Byte by Byte: The Community Cost of Data Centres

Introduction

Recent innovations, particularly AI, have caused a “.com”-like boom in the demand and construction of data centres. With 78% of organisations reporting AI usage in 2024 and expectations of the AI market to reach $4.8t in value by 2033, it comes as no shock that the exponential demand for physical infrastructure has led to growth that has outpaced regulation. This rapid-scale development of data centres has led to an extortionate increase in demand for supporting resources from surrounding communities, namely electricity and water. The industry and regulatory bodies are now faced with the predicament of deciding at what cost such expansion is worthwhile, finding the need to balance the need for data centres with the coupled socio-environmental costs for host communities. This article assesses the key conflicts regarding data centres thirst for water and energy and proposes a three-tiered regulatory framework, informed by empirical research, industry reports and case studies,  to foster sustainable growth whilst promoting environmental stewardship.

The Trade Off Dilemma: Data Boom and Local Bust?

Data centres are a significant proportion of private investment, representing a projected $2tn of global spend in 2026, and are viewed by governments as “critical national infrastructure”, explaining why current growth has been unobstructed. In terms of employment, the data boom brings employment, both through technical staff but also construction workers, often requiring thousands of builders during the typical two-year construction period. PwC reported that the data centre industry brought 4.7m jobs to the US in 2023 due to each direct job fuelling six subsequent jobs elsewhere.

However, not everyone holds data centres to such high regard, particularly the local hosting communities where resource constraints and local conflict have led to “effective moratoriums” on future development, as seen in Ireland last year. In Ireland, data centres use more energy than all homes combined, totalling 21% of the country’s energy use, exposing the real concern that data centres are hungry for power that isn’t locally available, resulting in either elevated prices for residents or energy generation through sources like fossil fuels. The sheer demand data centres have for energy has led to major tech giants abandoning their 2030 net zero targets to pursue AI/data centre policy, suggesting that those leading data centre construction are doubtful of how such activity can be made sustainable.

As data centres grow in demand and use more energy to process information, they also require more intensive cooling systems. An average data centre uses around as much water per day as a town of 50,000, which is particularly concerning when acknowledging some of the largest clusters are in water-scarce regions like Nevada, Arizona and Inner Mongolia (China). Whilst regions like California regularly proclaim water crises, we often hear about individual user restrictions such as hosepipe bans, but regulations on data centres themselves aren’t discussed, often due to the multi-billion dollar investments they bring. It is reported that less than one third of operators track their water consumption, raising questions about whether the true extent of water usage is known and whether the situation could be more extreme.

Policy Recommendations

1. Conditional Tax Abatements

   
   

   Existing tax benefits for data centres do not address the local issues they impose. Future economic benefits should be tied to measurable performance metrics, particularly on power usage effectiveness and water usage effectiveness. The Netherlands is a prominent first-mover in its permit/zoning regulations and their system directly ties business benefits with local preservation, but also ensures inefficient centers pay their fair share of tax rather than the current status quo of tax cuts from localities due to the perceived economic benefits. Industry giants argue that conditional incentives bring uncertainty and discourage investments like Google’s $5bn cash injection into British data centres and encourage relocation to less environmentally conscious hosts. However, conditional abatements are necessary to ensure accountability and that localities are funding performance across all metrics, especially when considering the long-term growth prospects in return for abatements have been limited, as seen in the Blyth £10bn data centre delivering a tenth of the originally pitched long-term employment numbers.

   
   

2. Enforced Renewable Sourcing

   
   

   A large proportion of data centres are powered by fossil fuels, and tech giants are laissez-faire about reducing this if it compromises growth. On-site renewable production should be incentivised, when possible e.g., sun-rich regions like Nevada, preventing both emissions and local power grid disruption. This approach of on-site energy generation alleviates the stress on local communities and overwhelming local power grids, but also tackles the issue that 56% of electricity utilised by data centres comes from fossil fuels. This isn’t a “one-fits-all” solution as many major clusters like the UK and Virginia cannot run solely on solar or wind power. In the ever-competitive global environment, it is unlikely that nations will forego their role in the data boom due to their geographical restrictions regarding on-site renewable production. In such regions where this is not possible, renewable power purchase agreements should be enforced as the majority fuel.

   
   

3. Extensive Regulation in Resource-Scarce Regions

   
   

   In regions that are water-scarce, like California, or energy-limited like Ireland, heightened regulations should be in place, including public tracking/reporting of water/energy consumption. Oversight systems should also have technical requirements such as advanced closed-loop cooling systems to prevent issues like in rural Georgia, where natural wells for farming have dried up due to local data centres. This approach targets the most visible conflict of data centers and host communities and only through high standards will a “race to the bottom” be prevented due to the economic lust for investment. Local governments will likely resist such policies as exemplified by the Governor of Georgia vetoing responses to data centre overconsumption due to fears that heightened regulation will deter multi-billion dollar investments. Whilst resistance is expected, the heightened regulation ensures growth doesn’t come at the cost of essential local resources, increasing the long-term viability and business case of host regions.

Concluding Remarks

In conclusion, data centres should face more regulation considering their socio-environmental footprint in order for current growth to be sustainable. While this may reduce competitiveness for host nations/localities who implement such measures, adoption by major markets like the US, UK etc, will create industry standards and make it less costly for data centre providers to emulate existing practice in other less-regulated markets. The policy recommendations will help prevent unsustainable growth and ensure the data boom doesn’t come at the advent of a local bust.

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