A new approach to the EU’s promised cross-border climate action – EnviroNews

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The EU must reduce its greenhouse gas emissions by 90 percent by 2040 relative to 1990 – of which 5 percentage points can be achieved through climate action elsewhere, according to the 2025 law. A study by the Potsdam Institute for Climate Impact Research (PIK) now proposes a novel instrument for this external component: performance-based Jurisdictional Reward Funds.

This avoids perverse incentives, strengthens international and thus also European climate action, and costs just €5 billion annually. The study is available as a PIK Policy Paper on the institute’s website. Co-author, Ottmar Edenhofer, is PIK Director and Chair of the EU climate advisory board.

“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,” says Edenhofer. “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.”

This two-part climate target refers to a somewhat controversial provision in the Paris world climate agreement: a country can acquire “international carbon credits” and count them towards its own climate balance by financing emissions reductions abroad, either at the project or the government level. Some see this as a gateway to cheating. After all, there is little additional benefit to financing climate protection projects if they were planned anyway. And at government level, funding may create incentives for countries to initially set their targets too low in order to be excessively rewarded later. However, both problems can be overcome.

Just 21 euros per tonne of CO₂ saved.

“The option of crediting climate protection efforts beyond one’s own borders is an opportunity – if it is designed correctly,” says Lennart Stern, PIK researcher and also an 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.”

Such a performance-based reward could, for example, promote forest conservation in non-EU countries. It would then reallocate a fixed budget year on year to countries that have been particularly successful, measured against a universally set deforestation rate. Each country would know in advance the level of performance required to receive funding; the amount of the payment would then depend on how much the country is doing compared to other countries. The formula is designed in such a way that above-average and additional efforts are rewarded with higher payments.

The research team also provides an initial estimate of the costs involved. This is based on early experiences with the rainforest fund launched at the most recent world climate summit, as well as on empirical research into fossil fuel markets. In the cost-optimal mix, the EU would allocate only 6 percent of this new policy instrument to forest conservation, 32 percent to phasing out oil and gas, and 62 percent to phasing out coal. Reducing greenhouse gases beyond its borders by 5 percent relative to 1990 EU levels would then cost the €5 billion in 2040. That is just €21 per tonne of CO₂ avoided.

Automatic alignment with what China and the US are doing

Climate protection achieved abroad also has benefits for the EU itself. The international carbon credits received under the Paris Agreement can be integrated into the EU Emissions Trading System (ETS), where they can help prevent sharp price rises. The study calculates that, through the gradual introduction of international carbon credits between 2036 and 2050, the carbon price in the existing EU ETS covering electricity and energy-intensive industry could be 40 to 45 percent lower, on average, than without these credits. The incentive to move away from fossil fuels remains strong – because investors expect carbon prices to rise outside Europe due to increased climate cooperation.

Under current conditions, Brussels can achieve significant emission reductions using the policy instrument outlined in the study. After all, there are still many cost-effective abatement opportunities in developing and emerging economies. If, however, China and perhaps even the US were to use such reward funds at any point in the future, this potential for low-cost emission reductions would soon be exhausted. Costs would rise, and more of the EU’s 2040 climate target would have to be achieved within the EU itself. But in this case, Europe would be less exposed with its climate policy, and global climate protection would be strengthened even more.