Greenhouse Emissions: the Internal Cost of Carbon

Last April, Microsoft announced the results of its internal tariff on carbon emissions, introduced in 2012. Thanks to the funds generated by this tariff, the software giant has purchased 10 billion kWh of renewable energy, cutting its emissions by the equivalent of 7.5 billion tons of CO2 and saved about $10 million each year. These improvements are due to investment in wind, hydro and biomass energy, in addition to an increase in environmental efficiency. The internal carbon tariff is a mechanism to include environmental externalities in the corporate calculation of economic interest. In Microsoft, the tariff stands at $6-7 per ton of carbon. Every project must be accompanied by an analysis of C02 emission over its lifecycle; the relative cost (equal to the tariff times tons of emissions) is added to the other costs and revenues to assess whether the project is viable or not.

For instance, a cloud service of Microsoft will have to cover the internal cost of carbon linked to consumption of electric energy, insofar as the energy supplier burns fossil fuels to provide power. According to the latest data by the Carbon Disclosure Project, over 150 companies around the world (29 in the US, and 66 in the EU) use some form of carbon tariff in their internal operations. For example, Disney factors in the expenditure for the reduction or offsetting of CO2 emissions and allocates it among the various organizational units in proportion to the emissions they have released. ENI is the only Italian corporation to have adopted internal tariffs on carbon.

Microsoft calculates its tariff on the basis of market prices of US Renewable Energy Credits (REC market) and of current costs of carbon offsetting projects such as reforestation. Other companies prefer estimating the long-term market cost of CO2 emissions, based on the prudential hypothesis that this cost is bound to rise a lot in the future, due to the effect of more stringent regulation. Google, which has recently introduced the technique, has a $14 tariff; Mars charges 20-30 dollars per ton of carbon, while some oil companies arrive at $60, due the long lifespan of their projects and strong exposure to regulatory risk.

Internalizing the cost of carbon allows the shelving of marginal projects that are convenient only by neglecting environmental externalities. It also provides incentives to adopters for seeking solutions to contain emissions. Finally, it spreads across a business organization awareness of the climate issue and encourages new ideas and innovation. For Microsoft, carbon tariffing is one of the pillars of its strategy to attain zero emissions (carbon neutrality) in all its operations and purchases.