EU, UK Move to Link Carbon Markets

The United Kingdom (UK) and European Union (EU) have agreed to work toward linking their emissions trading systems (ETS) in a move that could ease trade tensions, cut compliance costs and align their climate policies post-Brexit. The announcement was made during the first EU-UK summit, where leaders also discussed broader cooperation on energy, climate, migration and security.

The envisioned agreement would allow mutual recognition of carbon allowances issued by either the EU or the UK and enable exemptions from their respective Carbon Border Adjustment Mechanisms (CBAMs). Both parties said the linkage should initially cover sectors such as electricity and industrial heat generation, manufacturing, maritime transport, and aviation, with provisions to expand to additional sectors.

The EU ETS, launched in 2005, is the world’s largest carbon market and is projected to generate approximately €40 billion (US$45.12 billion) in revenue from 2020 to 2030. In 2023, the EU also adopted its CBAM to prevent carbon leakage by equalizing the carbon cost of imports with domestically produced goods. The UK introduced its own ETS in 2021 and plans to implement a CBAM in 2027.

“We are both committed to leading by example on the path to net zero. And that is why we have also agreed to work toward linking our emission trading system. A larger integrated system is a big step forward in decarbonization and creates a level playing field,” said Ursula von der Leyen, President, EU Commission. 

Julia Michalak, EU Policy Director, International Emissions Trading Association (IETA), welcomed the agreement, stating that linking the systems could deliver significant economic advantages. “Aligning systems would reduce compliance costs and lower trade barriers for carbon-intensive goods,” she said.

The UK government estimates that linking with the EU ETS could save British exporters up to £800 million (US$1.07 billion) in carbon border taxes. While analysts warn that the move may initially raise UK carbon prices, the long-term benefit of CBAM exemptions is expected to offset the short-term cost increase.

Despite the agreement, no formal timeline has been announced. Experts point out that similar processes, such as Switzerland’s ETS linkage with the EU, took several years to finalize. According to carbon market analytics firm Veyt, the constructive tone is encouraging, but regulatory alignment ahead of the UK CBAM’s 2027 launch remains a complex undertaking.

Beyond market integration, both sides have also pledged to continue collaboration on clean energy technologies, including hydrogen, carbon capture and storage (CCS), and biomethane, aligning with their shared net-zero commitments.