Potsdam Institute Proposes EU Jurisdictional Reward Funds for International Carbon Credits

A new study from the Potsdam Institute for Climate Impact Research proposes that the European Union create performance-based Jurisdictional Reward Funds to achieve up to 5 per cent of its 2040 climate target through overseas action, at an estimated annual cost of €5 billion. The mechanism would reward developing and emerging economies for measurable emissions reductions, prioritising coal phase-out and reduced oil and gas production.

The proposed framework targets the flexibility built into the EU's 2025 Climate Law, which allows up to 5 percentage points of the 90 per cent emissions reduction target by 2040 to be achieved through international carbon credits under the Paris Agreement. Unlike project-based carbon offsets, Jurisdictional Reward Funds would link payments to government-level performance against common benchmarks. Countries reducing deforestation beyond a universally established threshold would receive higher payments. The researchers estimate the cost at approximately €21 per tonne of CO2 avoided in 2040.

The study recommends allocating 62 per cent of the fund toward coal phase-out efforts, 32 per cent toward reducing oil and gas production, and 6 per cent toward forest conservation. The mechanism is designed to avoid perverse incentives common in voluntary carbon markets, where countries may deliberately set weak targets to secure larger rewards later. Gradually introducing international credits into the EU Emissions Trading System between 2036 and 2050 could lower EU carbon prices by an average of 40 to 45 per cent, the analysis estimates.

The study notes that if major economies such as China or the United States adopt similar reward-based mechanisms, competition for low-cost emissions reduction opportunities in developing economies would increase. This would raise costs but ultimately strengthen global climate cooperation. For India and other emerging economies with significant coal sectors, Jurisdictional Reward Funds could provide a substantial financial incentive to accelerate the energy transition while generating resources for adaptation — a model with direct relevance to current debates at Bonn and COP31.

Key figure — €5 billion annual cost to meet 5% of EU's 2040 climate target