Feb 19, 2017

Microsoft’s Carbon Fee: Going Beyond Carbon Neutral

Microsoft is one of the first companies in the world to set a voluntary carbon price on its operations: all business units pay for the carbon they emit, and the revenues are invested in energy efficiency, renewable energy, and carbon offset projects. Since its inception in 2012, this carbon fee has improved business operations, mitigated climate change, and driven cultural change within the company and the broader business community.

On December 13, 2016, Microsoft shared its experience with carbon pricing in the third webinar of the “Internal Carbon Pricing: Practical Experiences from the Private Sector” series. The webinar was opened by Emily Farnworth of the World Economic Forum, and featured a conversation between TJ DiCaprio, Microsoft’s Senior Director of Environmental Sustainability and the chief architect behind the carbon fee, and Peter Boyd, Executive Fellow at Yale Center for Business and the Environment. They covered a range of topics while talking through the development and successful execution of the carbon fee.

How It All Began

“The carbon fee is essentially our own corporate carbon tax, and it is putting us on a path to a net-zero-emissions world,” TJ said as the discussion kicked off.

In 2012, Microsoft committed to making their operations across the world carbon neutral by fiscal year 2013, targeting not only data centers but also offices, software development labs, manufacturing plants, and employee business travel. To achieve this, Microsoft needed to make the impacts of energy consumption visible. Because tons of carbon reduction was a foreign metric to many in the company, Microsoft instead introduced a carbon price—a financial metric that was readily understandable to operations staff. The company went further and integrated the carbon fee as a line item in the profit and loss statements (P&L), which helped to achieve the critical engagement with finance departments and senior leaders of all business groups.

The carbon fee is calculated by dividing the total cost of environmental initiatives and investments needed to get the company to net-zero carbon by the projected total emissions across all Microsoft operations. Business units are then charged a carbon fee based on their projected emissions.

 “We did not want to debate why it has to be a certain price of carbon,” TJ said, explaining why they used this approach instead of an external carbon-pricing model such as the Social Cost of Carbon. “By using a simple model from an organizational perspective—money in, money out—accountability for the pollution associated with our own operations, and resources for our own environmental work, the carbon fee was easily understood and unarguable.”

Microsoft started with a small price on carbon to avoid shocking the system. The carbon fee achieved solid impacts in the first year, and has since been raised annually as a result of increased support and enthusiasm.

Results to Date

Since it began, Microsoft’s carbon fee has eliminated 9.5 million metric tons of greenhouse gas emissions, fostered a corporate culture of sustainability, led to 14 billion kWh of green power purchases, and positively impacted over 7 million people worldwide through carbon offset projects.

“The carbon fee has a multidimensional economic impact,” TJ said. “It goes beyond driving efficiency, education, and awareness within Microsoft; it impacts communities where we operate and sets an example globally.”

The three strategic pillars of the carbon fee are to “be lean, be green, and be accountable.” The fee has driven a reduction in energy and travel consumption, enabled investments in both renewable energy and carbon offset projects, and held groups responsible for their emissions.

Procuring green power and purchasing carbon offsets, in particular, have spurred innovation and achieved widespread impact. The majority of renewable energy has come from the U.S., owing to its availability, but Microsoft is increasingly purchasing green energy in other countries where it operates. The boundaries defining carbon offsets are broad in geography and scope. “We are investing in projects spanning wildlife preservation, women’s empowerment via efficient cookstoves, clean water, and community development in the form of animal husbandry,” said TJ.

Microsoft is also leveraging its Puget Sound campus as a “living laboratory” to test, innovate, and accelerate improvements in renewable energy. One project, for instance, is researching underwater data centers that are cooled by ocean water and powered by ocean currents.

Most importantly, the carbon fee has linked employees with communities worldwide while producing a double impact: employees are not only aware of Microsoft’s own environmental footprint, but they also see the value from reinvestments of the carbon fee.

“A positive virtuous cycle is created—our staff see the value from the investments, and, surprisingly, the tax payers [business units] are now asking to raise the tax!”

Lessons Learned and Future Outlook

Reflecting on Microsoft’s experience, TJ advised peer organizations to “not be afraid to start, make small steps, and show immediate results and wins.” “Present an idea, get allies, gather around a goal, and start a pilot. All you need is two to three business leaders to start asking how an internal carbon charge can help raise and earmark funds to meet your goals,” she added.

TJ also emphasized the need to keep the model as simple as possible and concretely aligned with an organization’s goals, mission, and values. “Explain that if one has to pay a price on carbon, this is the value we will deliver, and this is how it aligns with our organizational goals.”

At Microsoft, it took over two years for the carbon charge to take strong hold. “Once an item is on the P&L, people asked: What is this fee? What is carbon emission? How can we reduce that tax? How can I get some of these funds? The fee leads to incredible brainstorming and engagement,” TJ said. Those who pushed back were encouraged to apply for the funds. The highest energy users thus saw themselves as beneficiaries as well as tax payers.

As Microsoft has achieved carbon neutrality for its own operations, the company is now going “Beyond Carbon Neutral” through a variety of initiatives. The company is engaging suppliers and quantifying emissions from customers’ use of its cloud services, helping to expand the renewable energy market worldwide, and supporting public policies that encourage renewable energy development. Through carbon-offset community projects and climate-related energy and technology innovation, Microsoft also aims to help countries around the world achieve their Nationally Determined Contributions (NDCs).

Microsoft’s carbon fee has evolved from driving efficiencies to spurring innovations that both create new business opportunities for Microsoft and contribute to global climate action. Microsoft is now looking beyond its own operations and partnering with suppliers, policy makers, experts, NGOs, and communities.

When asked about the “special sauce” of success, TJ credited Microsoft’s employees and emphasized the importance of engagement: “Once you engage the brilliant minds of your organization, it just builds and builds, because people are so happy with making a difference and trying out their solutions.”

Watch the full webinar here: