The news conference had Branson flanked by former U.S. Vice President Al Gore and British ex-diplomat Crispin Tickell. The goal of the prize is to tackle one of man's greatest issues – global warming – by spurring development of new technology.
"Man created the problem and therefore man should solve the problem," Branson said of greenhouse gases at a news conference.
The prize will go to anyone who can remove one billion tons of greenhouse gas each year over the course of ten years. The winner will receive $5 million.
Gore, who made the global warming documentary "An Inconvenient Truth", will be one of six judges for the contest, dubbed the Virgin Earth Challenge.
The move by Branson comes just five months after his announcement that he would commit $3 billion of Virgin's profits to fight global warming over the next 10 years.
At the news conference, Branson shrugged off the fact that his airlines, Virgin Atlantic and Virgin Express, are a part of the greenhouse gas problem. Removing an airline from the market won't remove the number of commercial planes in flight, he said, because other companies would take over that market share.
Airline emissions represent 3 percent of all contributors to greenhouse gases -- much less than automobiles -- but that 3 percent represents more than 370 million tons of CO2 a year. However, unlike the automotive industry's advances with hybrid cars, more efficient jet fuels are yet to be seen, Steve Rayner, a professor of science and civilization at Oxford University, told the New York Times.
"This project may hold particular appeal in the aviation industry as there really are no other viable, cleaner fuels in the pipeline," Rayner said. "I think that's why Branson has latched onto this."
Earth's atmosphere currently has 200 metric gigatons of carbon in it, accelerated by the industrial revolution in the 18th and 19th centuries, said Australian environmentalist Tim Flannery via video link at the conference. The increase in greenhouse gases from factories and burning fossil fuels have changed the environment we live in – creating increased carbon concentrations by 100 parts per million in the air, and raised temperatures that correlate to rising sea levels, floods and storms.
"We are now facing a planetary emergency. The planet has a fever," Gore said at the news conference. "This is an initiative to stimulate someone to do something that no one knows how to do. This is right at the cutting edge."