RECs allow for voluntary procurement of renewables which provides a market incentive for the renewables sector. Without the market-based accounting method, organisations would be unable to support the energy transition directly other than policy and utility advocacy efforts. There is therefore no doubt that there is an important place for RECs as part of a company’s wider net zero strategy and, more widely, climate finance for all.

Bitcoin, digital assets, and navigating the RECs terrain

More pertinent still, however, is the specific context within which a REC solution is applied and understood – and this is particularly so in the Bitcoin case.

As we have already seen, a common critique levelled at the use of RECs is the need to address ‘additionality’ – that is, the idea that decarbonisation claims are credible only if the purchase of RECs directly results in an equal amount of new renewable energy being generated. While this is a very valid concern on its own account and it is the ambition of companies that participate in these markets to help advance the development of new projects, it’s important to consider several of the nuances that apply in the digital asset service provider context. Attribution is also an important element to acknowledge, as RECs enable a company to verify they procured and can claim ownership over a given carbon-free megawatt-hour and that the purchase provided additional revenue to a given renewables facility.

Crucially, as intermediaries and end service providers, we must remember that purchasing RECs is an action that digital asset service providers take at the supply chain (Scope 3) level, on a voluntary basis, and not as an accounting method for direct electricity consumption at source. The original electricity consumption itself is incurred during the process of Bitcoin mining operations, which is where end service providers have limited influence given their removal from the actions of miners and the network’s global, often anonymous miner distribution. 

This is in itself an unusual situation—or, more aptly put in the context of solving the climate finance gap, an opportunity for leadership. As a market-based accounting method, RECs are normally used for Scope 2 emissions related to direct consumption of electricity. In the case of intermediaries in the digital asset space, those REC purchases are accounting for Scope 3 value chain emissions and thus represent a purchase on behalf of value chain partners’ respective electricity use. This restricts the available options. With Scope 2 emissions, direct energy generation, such as from solar panels on an organisation’s premises might be an option. However, with Scope 3, such options cannot be employed.

This makes RECs (‘unbundled’ from the electricity supply, as opposed to ‘bundled with electricity) the most effective and readily available tool in a complex, multi-stakeholder situation, as it maintains a direct line of sight with electricity consumption while addressing the unavoidable limitations of being distanced from and unable to directly influence that consumption. 

Why unbundled RECs?

In this regard, the scale of operations for smaller digital asset solutions providers means that unbundled RECs are often the only feasible route, as entering into Virtual Power Purchase Agreements (VPPAs) or directly partnering with new renewable energy projects is typically out of reach for most companies and in most countries. In such a scenario, taking the best action possible at the present time is better than taking no action at all.

More actively, purchasing unbundled RECs also gives room for manoeuvre to pursue deliberate REC procurement strategies that match up with, for instance, the composition of global Bitcoin mining operations or an assessment of where maximum impact can be achieved in terms of identifying the most polluting grids worldwide.

Why not go straight to the miners?

Given many of the complexities we have described, a common claim is that this process can be bypassed entirely by having Bitcoin miners simply use or purchase renewable electricity directly at source, backed by the appropriate certifications, and then offer ‘renewably powered Bitcoin.’ Of course, this is the ideal situation in the longer term: in fact, a lot of progress is being made directly at the miner level and we continue to input into the industry collaboration and initiatives (e.g. WEF, CCA, GDF) that make sure this progresses in the right direction over time. Having Bitcoin miners procure renewables and verify using the RECs they received through their procurement as evidence would be preferable to having to buy RECs on behalf of miners. 

However, we must also be realistic about the current situation. Even if individual miners are able to use near 100% renewable electricity and obtain the necessary certifications, Bitcoin’s production remains a competitive process involving miners worldwide. All of these miners expend energy concurrently during the Bitcoin mining competition, regardless of who eventually receives the block reward. Therefore, the only way to make substantiated claims about ‘renewably powered Bitcoin’ at the network level is if every single miner worldwide were to use near 100% renewable energy and show the RECs to verify these claims. Again, this is unusual, if not unique, and has to do with the specifics of Bitcoin as a decentralised technology. 

Finding the best solution

As a result, the priority remains to find the most appropriate solution based on the current circumstance – which can differ identifiably between the participants in the ecosystem. For instance, accounting for electricity consumption at miner level focuses on the mining process and the issuance of new Bitcoin. This is quite appropriate from a miner perspective. 

In contrast, the Southpole / Crypto Carbon Ratings Institute (CCRI) hybrid methodology that underpins Zumo’s REC purchase procurement process is more tailored to platforms and end service providers as it accounts for both bitcoin holding and bitcoin transaction components in its calculation. This is more fitting to the needs of the specific platform use case, as it can address the electricity consumption attributable to ongoing service provider transaction activity as well as holdings, which is especially pertinent as bitcoin mining rewards diminish over time. Different contexts require different solutions, which is a nuance that can often be overlooked.

Does it make a difference in the end?

Despite all the limitations and nuances involved, we consider that RECs are a useful, already available, and most applicable tool in the toolbox for tackling the specific case of Bitcoin electricity consumption, and that the potential for a secondary market ripple effect across the industry should not be dismissed out of hand. Given Bitcoin’s known levels of electricity consumption, the voluntary REC market stands to see a significant positive impact if the adoption of RECs becomes a standard practice across the industry. After all, if Bitcoin’s energy usage can be compared to that of nations, and portrayed on such scale, it seems inconsistent to argue that a coordinated move toward REC purchasing would have no corresponding market impact on a relative basis. Indeed, industry initiative the Crypto Climate Accord is focused on ‘decarbonising the cryptocurrency and blockchain industry in record time’.

Ultimately, as we have outlined in the past – and continue to work on collaboratively with the rest of the industry – this is an issue that needs to be tackled concurrently across the miner, platform and end user contexts, with active engagement and progress from both ends. Action from multiple angles means more progress and better solutions.

In conclusion: navigating the ESG-aligned digital asset path

The merging of digital assets with sustainability commitments is both promising and complex. Healthy scepticism is always useful when approaching a topic as evolving and nuanced as Bitcoin electricity consumption, and all organisations need to be accountable for any sustainability related claims that they make. No market instrument – whether RECs, carbon offsets or carbon removals – is a silver bullet, and they must be used as part of a wider strategy to reduce carbon emissions.  Yet RECs do enable verified claims and deliver additional revenues that help activate much-needed financing for the energy transition. 

There’s no doubt that there are opportunities to affix more data to RECs to provide buyers more differentiated offerings so that buyers can send more targeted, precise market signals optimised for grid decarbonisation impact through their renewables procurement. Luckily big strides are being made on this front – including with the deployment of blockchain well beyond the Bitcoin debate. Within the specific context of digital assets, RECs can play a pivotal role when transparency, thorough research, reasonable impact-related claims, and genuine commitment underpin their use.

As elsewhere, it will be important to remain alert to context, and agile and prepared to update approaches as the conversation evolves. As the dialogue between sustainable practices and digital asset strategies continues, we will continue to work on finding the best solutions available to move towards a more sustainable financial world, and we invite our peers to compete with us in a “race to the top” to develop and iterate on climate impact solutions so we can reduce emissions swiftly across the power sector for all.

* REC is the North American and commonly used generic term, but other examples are REGOs in the UK, GOs in the EU, I-RECs in developing countries, etc – all collectively known as Energy Attribute Certificates (EACs).