By Brandon von Kannewurff MBA ’23
This article was written in response to a seminar given by Vanessa Miler-Fels, Director of Energy Innovation and Impact at Microsoft, in an EDGE Seminar at Duke University’s Fuqua School of Business in Fall 2021. This article voices one student’s perspective and does not necessarily represent the views of either Duke University or the seminar speaker.
Microsoft has upped the ante. Climate commitments have become the norm for large corporations, with at least 54% of Fortune 500 companies committing to reduce their Scope 1 and 2 emissions in line with the goals of the landmark 2015 Paris Agreement.[i] In 2020, Microsoft raised the bar higher by committing to Net Zero scope 1, 2, and 3 emissions by 2030, and, further, promising to remove all emissions it has ever produced by 2050.[ii]
If successful, this would be no small feat. But the company wants to go further. Microsoft’s real potential lies in the market power it commands with its customers. Microsoft office products are the lifeblood of the business world, with an estimated 87.5% market share among of cloud-based business suites. In the absence of a globally accepted carbon price, I propose that Microsoft should leverage this massive market power to drive change by layering in a carbon surcharge into the price of its own products. This structure could quickly incentivize players across a wide variety of industries to decarbonize by providing clear incentives to reduce carbon emissions.
The Surcharge Structure
A carbon surcharge would fit seamlessly within Microsoft’s pricing structure because office customers are charged a monthly subscription fee for the service.[iii] This allows Microsoft to constantly monitor customer activity and flexibly adapt the enterprise prices to reward customers for making meaningful change. Additionally, the ‘carrot & stick’ approach fits within the same framework Microsoft uses to push suppliers to reduce emissions.
In practical terms, the new pricing menu would incorporate the following tiers:
- No Science-Based Climate Commitments (30% Premium): Customers without science-based climate commitments would pay a significant premium to use basic office products. This tier includes companies that have no targets or have targets without realistic backing. An example is Chevron, who has made a 2050 Net Zero commitment, but does not consider the climate effects of the oil it provides to customers.[iv]
- Insufficient Action on Climate Targets (15% Premium): This tier includes customers who have made credible, science-based targets, but have slipped in implementation. This allows Microsoft to threaten higher prices to customers whose progress has slowed, while still recognizing the important progress made thus far.
- Science-Based Targets (Base Pricing): This tier includes customers who have made science-based commitments and are on-track to meet them.
- ‘Model Companies’ (20% Discount): This tier includes two types of companies:
- First, companies like Stripe that have made ambitious, carbon-negative commitments like Microsoft and are on track to meet them.[v]
- Second, companies like Maersk that operate in hard-to-decarbonize sectors, but are making significant, credible investments in technologies necessary to reach Net Zero.[vi]
While the precise figures can be adapted, this could form the basic structure. The ‘stick’ pushes real, significant action to fight the climate crisis. The base pricing does not provide a discount because all companies should be, at a minimum, aligned with science-based targets. Finally, the structure rewards customers who are doing exceptional work, spurring crucial change across industries.
One benefit from this structure is that incremental revenue from could augment Microsoft’s ambitious Climate Innovation Fund. This commitment will help drive innovation by scaling new technologies critical to reducing and removing CO2 emissions.[vii] Incremental funding could shift money from early-stage investments to more capital-intensive processes like scaling-up deployments. By paying a premium for promising, scaling technologies, Microsoft can further increase its impact.[viii]
Additionally, this structure hinges on Microsoft’s ability to help customers track their own emissions. Just this July, the company created a cloud-based software to analyze emission sources and identify opportunities to reduce them.[ix] Without accurate measurement of emissions, Microsoft could not help customers make the changes desired.
Finally, this surcharge does not ban fossil-fuel based companies from using off-the-shelf products. Paradoxically, the massive market-power that allows Microsoft to push for these changes simultaneously prevents the company from fully leveraging it. Explicitly excluding companies from purchasing basic products could expose the company to anti-trust lawsuits that would threaten the company’s survival. Instead, pricing tiers are a conventional business tool that, applied in a new way, could create major change.
While adopting this approach would be revolutionary on its own, a consortium of tech companies with similar approaches could drive deeper change. Sharing best practices with fellow tech giants like Google has two primary benefits. First, it minimizes leakage. Though Microsoft is the largest player in the cloud-based office product market, Google commands the remaining minority of the market. Partnering with Google would thus make the carbon surcharge a basic business cost for all non-confirming businesses, eliminating leakage. Secondly, a partnership increases the total funding to deploy carbon negative technologies critical to driving down global emissions.
Additionally, this consortium should consider publishing the list of companies in each tier. For one, increased transparency allows investors to estimate the cost of non-compliance, creating pressure from outside sources to reduce emissions. Additionally, this transparency allows employees greater understanding of each company’s carbon footprint, pushing them to drive change internally or even leave the company, if insufficient action is taken.
In summary, a carbon surcharge leverages Microsoft’s massive market power to push its customers towards positive social change. While a deeper analysis could eventually be conducted to provide a more sophisticated carbon pricing scheme, a simple carbon surcharge based on four tiers would allow Microsoft to quickly implement an impactful method to push its customers towards a Net Zero world.
[i] Cervantes, Luz, et al. “Power Forward 4.0: A Progress Report of the Fortune 500’s Transition to a Net-Zero Economy” The World Wildlife Fund, June 2, 2021. Accessed October 31, 2021. https://c402277.ssl.cf1.rackcdn.com/publications/1499/files/original/Power_Forward_4.0.pdf?1622608268
[ii] Smith, Brad. “Microsoft will be carbon negative by 2030.” Microsoft, January 16, 2020. Accessed October 31, 2021. https://blogs.microsoft.com/blog/2020/01/16/microsoft-will-be-carbon-negative-by-2030/
[iii] Keizer, Gregg. “Microsoft to shift SMBs’ Office Subscriptions to ‘Microsoft 365’ brand.” ComputerWorld, March 30, 2020. Accessed October 31, 2021. https://www.computerworld.com/article/3535208/microsoft-to-shift-smbs-office-subscriptions-to-microsoft-365-brand.html
[iv] Chevron. “Chevron sets Net Zero Aspiration and New GHG Intensity Target.” October 11, 2021. Accessed October 31, 2021. https://www.chevron.com/stories/chevron-sets-net-zero-aspiration-and-new-ghg-intensity-target
[v] Anderson, Christian. Decrement Carbon: Stripe’s Negative Emissions Commitment.” Stripe, August 15, 2019. Accessed October 31, 2021. https://stripe.com/blog/negative-emissions-commitment
[vi] Johnson, Taylor. “Towards a Net Zero Future.” Maersk, 26 June 2019. Accessed October 31, 2021. https://www.maersk.com/news/articles/2019/06/26/towards-a-zero-carbon-future
[vii] Microsoft. “Climate Innovation Fund.” Accessed October 31, 2021. https://www.microsoft.com/en-us/corporate-responsibility/sustainability/climate-innovation-fund
[viii] Lacey, Stephen. “Microsoft’s Carbon-Negative Gambit” Greentech media, January 24, 2020. Accessed October 31, 2021. https://www.greentechmedia.com/articles/read/microsofts-carbon-negative-gambit
[ix] Holger, Dieter. “Microsoft Introduces Emissions-Tracking Tools Based on Predictive Analytics.” The Wall Street Journal, July 14, 2021. Accessed October 31, 2021. https://www.wsj.com/articles/microsoft-introduces-emissions-tracking-tools-based-on-predictive-analytics-11626274800