Carsten Müller, Patrick Behr, Sebastian Bleuel, Eric Nowak

• Climate change is a global challenge, with estimated mitigation costs ranging from $1.6 to $3.8 trillion per year. As a pioneer in climate action, the European Union has the most exten-sive emissions trading system worldwide (90% of the global value of $759 billion in 2021). In this paper, we review the European Union's climate strategy, emphasizing the EU Emissions Trading System (EU ETS) development, and the role of tropical forest carbon credits for off-setting. We argue that the European Union continues to leave a significant potential of trop-ical forests as natural carbon sinks unattended. In contrast, we reveal that the regulators can learn from the experiences made in the past and the finalization of the rulebook for Article 6 of the Paris Agreement. We present a proposal on changes to the EU ETS regulation by con-verting the European Commission's proposal to increase the linear reduction factor from 2.2% to 4.2% to the eligibility of forest carbon credits, resulting in additional funding poten-tial for forestry projects to increase necessary carbon sinks. Simultaneously, allowing flexibil-ity of investing to a limited extent in neutralization projects mitigates the risk of overstress-ing regulated companies to reach the emission reduction targets.