A study published by the Potsdam Institute for Climate Impact Research (PIK) proposes a novel approach for the European Union (EU) to meet its legally mandated target of reducing greenhouse gas emissions by 90% from 1990 levels by 2040. The study introduces jurisdictional reward funds as a performance-based mechanism to finance emissions reductions outside the EU, aligning with international climate cooperation goals.
What Happened
On June 16, 2026, the PIK released a policy paper presenting a new instrument for the EU’s externally oriented climate action component. The EU’s 2025 law allows up to 5 percentage points of its 2040 target to be met through climate efforts funded beyond its borders. The study outlines jurisdictional reward funds as a way to allocate a fixed budget annually—estimated at 5 billion euros—to developing and emerging economies that demonstrate measurable progress in reducing emissions, such as through forest conservation or fossil fuel phase-out.
Key Facts
- The EU’s 2040 greenhouse gas reduction target is a 90% decrease relative to 1990 emission levels.
- The external climate action component can account for up to 5% of the total reduction requirement.
- Jurisdictional reward funds would distribute payments based on comparative emission reduction performance among eligible countries.
- Annual cost to the EU for this instrument is estimated at 5 billion euros in 2040.
- The study estimates a cost of approximately 21 euros per ton of CO2 avoided using this method.
- Funding is projected to focus 62% on coal phase-out, 32% on oil and gas phase-out, and 6% on forest conservation efforts.
- Integration of international carbon credits into the EU Emissions Trading System (ETS) could reduce ETS carbon prices by 40% to 45% on average between 2036 and 2050.
Why It Matters
This new mechanism aims to avoid issues found in previous voluntary carbon markets, such as incentives for countries to set weak climate targets to benefit financially. By focusing on government-level, performance-based rewards, the EU can promote additional and verifiable emissions reductions beyond its borders. The integration with the EU ETS also helps stabilize internal carbon prices, reducing economic volatility for EU industries transitioning to low-carbon alternatives.
Background
The EU’s 2025 climate law stipulates ambitious emissions reduction targets for 2040, with allowances for some reductions to be achieved through international cooperation. This approach builds on the Paris Agreement’s controversial provisions permitting countries to credit emissions reductions financed abroad. Previous carbon markets have sometimes faced criticism for lacking true additionality and encouraging low baseline targets.
Analysis
Ottmar Edenhofer, PIK director and chair of the EU climate advisory board, emphasized the stabilizing effect of international flexibility on EU climate ambition, noting the system’s resilience despite uncertain global cooperation. Lennart Stern, PIK researcher and co-author, points out that a uniform offer for all eligible countries—rewarding performance comparably—can mitigate perverse market incentives seen in earlier carbon credit systems.
Who Is Affected
Eligible countries include developing and emerging economies that have demonstrated a proven track record of tightening climate policies. EU member states will also benefit indirectly through lower ETS carbon prices and cost-effective fulfillment of their emissions targets.
What Remains Unclear
- The study does not confirm how this mechanism will scale if major economies such as China or the U.S. adopt similar reward funds.
- The exact regulatory frameworks and governance details required to implement jurisdictional reward funds remain to be finalized.
- The long-term effectiveness and verification of additional emissions reductions abroad await practical testing.
What Comes Next
This policy proposal is now available for consultation on the PIK website as part of a published policy paper titled “Making international carbon markets work for Europe.” Further discussions and potential integration considerations within the EU and global climate governance forums are expected in the near future.
Sources
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