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Financial Incentives for Inaction: A Look at Carbon Credits and Cryptocurrency Mining

In today's financial landscape, we observe innovations that pay stakeholders for inaction rather than production. A case in point is the carbon credits system. Traditionally, trees were cut down for products like paper and lumber, which could be sold for profit. However, leaving the trees intact serves the environment by storing carbon. Now, modern finance has made it possible for owners to be financially rewarded for not cutting down these trees, although accurate measurement remains a challenge.

A similar trend is notable in the cryptocurrency mining sector, particularly with Bitcoin. The process of mining Bitcoin is energy-intensive, often relying on electricity generated from carbon-emitting sources, which is detrimental to the environment. However, halting such activities can now also be monetized.

Take Riot Blockchain Inc., for example. The Castle Rock, Colorado-based company made substantial gains by selling unused electricity instead of mining Bitcoin. Specifically, they garnered $13.5 million in power curtailment credits in one quarter, while also generating $49.7 million in revenue from mining. Last year, they recorded $27.3 million in such credits, and $6.5 million in 2021 from selling power to the Electric Reliability Council of Texas (ERCOT).

In June and July, Riot reported $18.3 million in power credits. This included $14.8 million from selling power back to the ERCOT grid at spot prices under its long-term contracts and $3.5 million in credits for participating in ERCOT's demand response programs. Riot has a standing agreement with TXU Energy Retail Co., which obliges the latter to supply electricity at fixed prices until 2030. Riot can sell excess power back to TXU at market rates, reducing future electric bills when spot prices surpass contract prices.

Just like with carbon credits, the system isn't perfect; there are measurement issues. Modern finance seems to have both created a problem (Bitcoin mining's environmental impact) and provided a solution (incentives for not mining). The result is a form of financial engineering where activity is stalled, yet revenue is generated.

Riot's example suggests a future where Bitcoin miners could potentially earn more from 'non-activities' like not using electricity or carbon. If energy prices escalate and Bitcoin prices decline in a warming world, those who enter this 'business of inaction' early could reap significant financial benefits.

It's a perplexing but fascinating turn of events that calls for a closer look to ensure that these financial mechanisms solve more problems than they might create.


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