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Microsoft's carbon pricing scheme: A progress report

Last week I sat down with my colleague, TJ DiCaprio, a senior director of environmental sustainability at Microsoft Corp. and the chief architect of our internal carbon fee. Over the past six months, we’ve received lots of questions about how things are going, what we’ve learned and what’s next. What follows is an edited transcript of our conversation that touches on how the company is responding to an internal price on carbon and some of the investments we’re looking at making in 2013, such as power purchase agreements for renewable energy.

By the way, look for both TJ and me at the upcoming Greenbiz Forums  TJ will be speaking in New York on Feb. 20 and I will be in San Francisco on Feb. 27. Come say hi!

Josh: You played a big role in defining and rolling out the carbon fee at Microsoft in the last year. Can you explain why we instituted a carbon fee and how it works?

TJ: The carbon fee policy provides an incentive for our business groups to reach the company’s objective of carbon neutrality. Working with our finance team, our model is to charge a fee for the carbon associated with the use of electricity and business air travel. The funds collected are invested in additional efficiency, clean energy and carbon offset projects.

Josh: What makes carbon pricing different from other approaches Microsoft could have taken to reduce emissions?

TJ: A carbon price changes the accountability model and integrates carbon into the financial structure of the company. Carbon is equated to a dollar value, which is well understood within the organizational structure. Placing a price on carbon connects our sustainability goals with long-term financial planning in a way that hasn’t happened before.

Josh: How have you seen it be incorporated in long-term planning here at Microsoft? What kind of difference is it making?

TJ: A great example is where a business group plans their operating costs of 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. What’s important here is that Microsoft is internalizing the external cost of carbon into its financial planning

Josh: Since we announced the carbon fee last spring, what’s happened to make it a reality?

TJ: We implemented the carbon fee July 1, 2012, the beginning of our new fiscal year. To ensure alignment across the organization, we 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 the prior year. Some topics of discussion have included the efficiency and clean energy projects the company is supporting and oversees the implementation and administration of the internal carbon fee.

Josh: I think some people are curious where the money goes. When did the first funds go into the carbon fund?

TJ: We collected the first-quarter funds in October 2012 and subsequently invested in carbon offset and renewable energy projects, including wind, hydro and biomass.

Josh: Explain how the carbon price is determined.

TJ: We initiated the policy with a low price on carbon based on the blended cost of our current investments in clean energy, efficiency projects and carbon offset projects.

Josh: Now that we’re six months in, do you feel like the right price was set?

TJ: Yes. Our governance council provides the flexibility to allow the carbon price to grow over time to meet investment goals. The carbon price will likely increase over time as we expect the price of carbon offset projects to also increase over time. In this first year, the carbon price has proven effective at facilitating the right conversations and initiating net new carbon reduction projects across the company.

Josh: What’s been your experience working with teams across the businesses on carbon fee education and planning?

TJ: To put it in one word, inspiring. 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?” Through the Carbon Neutral Council, we are in the process of reviewing new long-term commitments to purchase renewable energy and invest in a variety of efficiency projects.

To achieve that, we’ve purchased Green-e certified renewable energy credits to offset our projected emissions for the first half of our fiscal year and invested in select carbon offset projects in the U.S. and internationally. We’re in the process of developing a more comprehensive portfolio, so stay tuned for progress over the next few months.

Josh: One of the newer developments from our efforts to drive efficiency measures in the business was the creation of energy efficiency grants here at Microsoft. Can you explain how those efficiency grants work?

TJ: These grants, funded by the carbon fee 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.

Josh: Efficiency grants weren’t part of the carbon fee announcement last year; can you explain how those came into play?

TJ: This is the terrific part of the implementation process! The carbon fee helped start the conversation. By engaging in brainstorming and listening to feedback, we heard loud and clear from stakeholders across the company that investments that directly support business group efforts would be much more effective than simply a punitive model.

Josh: When you talk with your counterparts at other companies, how do you describe what other companies can learn from putting a price on carbon?

TJ: We don’t need to wait for legislation. We have the opportunity to take action now to help mitigate climate change by improving operational governance of our own organizations and setting an example for others to follow. As sustainability leaders, we can lead the change we are searching for today. 

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