By replacing physical cash and the carbon emissions associated with its production, circulation, and management, could a retail CBDC be a tool for reducing CO2e emissions?

Key Points:

• 63% of cash-related energy consumption in the UK is from ATMs, compared to 43% in Canada.

• 52% of cash-related energy consumption in Canada is from distribution of banknotes, compared to just 11% in the UK.

• Geographically large currency systems expend more energy transporting cash than compact ones; economies which can generate more of their energy from cleaner sources will see fewer emissions from ATMs.

• 2021 UK CO2e emissions were 342 million tons. Banknotes contributed 550,000 tons (.2% of total).

• Canadian emissions were 672 million tons for 2020. Banknotes contributed 222,285 tons, or .03%.

If CBDCs usurp cash as the central bank liability used for retail payments, the current hard currency system could be retired. Banknote Lifecycle Assessments (LCAs) by the Bank of England (BoE) and Bank of Canada (Boc) have shown that the manufacture, circulation, and destruction of currency contributes materially to countries’ carbon footprints. I assess the extent to which banknotes specifically contribute to greenhouse gas emissions, and how those emissions may vary across two similar economies with very different geographic features: the UK and Canada.

Energy use and carbon emissions from bank notes in England

In 2013 the BoE conducted a cradle-to-grave evaluation of energy consumption from circulating banknotes. The report includes the proportion of energy demand by life-cycle stage across all denominations of pound notes. Combining these statistics with BoE data on notes currently in circulation allows us to construct a weighted-average composite showing the proportion of energy consumed by each lifecycle stage across all GBP notes currently in use:

ATM use is the key source of energy demand from banknotes in the UK, responsible for almost 65% of total consumption. Because £10 and £20 notes account for the majority of notes in circulation (34%, 49%, respectively), the aggregate figure reflects the heavy weighting toward ATM use by these denominations. By contrast, the £50 note is rarely stocked in ATMs, primarily sitting in cash centres and at banks for issuance on demand. Interestingly, the “transport” categories represent a comparatively small amount of the total energy demand – more on this later.

The BoE LCA also provides an overview of kilowatt hours (kWh) of energy used by ATMs per banknote. When combined with the UK Government’s guidance on greenhouse gasses emitted per kWh of energy (.2123 kg of CO2e/kWh), we can extrapolate CO2e emissions by ATMs on a per note basis. We can then use BoE data on the number of notes in circulation to estimate total emissions from ATMs:

ATMs produce approximately 350 million kilograms of CO2e per year, or 350,000 tons. As we've seen, these ATMs account for 65% of energy demand in the banknote lifecycle, meaning that (assuming the same CO2e emissions ratio) annual CO2e emissions directly attributable to energy consumed by banknotes is approximately 550,000 tons:

Of the total 550,000 tons, nearly 350,000 are attributable to ATM use, with the next largest category, substrate production, contributing over 100,000 tons. The use stage of a banknote’s lifecycle in the UK is by far the most impactful to global warming, with the manufacturing stage (135,000 tons from substrate production, raw material production, and printing) a very distant second. Emissions from distribution (cash centres and transport) and end of life (EoL) are significantly lower, at 62,000 tons and 5,000 tons respectively.

Energy use and carbon emissions from bank notes in Canada

The Canadian LCA provides a similar, but less detailed, breakdown of a banknote’s energy demand by lifecycle stage. To allow for comparison, I have reclassified the original UK lifecycle stages with the BoC categories, and presented them along with the Canadian data in figure 3 below:

The striking difference in these figures is the relatively outsized energy requirements of distributing banknotes in Canada compared to the UK – 52% of total energy demand to just 11%. I hypothesize that this higher distribution component of energy demand is due to Canada's greater geographic area and lower population density, necessitating longer trips for the armoured cars and airplanes carrying notes from printing centres. Fortunately, the BoC and BoE LCAs provide travel distances for banknotes within this distribution stage. In figure 4 below I have combined those figures across sub-stage and presented the average distance travelled by a banknote in each country:

A significant difference is clear: during distribution the average banknote in Canada travels almost 1,120 km (about the distance from Vancouver to Calgary) to just 480 km in the UK (about the distance from London to Newcastle) – or 133% farther. Additionally, UK banknotes are exclusively transported by armoured car whereas Canadian banknotes are also flown. These figures would seem to support the hypothesis that where banknotes have further to travel, they contribute relatively more to CO2e emissions.

Comparing Canadian and UK banknote greenhouse gas emissions

Before compiling aggregate statistics for the Canadian banknote system and making comparisons to the UK, we must make several caveats. First, the volume of UK banknotes is 1.62x that of Canada (4.5 billion GBP banknotes in circulation compared to 2.8 billion CAD notes). This partly reflects the larger UK economy, which has a GDP roughly 1.75x Canada’s ($2.8T to $1.6T). Additionally, Canada has a lower emissions coefficient than the UK, meaning every kWh of energy consumed in Canada produces less CO2e (as we have already seen, one kWh of energy in the UK produces .2123 kg CO2e; one kWh of energy in Canada produces .140 kg CO2e). And unfortunately, the Canadian manufacturing data seems too unreliable for significant analysis. Indeed, quantifying its environmental impact is a much more complicated process, requiring difficult judgements on which up-stream processes should and should not be considered. But the figures presented in the report seem unreasonably low.

With these caveats in mind, Figure 5 below presents a comparison of UK and Canadian banknote related CO2e emissions. It includes an aggregate for Canadian banknote emissions, an increase of these figures by 70% to allow a like-for-like comparison to the UK, and the UK emission statistics originally presented in figure 2:

Even before adjusting for differences in economic size, distribution of banknotes in Canada accounted for nearly 10,000 more tons of CO2e emissions than in the UK. After adjustment Canadian ATM emissions are still significantly lower than those of the UK, reflecting less carbon-intensive power generation in Canada. Finally, it seems likely that the reported BoC figures for manufacturing emissions – not even 10% of those in the UK – could be an underestimation.

Conclusions

These data imply that geographic features of an economy make a significant difference to greenhouse gas emissions from currency management, with larger countries consuming more energy in the distribution of notes. For Canada, where the average banknote travelled roughly 133% farther, CO2e emissions from distribution were nearly double the UK (when adjusted for economic size). And countries with less carbon-intensive energy generation emit less in the use phase of the banknote lifecycle. Emissions from ATM use were much greater in the UK, which has higher levels of CO2e per kWh of energy consumed. While not revelatory, this confirms the intuition that the use stage of banknotes will produce fewer greenhouse gasses where the power grid upon which ATMs draw is more CO2e efficient.

If the existing hard currency system were supplanted by retail CBDCs aggregate CO2e emissions could be lowered, but would such a reduction be a powerful tool for combatting climate change? The most recent figures show that the UK released 342 million tons of CO2e in 2021. My calculations estimate that the cash management system accounted for only 550,000 tons, about .2% of the total. Likewise, Canadian CO2e emissions were 672 million tons for 2020, with cash management emissions estimated at only 222,285 tons, or .03% of the total. Emissions reduction should be pursued in all areas of the economy and shrinking cash-related emissions would mean material decreases in CO2e (potentially by hundreds of thousands of tons), but CBDCs will not be a shortcut to solving the urgent problem of global warming.