The Baker’s Dozen: A 748-Year-Old Solution for Climate Offsets

Can King Henry III’s royal decree governing bakers in 13th-century England teach us how to fight climate change, the greatest global challenge of the 21st century?  I’m pretty sure it can. Let me explain...

Deforestation is responsible for more than 10 percent of the greenhouse gas emissions that cause climate change, and halting and reversing tropical deforestation offers as much as 24–30 percent of potential climate mitigation.  The internationally agreed mechanism for reducing tropical deforestation, called REDD+, has rich countries paying tropical forest countries for measured and verified performance in reducing emissions from deforestation.  Funding for these performance-based payments could come from one of two main sources: public budgets or carbon market offsets.  The UNFCCC allows both.

With publicly funded REDD+, funding for reduced deforestation comes out of the budget of government agencies just like any other overseas development assistance.  This is how Norway funds its performance-based payments to Brazil’s Amazon Fund and Guyana’s REDD+ Investment Facility, and how Germany funds its REDD Early Movers program.  This is how cash-on-delivery aid, a Center for Global Development specialty, is funded in other sectors as well.  See for example the UK’s education assistance to Ethiopia.

The benefit of publicly funded REDD+ is that approaches to payment-for-performance can be kept very simple.  Reducing deforestation has a positive effect on climate even if emissions aren’t accounted for precisely down to the exact ton. On the other hand, development assistance funding is subject to entrenched bureaucracy, competition for scarce resources among many worthy causes, and funding fads.  It is distinctly unlikely that public budgets alone can produce funding on the order of magnitude needed to halt tropical deforestation ($18–26 billion per year to cut deforestation in half, according to one source).

The other way to fund REDD+ payments is through carbon market offsets.  Most cap-and-trade programs to date allow regulated companies to meet some portion of their compliance obligations by buying emission reductions realized by entities in uncapped sectors, or offsets.  The European Union’s Emission Trading Scheme, for example, allows the use of offsets purchased through the UN’s Clean Development Mechanism (CDM).  California’s regulators are deliberating how its cap-and-trade system can incorporate offsets from REDD+. (The evolving politics of REDD+ in California is the subject of a new CGD-commissioned working paper by Cara Horowitz and Jesse Leuders, described by my colleague Frances Seymour here. Japan, Korea, China, and other countries are setting up cap-and-trade systems; these systems might also someday allow offsets from REDD+ as well.

The main reason so many cap-and-trade programs include offsets is that they lower the cost of meeting overall emission targets.  They do so by bringing in low-cost mitigation from sectors that have been traditionally difficult to regulate, such as agriculture, or from countries that have not been subject to binding climate targets through the UNFCCC (developing countries, or so-called “Non-Annex I countries”).  The cap-and-trade program envisioned by the Waxman-Markey bill that passed the US House of Representatives in 2009 relied heavily on offsets to contain costs.  A recent report commissioned by the Nordic Council of Ministers estimated that full inclusion of REDD+ credits in a global carbon market would lower costs by about two-thirds.  The funding available for REDD+ through carbon market offsets is likely to be far higher than from development assistance budgets, because developed countries would get something tangible in return: the right to count the purchased emission reduction toward achievement of their own targets.

Still following? We’ll get to King Henry III soon, I promise.

Despite the benefits that offsets can provide, financing REDD+ through offsets occasionally comes under fire. This criticism has fallen into three categories:

Environmental integrity.  Cap-and-trade market rules have been shaped by concerns that offsets transactions could inadvertently allow “higher quality” emission reductions from capped sectors or countries to be traded for “lower quality” emission reductions from uncapped sectors or countries.  Anxiety about a series of what-ifs is often couched in intimidating jargon like leakage, additionality, and reversals.  What if emissions just shift somewhere else? What if the emission reductions would have happened anyway? What if emissions revert back in a few decades time? 

Flooding the market. Ironically, offsets’ greatest strength, lowering the cost of meeting climate targets, is also seen by some as a weakness. Some European environmental groups feared that REDD+ could “flood” the EU Emission Trading Scheme with cheap credits, lowering the incentive for reducing emissions at home.  This fear contributed to keeping REDD+ out of the EU ETS until after 2020.  The fear has subsided greatly now that the EU ETS is experiencing low prices anyway, due to the lack of political will to make more ambitious climate commitments.  But this anxiety is still alive in California where environmental justice advocates worry that offsets could mean fewer emission reductions at home, and thus less domestic co-benefits from cleaner air.

Buying their way out. Offsets have also faced the philosophical criticism that they would let polluters “pay to keep polluting.” Or as critics of California’s cap-and-trade program have put it, “legally allow the continuation of the predatory and consumerist model.”  

Fortunately, there are simple solutions to address all three of these concerns. Here are four solutions to ensure that offset can be included in cap-and-trade in a safe, fair way.  The most elegant of the solutions below, the baker’s dozen, actually addresses all three of the concerns at once.

1. Increase ambition in rich countries. In exchange for access to offsets, rich countries should take on more ambitious emission-reduction targets. Governments making commitments are highly cognizant of what they will cost, so cheaper cuts and deeper commitments are a natural package.  Rich countries would be buying their way up, not buying their way out. The prospect of cost containment from REDD+ offsets led the US House of Representatives to pass a more ambitious climate bill in 2009 than it otherwise would have. 
2. Increase scale in forest countries. Most of the challenges related to environmental integrity posed above are of less concern when REDD+ programs operate at the scale of countries, states, or provinces, rather at the scale of site-specific projects. Governments can make systemic policy changes that projects cannot.  This has motivated a trend away from project-scale approaches to halting and reversing deforestation (e.g., CDM) and toward so-called “jurisdictional” approaches (e.g., the Forest Carbon Partnership Facility’s Carbon Fund; the Verified Carbon Standard’s Jurisdiction and Nested REDD+ program).  Rules to address environmental integrity can and should still be applied, but these can be much simpler at the jurisdictional scale than the complex rules that weighed down the CDM.
3. Impose a quota.  If regulators are concerned about too many cheap credits from REDD+ entering domestic cap-and-trade markets, they can apply a quota to offsets.  Quotas would ensure that a certain level of emission reductions will be made at home, regardless of cost. Waxman-Markey would have allowed only up to 1–1.5 billion tons of CO₂ per year to have been achieved through offsets.  California allows no more than 4–8 percent of emission reductions to come from offsets. Alternatively, countries can consider dual climate commitments, in which a certain quantity of emission reductions must be made domestically, while a certain additional quantity are purchased from abroad on a per-ton basis.
4. Use the “baker’s dozen” to get more than you pay for. Finally, it’s time for the story. 

Back in 1266, more than a century before The Canterbury Tales, King Edward III was concerned that the citizens of England were being sold underweight bread and watered-down ale.  And so the king issued a statute called the Assize of Bread and Ale, which specified that every loaf of bread must contain a certain quantity of wheat.  Bakers who cheated their customers were punished under this law with pillory, public pelting, and gaol (old-timey for “jail”).

Now bread is a finicky product to bake, apparently, and even well-intentioned bakers found it a challenge to ensure that their ovens produced up-to-code loaves each and every time.  And so to stay on the right side of the law, bakers would add an extra loaf of bread to orders to keep the weight up. If a customer ordered 12 loaves, the baker would give 13, just to be on the safe side.  Hence, the “baker’s dozen.”

Just as the medieval baker’s dozen ensured that bread buyers would always get at least as much bread as they paid for, so too can a modern-day baker’s dozen ensure that the atmosphere receives at least as many emission reductions as offsets pay for.  If regulated companies buy 12 tons of emission reductions through REDD+ to offset emissions domestically, they’d be required to buy a 13 ton which they’d retire without using, just to be on the safe side.  This concept has been variably termed a discount, a trade ratio, or partial offsetting.  Under Waxman-Markey, for every four emission reductions purchased by companies to use as offsets, a fifth would have been bought and retired. 

The effect of a baker’s dozen rule is that offsetting not only contains costs, it is also assured of having a direct positive effect on the atmosphere.  Every ton of offsets purchased results in more global emission reductions than would otherwise have occurred. And while offset buyers pay a higher price than they would without the trade ratio, offset sellers stand to gain greater total revenue because of the trade ratio when demand for offsets is highly inelastic. 

Everybody wins from a baker’s dozen rule: Rich countries can access offsets cheaply and safely; forest countries gain extra revenue; and greenhouse gas emissions go down faster than they would otherwise.

You might call this approach “bread-plus.” (Ba-dum-ching!)