About three months ago, Tesla Inc.’s (NASDAQ:TSLA) eccentric CEO Elon Musk took everybody by surprise after announcing that the company would begin accepting bitcoin as payment. Tesla revealed in an SEC filing that it had bought $1.5 billion worth of bitcoin for “more flexibility to further diversify and maximize returns on our cash.”

It proved to be a brilliant move for bitcoin, helping the cryptocurrency add Tesla to the fray of mainstream companies such as Visa Inc. (NYSE:V), Square Inc. (NYSE:SQ), PayPal Holdings (NASDAQ:PYPL) that allow customers to transact in the leading cryptocurrency.

Maybe not so much for Tesla.

Tesla is now pulling off a rapid U-turn on bitcoin, saying the company will no longer accept bitcoin payments due to bitcoin’s environmental impact.

"We are concerned about the rapidly increasing use of fossil fuels for bitcoin mining transactions, especially coal, which has the worst emissions of any fuel, " Musk explained in a tweet.

From a purely investment viewpoint, bitcoin has been a good investment for Tesla, with the company’s bitcoin holdings contributing substantially to its bottom line.

However, Tesla is keen to be seen as a leading ESG investment, and holding bitcoin won’t cut it.

Bitcoin mining in effect

Since its debut 12 years ago, bitcoin has frequently been lambasted for its energy-intensive mining process. About 2.5 years ago, Nature Climate Change, a monthly peer-reviewed scientific journal published by Nature Publishing Group, warned that bitcoin mining alone could push global warming over the 2ºC catastrophic threshold in just 14 years if adoption rates matched those by other broadly used technologies. 

Yet, bitcoin mining rate has increased 500% since that publication.

On the opposite side of the spectrum, crypto buffs, investors and speculators view critics who squawk at the vast amounts of energy supposedly consumed by crypto mining and how it contributes to climate change as pedantic party poopers. For instance, PoW (Proof-of-Work) maximalists argue that bitcoin is the “most secure public chain” as measured by hashrate, but deny that bitcoin is an energy hog. 

In the other camp are crypto apologists (such as CoinShare) who concede that bitcoin and crypto mining are indeed power-hungry processes, but also claim that most of the energy is derived from renewable sources.

You can chalk up Mike Colyer, chief executive of Foundry, as belonging to the latter camp--but with a fresh twist. Foundry is a sister company of major bitcoin player Grayscale.

Coyler has told Insider that bitcoin can actually become a useful bridge as we the world transitions to sustainable energy.

According to Coyler, the green energy boom has led to an oversupply in many areas, making it costly to manage for renewable energy firms. Colyer says locating bitcoin mines near renewable energy projects can help lap up this excess power.

More importantly, Coyler argues that such an arrangement allows for a faster payback on wind and solar projects and can, therefore, spur even more rapid adoption of clean energy by encouraging infrastructure buildout in regions where it would not have been attractive before due to the said oversupply.

Bad for the environment

As you might expect, many green-leaning analysts remain unconvinced by Coyler’s proposition, with Bank of America analysts pointing out that the bitcoin network now consumes as much electricity as the Netherlands. In fact, if bitcoin was a country, it would be a top 30 electricity consumer.

BofA commodities strategist Francisco Blanch and his peers say that bitcoin's estimated energy consumption has grown over 200% over the past two years alone making it a major environmental risk. The Cambridge Bitcoin Electricity Consumption Index currently puts energy consumption by the bitcoin network at a staggering 136.3 TWh per year, or 3.4% of the ~4,000 TWh of electricity consumed in the United States in 2019.

They have also shot down one of Coyler’s major selling points: That bitcoin mining can make the energy transition smoother.

According to Coyler, bitcoin miners will naturally seek the cheapest energy source in a bid to maximize their profits--which happens to be renewable energy in places like North America.

The Foundry CEO does have a valid point. Mid-last year, UAE-based clean energy think tank International Renewable Energy Agency (IRENA) reported that more than half of the renewable capacity added in 2019 achieved lower power costs than the cheapest new coal plants. IRENA goes on to say that replacing the costliest 500 GW of coal with solar PV and onshore wind would cut power system costs by up to USD 23 billion every year; lower annual CO2 emissions by around 1.8 gigatons (equivalent to 5% of total global CO2 emissions in 2019) and also yield an investment stimulus of USD 940 billion (1% of global GDP) to boot.

However, Coyler has also neglected to mention that over 65% of bitcoin mining happens in China, a country where coal and other fossil fuels are by far the most dominant energy sources.

Two years ago, CoinShares made the controversial claim that the bitcoin network gets 74.1% of its electricity from renewables, making it one of greenest industries. However, A University of Cambridge report begs to differ by pointing out that whereas the majority of bitcoin mining facilities draw on renewables to some extent, the average share is just 28%.

With a cross-section of experts predicting bitcoin prices will break the $100K barrier soon, bitcoin mining could end up doing a lot more harm than good to the environment. Christopher Bendiksen, head of research at CoinShares, has warned that another price spike could push energy use even higher:

“We fundamentally don’t know how high the price of bitcoin will go. If the bitcoin price goes up by 10x, you would expect the energy consumption of the network to also go up by 10x.” 

Bitcoin might not be among the biggest offenders as far as carbon footprints go, but could be competing for those honors in a decade or so unless the energy transition in places like China advances at a much faster clip.

Which means Elon Musk might be fully justified in his latest decision about cryptocurrencies not named dogecoin.