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Abstract:
The revised EU Climate Law allows the use of international flexibility mechanisms for up to 5% of 1990 net emissions under the 2040 target. The provision is not a relaxation of ambition: it shifts part of the mitigation effort abroad to contain costs while keeping the overall emissions reductions unchanged. The challenge is ensuring that what is credited abroad is real.
Properly designed, international flexibility acts as an insurance mechanism against geopolitical uncertainty. If global climate ambition remains weak, access to lower-cost mitigation abroad helps contain compliance costs and sustain political support for ambitious EU targets. If international climate ambition strengthens, international opportunities for emission reductions become scarcer and mitigation efforts naturally shift back to Europe.
We propose Jurisdictional Reward Funds (JRFs) as a high-integrity framework for implementing the 5% provision. Unlike previous mechanisms, whose systematic failure to deliver real emissions reductions is well-documented, JRFs rely on universal baselines on jurisdiction-level rather than project-level additionality assessments or negotiated benchmarks. They thereby avoid the existing incentive problems undermining existing Article 6 mechanisms and ensure credited mitigation is environmentally credible.
A strategically optimized procurement portfolio for reducing fossil fuel use and conserving tropical forests could fully utilize the 5% provision at annual costs of roughly €5 billion in 2040 (€21/tCO2). Under stylized integration scenarios, international credits could reduce ETS1 allowance prices after 2030 by around 40-45% relative to baseline, with smaller but meaningful effects under ETS2 integration and substantially larger effects under earlier or more prolonged integration.
