Editor's note: Tamara DiCaprio will be presenting a One Great Idea on Microsoft's carbon fee model at the GreenBiz Forum in New York (Feb. 19 to 21).

Last July, Microsoft implemented a carbon fee model for emissions that applies to data centers, software development labs, offices and air travel. Under the new plan, the internal cost for electricity use or air travel, for instance, now includes not only the price the business group pays for the service, but also the price it pays to offset the carbon emissions associated with it.

The fee for carbon emissions goes toward an investment fund that is used for a variety of efficiency, renewable energy and offset projects that help the company reach its set goal of becoming carbon neutral by the middle of the year, said TJ DiCaprio, senior director of environmental sustainability at Microsoft. She spoke with GreenBiz about the innovative model, its aims and the challenges involved with such an undertaking.

Alison Moodie: What are the key aims of the carbon fee initiative?

TD: The carbon fee model provides a needed path to integrate environmental priorities into our business planning structure — it's a practical example of aligning people, planet and profit. It represents an incentive for business groups to reduce their emissions: When the otherwise external cost of offsetting carbon emissions is included in a project financial analysis through the carbon fee, efficiency projects benefit. Ultimately, we hope this example of private sector environmental policy can play a role in influencing and driving public policy by demonstrating a new approach to managing carbon impact.

AM: It seems like an unusual plan. How did the idea for the platform come about, and is it based on any existing models?

TD: Microsoft understands that its business model supports the use of technology, which requires use of energy. The technology sector is responsible for 2 percent of global emissions, and is growing. As a result, Microsoft realized that the first step to demonstrate environmental responsibility was to be part of the solution. And that started with getting its own house in order, by driving efficiency across the organization and reducing net emissions. The most obvious way to do this was to include the cost of reducing emissions in our financial model. To do that we needed to put a price on carbon and cascade that cost across the business groups to integrated into their financial planning.

In addition, policy is playing an essential role in global efforts to contain and mitigate the effects of carbon emissions and associated climate change. To date, the majority of environmental policy has been implemented through the public sector — in particular, governmental regulations mandating that organizations report their carbon emissions and, on occasion, pay fees or taxes based on those emissions. However, private environmental policies are playing an increasing role, empowering organizations to demonstrate their commitment to environmental responsibility and embed environmental factors into their business planning.

While this may seem like an unusual approach in the private sector, we were inspired by a number of public policies around the world, including California's cap-and-trade program, Australia's Clean Energy Act and the European Union Emissions Trading System [EU ETS].

AM: It appears information technology is key to the success of the plan?

TD: Along with policy as the governing factor, technology is the foundation with which we gather timely and accurate data and drive efficiency. We use technology to both proactively measure and manage environmental performance while enabling us to accurately administer the carbon fee.

In addition, our efficiency initiatives are also based on the implementation of technology, such as using technology to optimize the efficiency of our data centers, offices and software development labs. As well, we actively use Microsoft collaboration technology to reduce emissions from business travel.

AM: What are the challenges involved in a large-scale initiative such as this?

TD: Keeping the carbon fee model simple is critical. We are embedding the carbon fee within existing corporate chargeback models to the business groups. To help address potential challenges and ensure alignment across the organization, we also established a steering and governance body called the Carbon Neutral Council. We meet on a monthly basis to brainstorm new ways to meet the environmental commitments we set for the company.

AM: The model was launched in July. What have been your observations so far? What's working and what isn't?

TD: In this first year, the carbon price has proven effective at facilitating education with the right conversations and initiating net new carbon reduction projects across the company. With the price in place, people are teaming up to discuss how to drive efficiencies and further invest in more clean energy. And people outside of our sustainability team are beginning to ask, "How do we work together to reduce carbon and mitigate the incremental fee?"

In brainstorming with stakeholders across the company and listening to feedback, one thing we heard loud and clear was that investments that directly support business group efforts would be much more effective than simply a punitive model. This feedback led to the creation of energy efficiency grants, funded by the carbon fee, to help drive collaboration and awareness across the company around prioritizing efficiency. We have extended an offer to our internal business groups to submit proposals for projects that support carbon reduction and increased efficiency. Examples might include metering, lighting retrofits, energy management programs and travel reduction. The type of projects will vary based on what makes sense for their business and geography. We will be reviewing proposals over the next couple of months.

AM: There's a real need for high-tech companies like Microsoft to reduce power consumption. Going forward, what else is Microsoft doing to cut down on emissions, and will you be expanding on the fee model in any way?

TD: In the white paper we published earlier this year, "Becoming Carbon Neutral: How Microsoft is Becoming Lean, Green, and Accountable," we share many of the strategies we're employing to reduce our emissions. I'll give you a couple examples. In our Dublin data center, we were able to improve energy efficiency by approximately 50 percent by using outside air and airside economizers for greater cooling efficiency. In our offices, we're continuing to expand our energy-smart building management system program that helps us identify when critical equipment will or has failed, enabling us to keep systems running efficiently and making our energy use more predictable. These initiatives — and many more like them across the company — are key to reducing our emissions.

Looking ahead, we expect that our internal carbon price will likely increase over time as we also expect the price of efficiency, renewable energy and carbon offset projects to increase over time.

AM: Microsoft has pledged to be carbon neutral by the middle of this year. That's a pretty ambitious goal. Why did the company choose to aim so high? And seven months in, does it look like it will succeed?

TD: Environmental sustainability is an important focus across our organization. Ultimately, we believe that making a commitment to becoming carbon neutral and implementing a carbon fee will be good for both the environment and our business.

The first step is under way, which is to establish the process and run it through the financial cycle. This is a long-term commitment which is only improving over time. Already the carbon fee model is helping us drive the right conversations across the business and we're starting to see carbon pricing incorporated into long-term business planning. For example, when a business group plans for future business over five to seven years, the total cost (to support a cloud service, for example) now also includes the carbon fee associated with its lifetime energy consumption, similar to how we might plan for energy, support and management costs of the server.

We are thrilled to see the excitement and pride across the company to do our part internally to help reduce global emissions.