Climate protection beyond our borders acts as a stabilizing mechanism.
As the European Union charts a course toward a 90 percent reduction in emissions by 2040, researchers at the Potsdam Institute have offered a mechanism that asks an old question anew: can one nation's ambition be meaningfully expressed through another's progress? The proposed Jurisdictional Reward Funds would direct roughly five billion euros annually toward measurable climate action in developing economies, paying governments for verified results rather than promises. It is a design that seeks to reconcile the moral weight of domestic responsibility with the practical reality that the atmosphere does not recognize borders.
- The EU's 2040 climate target carries a structural tension: five of the required ninety percentage points may be met through funding emissions reductions abroad, but no credible mechanism has existed to do this without gaming or waste.
- Past carbon credit schemes have been widely discredited for rewarding inaction dressed as progress, creating urgency for a fundamentally different architecture.
- The Jurisdictional Reward Fund model responds by tying payments to transparent, comparative benchmarks — governments that outperform peers on forest protection or fossil fuel phase-out receive proportionally greater rewards at roughly €21 per ton of CO2 avoided.
- Integrating these international credits into the EU Emissions Trading System could suppress carbon prices by 40 to 45 percent between 2036 and 2050, lowering costs for European industry while preserving the long-term incentive to decarbonize.
- The window for cheap international reductions is finite — if China or the United States launch similar funds, the pool of affordable opportunities narrows and Europe's domestic burden grows, making early action both strategically and economically rational.
The European Union has pledged to cut greenhouse gas emissions by 90 percent by 2040, with a notable provision: five of those percentage points may be achieved by funding climate action beyond its own borders. Researchers at the Potsdam Institute for Climate Impact Research have now designed a concrete mechanism to make that provision credible — a system they call Jurisdictional Reward Funds, estimated to cost around five billion euros per year.
Unlike earlier carbon credit schemes, which drew criticism for subsidizing outcomes that would have occurred regardless, this proposal ties payments to transparent performance benchmarks applied equally across all participating countries. Governments in developing and emerging economies that demonstrably outperform their peers — in halting deforestation or accelerating coal phase-out, for instance — would receive higher rewards. The research team's cost-optimal model allocates the fund heavily toward fossil fuel transitions, with 62 percent directed at coal phase-out, 32 percent at oil and gas, and just 6 percent at forest conservation, arriving at an efficiency of roughly €21 per ton of CO2 avoided.
Ottmar Edenhofer, the institute's director and a chair of the EU's climate advisory board, frames the mechanism not as a loophole but as a stabilizing force. By anchoring European climate policy to global realities, he argues, it becomes more durable against shifts in other major economies. The proposal also carries a secondary benefit: gradually introducing international carbon credits into the EU's Emissions Trading System could reduce average carbon prices by 40 to 45 percent through mid-century, easing costs for European industry without eliminating the long-run incentive to abandon fossil fuels.
The researchers are candid about the proposal's implicit urgency. The pool of low-cost emissions reductions in developing economies is large now, but it will not remain so. Should China or the United States adopt comparable funds, competition for those opportunities would intensify and Europe would face a steeper domestic climb. That outcome would also signal a deepening of global climate cooperation — a trade-off the researchers appear prepared to accept, and perhaps even welcome.
The European Union has committed to cutting its greenhouse gas emissions by 90 percent by 2040 compared to 1990 levels. But here's the catch: five percentage points of that reduction can come from funding climate action outside its borders. Now researchers at the Potsdam Institute for Climate Impact Research have designed a specific mechanism to make that work—and they say it could cost just 5 billion euros a year.
The proposal centers on what they call Jurisdictional Reward Funds, a performance-based system that would pay developing and emerging economies for measurable climate progress. Unlike older carbon credit schemes, which have been criticized for rewarding projects that would have happened anyway or for creating perverse incentives, this approach sets transparent benchmarks that apply equally to all participating countries. A government that outperforms its peers in, say, forest conservation or coal phase-out would receive higher payments. The formula is designed so that additional effort yields additional reward.
Ottmar Edenhofer, director of the institute and chair of the EU's climate advisory board, frames this not as a shortcut but as a stabilizing mechanism. International climate finance, he argues, keeps European climate policy grounded in reality. If Brussels commits to ambitious domestic cuts while also supporting global emissions reductions, the policy becomes more resilient to shifts in other major economies. "Rather than dismissing international flexibility as a questionable substitute for ambition at home," Edenhofer says, "climate protection beyond our borders acts as a stabilizing mechanism."
The research team has sketched out how the money would flow. In their cost-optimal scenario, the EU would allocate just 6 percent of the fund to forest conservation, 32 percent to phasing out oil and gas, and 62 percent to phasing out coal. The math works out to roughly 21 euros per ton of CO2 avoided—a figure drawn from early experiences with rainforest funds and empirical research into fossil fuel markets. That efficiency matters because there are still many cheap emissions reductions available in developing economies; the EU can leverage that advantage while it lasts.
There's also a secondary benefit for Europe itself. Under the Paris Agreement, international carbon credits can be integrated into the EU's Emissions Trading System, the continent's cap-and-trade mechanism for electricity and energy-intensive industry. The study calculates that by gradually introducing these credits between 2036 and 2050, the carbon price in the ETS could average 40 to 45 percent lower than it would be without them. That sounds like a subsidy, but the researchers argue it's actually a form of insurance: investors would still expect carbon prices to rise globally as climate cooperation deepens, so the incentive to abandon fossil fuels remains intact.
The proposal contains an implicit warning. Right now, the EU can achieve significant emissions reductions cheaply by funding projects abroad. But if China or the United States eventually adopt similar reward funds, that pool of low-cost opportunities will shrink fast. Costs would rise, and Europe would have to do more of the heavy lifting domestically. On the other hand, that scenario would also mean global climate cooperation had strengthened considerably—a trade-off the researchers seem willing to accept. For now, the EU has a tool that could make its 2040 target both ambitious and achievable.
Notable Quotes
Rather than dismissing international flexibility as a questionable substitute for ambition at home, climate protection beyond our borders acts as a stabilizing mechanism.— Ottmar Edenhofer, Potsdam Institute for Climate Impact Research director
To avoid the perverse incentives of previous voluntary carbon markets, we propose a more efficient framework where Brussels provides financing as remuneration for efforts made by governments outside the EU.— Lennart Stern, PIK researcher
The Hearth Conversation Another angle on the story
Why does the EU need to count emissions reductions from other countries toward its own target? Doesn't that just let Europe off the hook?
It's a legitimate concern, but the researchers argue it's actually the opposite. If Europe commits to ambitious domestic cuts while also funding global climate action, the policy becomes more durable. You're not replacing domestic effort—you're stabilizing it.
But how do you prevent countries from gaming the system? Setting low targets just to look good later?
That's where the performance-based design matters. Every country knows the benchmark in advance. You're not rewarded for hitting a target you set yourself—you're rewarded for doing better than your peers. It's comparative, not absolute.
So if one country conserves forests better than another, it gets more money?
Exactly. And the formula is transparent and applies to everyone. There's no negotiation, no special deals. That removes the incentive to lowball your initial commitment.
What happens if China starts doing this too?
Then the cheap emissions reductions dry up fast. Europe would have to achieve more of its cuts at home, which would be more expensive. But that's actually a sign the system worked—it means global climate cooperation deepened.
Five billion euros a year sounds cheap. Is it really?
For achieving 5 percent of a 90 percent emissions reduction target across the entire EU economy, yes. It works out to about 21 euros per ton of CO2. That's well below what it would cost to do all that work domestically.