The European Union has committed to cutting its greenhouse gas emissions by 90 percent by 2040, compared to 1990 levels. Under its 2025 law, up to 5 percentage points of that target can be met by funding climate action in other countries rather than reducing emissions at home. Now, researchers at the Potsdam Institute for Climate Impact Research (PIK) have proposed a new way to make that work fairly and effectively and at a cost of just 5 billion euros per year.
The idea of paying for emissions cuts abroad isn’t new. Under the Paris climate agreement, countries can earn what are known as “international carbon credits” by financing climate projects in other nations and counting the results toward their own targets. But this approach has drawn criticism. If the projects being funded were going to happen anyway, there’s no real benefit. And at the government level, countries might deliberately set weak climate goals at first, just so they can later claim big rewards for improvements they were always planning to make.
The PIK team says both of these problems can be solved with better design. Their proposal centers on something called Jurisdictional Reward Funds: essentially a pot of money that rewards governments in developing and emerging economies for proven climate progress. The key difference from past efforts is that every eligible country plays by the same rules.
“The option of crediting climate protection efforts beyond one’s own borders is an opportunity – if it is designed correctly,” says Lennart Stern, a PIK researcher and co-author of the study. “To avoid the perverse incentives of previous voluntary carbon markets, we propose a more efficient framework: Brussels would provide financing via so-called Jurisdictional Reward Funds as remuneration for efforts made by governments outside the EU. All developing and emerging economies with a proven track record of tightening climate policy would be eligible. The key point is that, in principle, the offer is the same for all countries.”
Here’s how it might work in practice. Say the EU wants to help protect forests outside Europe. It would set a clear benchmark — a target deforestation rate — and distribute a fixed budget each year to countries that outperform it. Countries would know in advance what’s expected of them, and those doing the most compared to their peers would receive the biggest share. The system is designed to specifically reward efforts that go above and beyond.
According to the researchers, the most cost-effective way to spend these funds would be to direct 62% toward helping countries phase out coal, 32% toward reducing oil and gas use, and just 6% toward forest conservation. At that mix, cutting EU-equivalent emissions by 5% abroad would cost around 21 euros per tonne of CO₂ avoided, a relatively low price for meaningful climate progress.
There’s also a direct benefit for Europe. The carbon credits earned through this system could be fed into the EU’s existing Emissions Trading System, helping to keep carbon prices from spiking too sharply. The study estimates that gradually introducing these international credits between 2036 and 2050 could lower the average carbon price in the EU’s trading system by 40 to 45%. That said, businesses would still have strong reasons to move away from fossil fuels, since carbon prices globally are expected to keep rising as more countries step up their climate efforts.
Ottmar Edenhofer, PIK Director and co-author of the study, argues the approach actually strengthens Europe’s position. “Our analysis shows that the international flexibility built into the EU’s 2040 climate target should not simply be dismissed as a questionable substitute for political ambition at home,” he says. “Rather, climate protection beyond our borders acts as a stabilising mechanism. It ensures that ambitious climate policy in Brussels remains realistic in the future – regardless of what is decided in Beijing or Washington.”
And if major players like China or the US eventually adopt similar funds? The cheap opportunities abroad would dry up, pushing more of the burden back onto Europe — but by then, global climate action would be much stronger overall.
Edenhofer, O., Leisinger, C., Stern, L., Kalkuhl, M. (2026): Making international carbon markets work for Europe: Jurisdictional Reward Funds and the EU’s 2040 climate target, Potsdam : Potsdam Institute for Climate Impact Research, 18 p. https://doi.org/10.48485/pik.2026.17