This week, Microsoft is announcing an unusual initiative that it hopes will change how the company operates: an internal fee on carbon.
Starting July 1 -- the beginning of the company's fiscal year 2013 -- the software giant will charge all of its 100-plus global offices and data centers a fee for every ton of carbon they produce (mostly from plugging into the electric grid, so-called "indirect" emissions). The money collected will go to purchase Renewable Energy Certificates (RECs) and carbon offsets, allowing Microsoft to declare itself carbon neutral.
Although carbon neutrality is a claim that's gotten less credible over the last few years, Microsoft seems well aware of the challenge and is handling it well. Here's the problem with asserting neutrality: It's hard to ensure that any carbon reductions you're paying for -- from, say, capturing methane from a landfill or replacing inefficient cook stoves in Africa -- would not have happened anyway (this is the problem of "additionality").
So to navigate this tricky terrain and make the most of its efforts, Microsoft is working with a handful of NGOs and a well-respected partner, Sterling Planet, which will buy the RECs and offsets.
Interestingly, however, carbon neutrality doesn't seem to be the real point of Microsoft's initiative. From my conversations with the company, I take away four major reasons they're doing this:
So how will Microsoft make this initiative a reality? The execution plan has some interesting elements (see a pithy white paper on the full carbon neutrality plan here). The company will measure carbon footprint in different operational buckets such as plug load (electricity used) and business travel, and then offset each category "like for like" (i.e., buying RECs for electricity and offsets for travel). The fees will vary as well; for example, the company will charge employees for all air travel on a per-mile basis, which raises awareness at the individual level.
The program is smart, but I'm left with one major concern: Will the fees be high enough to change behavior? Right now, the market price of carbon is very low, so Microsoft is charging a small amount per ton. Even so, they will collect north of $10 million, which is enough to buy offsets. Over time, by my calculations, given the growth in cloud services the company is banking on, these carbon fees could rise to a more noticeable $50 million by 2020. But let's be honest: These numbers are clearly rounding errors to a company that netted $23 billion last year.
To be fair, as the behavioral psychology gurus (from books like Nudge) will tell you, sometimes just making people aware of a cost is enough to foment change. So the minor nudge here may be good enough. But in the longer run, the price on carbon needs to be more of a sledgehammer than a nudge. It should reflect the full cost to society of health impacts, national security risks, and price volatility, all of which add up to tens of dollars per ton or more.
Pricing carbon on your own, without a real market in place, is hard, which is why there are so few examples of companies doing it. Going back over a decade, BP put in place an internal carbon trading system that used a "shadow" price to encourage divisions to find the cheapest reduction opportunities (others like Shell have also used this tactic). But executives weren't charged real money. And more recently, athletic apparel company Puma (working with my colleagues at PwC and the UK's TruCost) produced an "environmental P&L" which measured the "real" cost of carbon and other environmental inputs like water. The company is exploring how to include the "price" in operations and give ownership to line managers; it currently says the metrics will "inform operational decisions."
So even with important experiments like these that have gone before, Microsoft's program is perhaps the first actual internal fee at this scale (my research isn't turning up anything exactly like this -- please send me examples if you have them!). It's innovative and committed, but it also points to a massive global failure of leadership on climate policy. We should put a price on carbon across the entire economy. But as Bernard says, "While governments have an important role to play, we hope there's a benefit in us moving faster than the policy world.
He's absolutely right. Companies cannot wait for the government wheels to turn to price and manage carbon -- the cost saving, risk reduction, and brand benefits of leading are too high.
(This post first appeared at Harvard Business Online.)
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