I recently read The Microsoft carbon fee: theory and practice by T.J. DiCaprio. It struck me how Microsoft’s innovative program exemplifies the trend toward continuous improver. An internal carbon fee encourages organizations to look at ongoing operational data and to identify opportunities for innovation and efficiency.
What is an Internal Carbon Fee?
The following description of the carbon fee is based on TJ’s paper.
- An internal carbon fee program has three primary components:
- An organizational carbon reduction policy
- A price on carbon A carbon fee fund investment strategy
The general idea is that the organization puts in place a policy to reduce carbon. That policy is backed by an investment strategy, which in Microsoft’s case includes purchasing green power, investing in efficiency innovations and buying offsets for emissions that cannot be eliminated. The investment is funded by the proceeds from an internal carbon fee, based on an internal carbon price.
The internal fee is the exciting part. The total fee is distributed across groups within the organization in proportion to each group’s contribution to the organization’s total emissions. This truly internalizes the cost of carbon pollution. As a result, the groups are motivated to understand their emissions and to reduce them.
Implementation of an internal carbon fee requires the collection of data related to emissions generating activities. In Microsoft’s case the relevant activities are energy and air travel (different activities may be material to different organizations). The activity data is converted to emissions data, resulting in an emissions inventory. The emissions inventory serves two needs:
- It provides a number for the organization’s total emissions. This number drives the carbon fund fee investment strategy and is then used to arrive at an internal cost for a unit of carbon (total emissions/total fund cost).
- It calculates the emissions for which each group is responsible and thereby allocates the appropriate portion of the overall fee to each group.
The calculation of an organization’s total emissions is an important step, because it is used to determine the internal carbon price, but it can happen ‘behind the scenes’ and relatively infrequently (such as annually). In fact, many organizations already produce an annual inventory that they report to organizations such as the Carbon Disclosure Project or that they use for their annual sustainability report.
What Characteristics Make an Emissions Inventory Valuable?
The annual total emissions inventory is necessary but as an executive in a specific group, it’s much more useful and interesting for me to understand my group’s emissions on an ongoing basis, because that’s where I can really make a difference. Remember that the goals of the carbon fee include cost reduction and pollution reduction. For these to truly be realized, the emissions inventory must be:
- Transparent – widely visible and easily understood
- Up to date – frequent data drives ongoing operational decisions
- Granular – the finer the better
These characteristics enable individuals to correlate their group’s specific operational activity with fluctuations in emissions levels. They foster a sense of accountability and responsibility across the organization. They spur innovation to improve efficiencies. In her paper, T.J. identifies just these characteristics and recommends using cloud-based sustainability tracking software to support the need for a transparent, up-to-date and granular emissions inventory. Let’s take a look at each of these characteristics.
Transparency is best served when the relevant data is ‘democratized’. Data illuminating the organization’s activities and resulting carbon impacts that might otherwise be siloed should be made available to the organization’s stakeholders. When employees are able to easily see the impacts of their activities, how they compare to their peers and their part in the ‘whole’, they are motivated to take responsibility and to seek improvement. Studies show that employees, in particular millenials, value this kind of transparency and tend to be more engaged, ultimately benefitting their organization.
While many organizations engage in a sort of backward looking annual inventory, they may be missing the value of a dynamic, forward-looking inventory that is continually up-to-date. By looking at say, monthly data, it is possible to make operational decisions and adjustments that avert emissions before they have been emitted. The carbon fee motivates this kind of dynamic engagement because it can lead to operational improvements that reduce a group’s costs.
The carbon fee minimizes the tragedy of the commons that so hampers progress in tackling sustainability issues. Most employees of a large manufacturing company for example, may harbor some notion of ‘I wish my organization wouldn’t generate that much pollution’, but in a big organization, they are unlikely to do much beyond that. When a fee is pushed down to individual groups, the consequences are more granular – individuals are more likely to see and feel their contribution and as a result, are more likely to take responsibility and to act. One form of granularity is in the reduction of the group size to which responsibility is assigned. Another form is in the allocation of carbon to different activities. When an employee sees that their group’s total carbon emissions are so many tons per year, they may feel a sense of responsibility but are ill equipped to do much about it. However, when one sees that their flight to London results in 1 ton of CO2 emissions and that flying business class would double those emissions, they are empowered to make different choices, thereby reducing their group’s carbon fee and making the world a better place.
A carbon fee program such as the one implemented by Microsoft serves the organization in a number of ways:
- It saves costs It reduces environmental impact
- It demonstrates corporate social responsibility
- It drives innovation
- It promotes employee engagement
At Scope 5 we’re excited to see organizations like Microsoft showing such leadership and we’re excited to provide through our service, the technology that supports this kind of program