Can taxes cool down AI & crypto’s power hunger? The IMF’s betting on it

We already know that because of the electricity used by high-powered equipment to “mine” crypto assets, one Bitcoin transaction requires roughly the same amount of electricity as the average person in Ghana or Pakistan consumes in three years. Research finds that PoW-based (Proof of Work) cryptocurrencies like Bitcoin emit approximately 0.86 metric tons of carbon per transaction, equivalent to consuming 1000 kWh of electricity.

Taxing the power hunger of these technologies isn’t about stifling progress, but about making it sustainable. If implemented wisely, such measures could drive the industry to invest in cleaner energy, smarter systems, and greener innovation, ensuring that the next digital revolution doesn’t come at the expense of the planet.

Meanwhile, AI is catching up. ChatGPT queries require 10 times more electricity than a Google search, due to the electricity consumed by AI data centers. US tech giants are now chasing energy assets owned by bitcoin miners as they scramble to lock in dwindling electricity supplies for their fast-growing AI and cloud data centers, facilities that are fueling the steepest surge in US power demand since the early 2000s.

According to IMF’s chart of the week, crypto mining and data centers together accounted for 2% of world electricity demand in 2022. And that share is likely to climb to 3.5% in three years, according to estimates based on projections from the International Energy Agency. That is equivalent to the current consumption of Japan, which is the world’s fifth largest electricity user.

A recent IMF working paper found that crypto mining could generate 0.7% 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% of the world total.

Worrying as all these numbers sound, the IMF says raising taxes is a solution.

Could Raising Taxes Work?

Higher taxes on the energy consumption of crypto and AI could internalize the environmental cost, incentivize greener practices, and fund climate initiatives. A tax on the electricity used by crypto miners and AI data centers could make energy-intensive activities more expensive, encouraging companies to move operations to locations with cheaper, renewable electricity, invest in hardware and cooling systems with higher energy-efficiency, and seek less energy-intensive blockchain consensus mechanisms, like Proof-of-Stake.

The tax would force these industries to account for the external cost of their carbon footprint on the climate and public health. Also, the funds raised from the tax could finance climate change mitigation and adaptation projects.

“We have to mobilise more and more countries in order for these critical sectors which are benefiting from globalisation to contribute to the financing of this common effort [to combat the climate crisis]. I want to urge all possible countries to join this international framework because it’s absolutely key, and it’s part of our agenda.” — Former French president, Emmanuel Macron

As the former French president, Emmanuel Macron, said, “We have to mobilise more and more countries in order for these critical sectors which are benefiting from globalisation to contribute to the financing of this common effort [to combat the climate crisis]. I want to urge all possible countries to join this international framework because it’s absolutely key, and it’s part of our agenda.”

According to the IMF, a tax of around $0.047 per kilowatt-hour for crypto mining could lower emissions by about 100 million tons annually and generate significant revenue. For data centers, a slightly lower tax rate of about $0.032 per kilowatt-hour could raise substantial funds while recognizing that many are already in areas with cleaner energy sources.

While some sectors like AI and crypto currently receive tax breaks, a targeted carbon tax would eliminate these and realign incentives with climate goals. A tax could also promote innovation by shifting focus away from energy-intensive applications and towards more beneficial uses of blockchain and AI.

In the race for digital dominance, both AI and crypto are guzzling energy at an unsustainable pace and the world is beginning to count the cost. As innovation surges ahead, regulation and responsibility must catch up. Taxing the power hunger of these technologies isn’t about stifling progress, but about making it sustainable. If implemented wisely, such measures could drive the industry to invest in cleaner energy, smarter systems, and greener innovation, ensuring that the next digital revolution doesn’t come at the expense of the planet.