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Digitization is accelerating, from Bitcoin to 5G, but do we fully understand the environmental impact of these technologies? In this podcast Freddie Fuller and Elma de Kuiper, Portfolio Manager, RBC Global Asset Management (UK) Limited discuss the nuances behind digital technologies relationship with energy and decarbonization and show why just because something is digital, does not mean it is carbon neutral. [12 minutes, 04 seconds] (Recorded May 19, 2021)

Transcript

Welcome, everybody. My name is Freddie Fuller and I’m the Product Specialist on the RBC European Equity Team. In this episode, we’re going to be taking a look at what seems to be rather a paradoxical relationship between technological advancement and energy consumption and ask the question is technology more of a help? Or is it a hindrance? And to discuss this today, I’m joined by Elma de Kuiper, a portfolio manager on our desk.

Hello. Yes. You know, it’s an interesting question, Freddie, because the answer’s not as straightforward as you might think. It’s certainly the case looking at technological leaps that humanity has made in the past, that in the first instance, these have led to environmental degradation. So, for example, the steam engine. When that came about, it enabled the replacement of human energy with machine energy. Hugely significant. But this was mostly derived from coal, which is very pollutive and mined under difficult conditions. Another example was the materials revolution where plastic was invented. Fantastic for so many applications, but plastic is derived from oil and does not biodegrade. So today, we’re undergoing a different kind of revolution, but I would say a revolution nonetheless. And it’s digital in nature, wouldn’t you say?

Yeah, absolutely. And I think to your points, it’s important to explore whether there is a similar aspect of potential environmental degradation stemming from this digital revolution as you put it. And we looked at some of the numbers, and it’s estimated that by 2025, there will be over 28 billion internet-connected devices. Which is an extraordinary number. And this aspect, alongside other forms of technology, could eventually add up to an estimated 20% of global energy use by 2025. So the sort of a first question, Elma, is do people really understand the energy intensity of their technology usage as it stands today?

I mean I don’t think so. Not until very recently. But the public is definitely becoming more and more aware. Just look at the recent headlines around Bitcoin, for example.

Yeah, exactly. And actually, headlines even out this morning.

Yeah.

It’s a good point. Bitcoin is a very good example of the need, not only as investors but from consumers as well, to look underneath the bonnet for the nuance.

Yes.

And it’s become increasingly clear that there is an enormous amount of energy consumption concerned with the “mining” of Bitcoin. But this is true on both an absolute and a relative basis and it’s important to look at these things in the context of their function. It’s difficult, I suppose, to compare Bitcoin to other companies, to peers, given its relative novelty, but if you were to compare it to say Visa, Bitcoin can only process, and this is by design, six transactions per second globally. Meanwhile, Visa, by contrast, handles 4,500 transactions per second on average. And commentators will often rebut this by saying, yes, but Bitcoin doesn’t have the office base and travel associated with a global company. But even when this is factored in, Bitcoin processes 2,500 fewer transactions than Visa for 600 times greater energy use. So the arguments really don’t stack up as far as we can see.

Yes. I mean, it’s astonishing actually. A lot of people think that just because something is digital, the carbon footprint is lower or miraculously not there, but that’s not necessarily true. And a lot of these comparisons are done without context or proportion. It would almost be like saying, we should fly on a private jet because commercial air travel as an industry emits 1,000 times more carbon than private jets do. And it just misses the point because, of course, that’s true, but commercial planes handle many thousands of times more people and, therefore, they’re much more energy efficient per passenger traveled. When we think about that energy intensity of Bitcoin, we can extend that to computing as a whole. It east up vast amounts of energy. The digital economy uses almost 10% of the world’s electricity. Ten percent.

Yeah.

I mean that’s more than the airline sector. And actually, if the tech sector was a country, it would be the fifth-largest emitter, which I think is mindboggling, but it really kind of brings home just the scale of it. And that’s not even including water, mineral usage, or waste.

Yeah. So taking all of this that you just talked about, on the face of it, the seemingly exponential rise in modern tech and digitization seems to be incompatible with the efforts of the world to decarbonize their economies. But again, we’ve been talking about nuance here. It’s important to ask ourselves is that just reductive thinking? And there’s a tendency to simply extrapolate current tech growth rates and the associated current energy usage just to create sort of headline-grabbing numbers.

Yes, sure. I mean, in reality, these predictions are often well off the mark. One just needs to look at the first electronic computer built in 1946, the great invention of that time, in my opinion. The energy needed for a computer operation has halved about every 19 months since. Every 19 months.

Yeah. And that’s something I was going to touch on there, is it’s the other side of the coin. And this is where it comes into play. There’s been a fair amount of research which seems to suggest that while technological innovation may lead to increase energy consumption in the short to medium term, it can ultimately result in a reduction in energy consumption in the long term.

Yes.

And to your earlier point, much of this is built on the innovations of the past.

Yes, absolutely. I mean, in my opinion, the sector where this is most obvious is transportation. So trains and cars, as we use them today, would not exist had the original steam engine not been invented. There’s now, as we all know, huge innovation happening in making them electric or even hydro-powered, and that’s another example of how our technology is constantly improving upon the original dirty machines.

Yeah.

And this is how innovation works. It’s always progressive and step-wise. And Isaac Newton put it best I think. He said he stood on the shoulders of giants and so too do our current technologies derived from the older iterations.

Yeah. And this is the crux of the matter, isn’t it? We’re going to ask ourselves can you translate the same effects from the transport sector, your example, to the rise of tech. And the answer seems to be that it’s at least possible. For example, France has actually found that compared to 2008 the energy consumption of digital technology has actually stabilized. Therefore, the massive transformations in data usage through video use, digitization of broader economies, smart sensors, et cetera, et cetera, do not seem to be having as much of an impact on energy consumption as original forecasters suggest.

Yes.

And this is something, Elma, you think is of equal importance in what I suppose is another hot topic in this realm, which is that of 5G and its rollout?

Yeah. I mean, it’s certainly true that energy consumption is expected to rise due to the widespread adoption of 5G.

Yeah.

But that’s modeled on consumption patterns of the past where, to be fair, every time a new standard was launched, and I’m talking here about 2G, 3G, 4G, the energy consumption increased quite significantly along with it. But I think it’s important to look at unit costs as well because actually, when you do, the picture is quite benign. We have 5G consumes 90% less power per bit of data than 4G, which is a huge and really quite important improvement. The makers of 5G equipment, so think of Huawei, Ericsson, Nokia, they’ve all independently found that 5G is the most energy aware standard. And you should think of things like efficient data transmission, smarter sleep modes, and they estimate that that will make it possible to quadruple data traffic, quadruple without increasing energy consumption. That’s very significant.

Yeah.

So, of course, we don’t know where that data traffic consumption is going to go. It’s quite possible that demand for data will increase far beyond that quadrupling. But it does illustrate what we’re talking about here I think, which is that technological innovation, it allows for far lower unit costs of what arguably is the most valuable commodity of our time, and that’s data.

Yeah. That’s really interesting. So to conclude, if it isn’t in doubt, and I think we can potentially take the position that demand for digitization and, therefore, correspondingly data usage is triggering a significant rise in energy demand. But as we have noted, one cannot simply extrapolate out into the future using existing consumption or efficiency. And in this instance, there is a case to be made that it is technology itself, albeit most likely combined with regulation from policymakers that could at the very least keep energy needs in check, if not even help reduce them in the future. Now, we’re not necessarily saying that tech is the saviour but we do need to take this into account.

Yes. You’re so right. I mean, it’s really actually very exciting to witness all that innovation happening in the realm of sustainability today. There’s a great book called The Uninhabitable Earth written by David Wallace-Wells, and in it he estimates that the transition to clean energy would save over $20 trillion in costs. So this isn’t often talked about, but there is definitely also a capitalist imperative to this energy transition, and that, in turn, further incentivizes technological innovation.

Yeah, absolutely. And to your point on the transition to clean energy, this will continue to play an increasingly important part in the growth of tech as it powers more and more of the digital economy. We have increasing options for energy savings such as the demand side. Then we have efficiency improvements on energy production. And then finally, hopefully, the eventual replacement of fossil fuels through renewable energy sources.

Yeah. Yeah. Precisely. There are multiple levers here that can be pulled to make the digital sector a greener one.

Well, look, that’s all we have time for today. Thank you very much indeed, Elma, for joining. And thank you to our listeners for tuning in.

Thank you.

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Publication date: May 26, 2021