California is selling out of cap-and-trade credits, China is preparing to launch a national carbon market and the European Union is already 10 years into the biggest global experiment to date on the economic effects of putting a price on carbon.

As far as the private sector goes, at least 150 major corporations have tested internal carbon pricing as of 2014 — encompassing an odd assortment of famously environmentally progressive companies like Google and Mars alongside foils such as Exxon Mobil.

For all the political controversy that continues to pervade global climate issues, shifting regulatory frameworks and increasing scrutiny of the risks related to climate change are having a tangible impact on how carbon emissions are tracked and accounted for.

How all of that plays out day to day for hulking multinational corporations, however, remains much more of a moving target.

Enter Microsoft, a company with a market value of roughly $348 billion, which today is publicly divulging the results of the first three years of an internal carbon pricing program and a related carbon fee investment fund. Individual Microsoft departments have added a budget line item reflecting the financial value of their emissions, which then translates to new capital for sustainability initiatives with the carbon investment fund.

microsoft carbon price and investment fund

The high level takeaways: $10 million in annual energy savings; emissions reductions on the order of 7.5 million metric tons of carbon dioxide equivalents and 10.2 billion kilowatt-hours worth of new renewable energy investments.

“Our carbon fee represents a proactive step to make our business groups accountable for their carbon emissions while creating a fund to support efficiency and innovation,” wrote TJ DiCaprio, Microsoft’s senior director of environmental sustainability, in the report on the program (PDF download) released today.

At the global level, increased emphasis on assigning a financial value to carbon emissions could represent a fundamental shift in the economics of climate issues. Paula DiPerna, a special adviser to the Carbon Disclosure Project (CDP) focused on the business response to climate change, compared the heretofore unmitigated costs of damage to the atmosphere to neglecting personal property.

“It’s as if we had a penthouse, and we’re using it to store dirty diapers,” DiPerna said in an interview with GreenBiz. “You would never do that if you had to pay for the penthouse.”

Still, advocacy groups such as Carbon Market Watch stress that existing carbon pricing models will have to evolve quite dramatically to truly make a dent in emissions, rather that relying heavily on offsetting environmental damage.

While a direct carbon tax is something that environmental groups have been pushing for years, most large-scale carbon pricing programs to date, such as those in the EU and California, rely on an emissions trading system (ETS for short, but better known as cap-and-trade systems). In the latter arrangement, large polluters have a financial incentive to cut emissions, but they can still buy extra credits for emissions beyond the specified cap.

“The EU [carbon program] has suffered from a large amount of excess emissions allowances largely caused by weak emission reduction targets and the inflow of carbon offsets,” noted one Carbon Market Watch policy brief from July (PDF). “This has resulted in a carbon price that is too low to promote low-carbon solutions.”

Carbon calculations

At a time when companies around the world are grappling with if and how to integrate once-tangential concerns about sustainability into their core financial strategies, DiCaprio explained that Microsoft “designed the carbon fee using a simple, repeatable model with the hope that other private and public organizations will adapt it.”

Microsoft’s internal carbon pricing program dates back to July 2012, when the company decided to adopt a carbon neutral strategy for its global data centers, offices, software development lab and company air travel.

Given that green energy procurement, carbon offsets, building retrofits and other approaches to cutting carbon impacts can be expensive, the company also created a fund to help cover associated costs. The initial process of implementing better emissions monitoring and analysis also exposed existing ways to cut back on emissions.

“[The fund] provides an incentive for our business groups to find lower-carbon alternatives and invest in carbon-saving initiatives,” the new white paper explained. “Using this price, we make the cost to achieve carbon neutrality a line item in the operating budgets of our business groups across more than 100 countries.”

DiPerna of CDP calls the phenomenon of recognizing these “hidden costs” of emissions embedded in company operations a “green cursor” that points to specific areas for improvement.

“The green cursor kind of illuminates things that normally kind of go by, like buying paper clips,” she said. “You think paper clips cost $1 a box. But then you see the hidden costs, and you say, ‘Huh, this box of paper clips is actually $1.20. Is it worth it?’”

To put a more finite price on the cash required for new sustainability initiatives related to the program, Microsoft convened a cross-departmental Carbon Neutral Council. The group was tasked with identifying potential projects — direct carbon footprint reductions, e-waste recycling, renewable energy, emissions-reduction or energy-saving technologies and carbon offset community projects — and then determining how much those efforts would cost.

“We divide the funds required for these environmental initiatives by our projected emissions to establish the carbon price,” the report stated of the calculations involved.

As of the latest round of CDP report in mid-2014 (PDF), Microsoft was pricing carbon at $6-7 per metric ton, on the low end of corporate fee estimates that stretch up to nearly $90 for utilities such as the U.K.’s National Grid. Here is an overview from CDP with estimates on where large corporations in the U.S. and the U.K. with an internal price on carbon are setting the mark:

CDP carbon price Microsoft Google Mars Exxon Mobil

While Microsoft declined to comment on the precise internal carbon price the company is using, the report does leave the door open for cost appreciation:

“We see tremendous opportunity to increase the size of the carbon fee investment fund and the potential of the program,” the report noted. “Where there is demand for greater investment, we simply increase the carbon price.”

Across industries, DiPerna said that price fluctuations likely will be most correlated to a company’s regulatory and market exposure to carbon-related issues. In some cases, that could mean premiums on the higher end of the spectrum.

“$80 is not outlandish,” she said.

Paying it forward

While setting a price per ton on carbon is a process in and of itself, the next step is perhaps more appealing: deciding what to do with all that money.

Once a price is set — either through a regulatory edict or a voluntary initiative such as Microsoft’s — both public and private entities have started to pilot new models for reinvestment in different types of sustainability projects.

In California, for example, cap and trade funds are being spent on everything from building severely lacking affordable housing near public transit to high-speed rail and energy efficiency upgrades.

At Microsoft, carbon funds have paid for 60 projects in 23 countries worth more than $2 million. Tangential benefits include positive marketing, better employee buy-in on sustainability initiatives and energy cost savings. But the actual investment fund is doled out based on a formal grant application process that prioritizes several factors:

Tangible examples of new programs that have gotten off the ground include:

Energy efficiency retrofits: Energy initiatives aimed at reining in the company’s existing footprint range from a $71,000 lighting upgrade for a 270-employee office in Bogota, Colombia (which has saved $18,000 per year and 55,000 kWh of electricity) to an overhaul of how the company approaches its $55 million in annual energy costs at its Washington headquarters, implementing an “Internet of Things meets Big Data approach” with an energy management system that ties together 38,000 sensors in 125 buildings.

Renewable energy: The company has focused on long-term power purchase agreements, such as a 20-year, 110 MW wind project in Texas. Microsoft also buys short-term renewable energy credits for renewable sources including biomass, geothermal, hydro, landfill gas and wind energy.

Electronic waste recycling: A Microsoft IT Asset Disposition Program set up in July 2011 has recycled 400,000 assets (phones, printers, keyboards) and reused 350,000 assets in the U.S. alone. For the 2015 fiscal year, the company is directing $15 for each of its 97,000 employees to the program, which pencils out to almost $1.5 million.

Carbon offsets with community socioeconomic impact: When looking to offset its enduring carbon emissions, Microsoft prioritizes projects in developing countries with potential to scale. That includes efforts such as preserving 47,000 hectacres of carbon-dense rainforest in Borneo at risk of deforestation in palm oil sourcing or investing in water filters and cookstoves in Guatemala to reduce wood fuel costs and incidence of disease.

In the future, the company notes in the report that it plans to more aggressively pursue on-site renewable energy and other larger-scale investment projects.

“Microsoft has been a pioneer in facing the facts, which are that climate change is happening and is going to mean a certain amount of change in the economy,” DiPerna said. “Companies need to know what the hidden costs are.”

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