EU and UK Move Towards Linking Carbon Markets 

In a landmark shift post-Brexit, the European Union and the United Kingdom are laying the groundwork to link their Emissions Trading Systems (ETS), a move expected to boost cross-border climate cooperation, reduce costs for industry, and strengthen international carbon markets. Formal talks are expected to begin in September 2025.  

What is Happening? 

At the EU-UK Summit in May 2025, leaders adopted a Common Understanding to explore reconnecting the EU ETS and the UK ETS, which have operated separately since the UK left the EU in 2020. This potential linkage, though not yet legally binding, outlines shared ambitions on climate, market integration, and sustainable growth. This would not be the first time two countries/regions link their ETS. For example, California and Quebec aligned theirs in 20141. 

Why Does It Matter? 

• Economic Benefits: A joint carbon market would be more liquid, predictable, and efficient. Analysts estimate €770 million in savings by 2030 just from improved market liquidity. 
• Climate Impact: A larger, harmonized ETS would enable greater investment in low-carbon technologies and reduce carbon leakage. 
• Trade Protection: Linking would exempt UK exporters from the EU’s Carbon Border Adjustment Mechanism (CBAM), avoiding costly tariffs. 

Key Features of the Linkage Plan 

• Sector Scope: Both systems cover energy, industry, and aviation. Maritime emissions will be included. However, the UK lacks an ETS2 it does not currently price emissions from buildings and road transport, unlike the EU. 
• Rule Alignment: The UK is expected to dynamically align its ETS rules with the EU’s, enabling faster policy coordination. 
• Governance: A joint body will manage the system, while legal disputes on EU law will be resolved by the Court of Justice of the EU (CJEU). 
• UK Contributions: The UK will share administrative costs and be consulted on future EU rules though without voting rights. 

What Are the Challenges? 

• Price Gap: The EU carbon price is currently around 30% higher than the UK’s, a gap that could distort competition. 
• Scope Differences: The UK has not yet committed to carbon pricing for households or road transport. 
• Market Tools: The UK’s market stability mechanisms are less developed than the EU’s. 

What are the impacts on the UK CBAM?  

• Regulatory Alignment: Linking ETS systems would support mutual recognition of carbon pricing, simplifying CBAM implementation on both sides. 
• Trade Simplification: UK-EU linkage could reduce trade frictions by avoiding double carbon charges or overlapping compliance requirements for importers/exporters. 
• Benchmark Consistency: A harmonized market would help align carbon intensity benchmarks, making it easier to assess embedded emissions fairly.
• Exemptions for EU Imports: EU exporters to the UK could be exempt from the UK CBAM if the EU ETS is deemed equivalent, reducing costs and promoting cooperation.
• Administrative Efficiency: Shared infrastructure and data could lower compliance burdens for companies operating in both markets. 

What’s Next? 

Formal negotiations must begin under EU Council approval, followed by European Parliament consent. While no timeline has been set, 2028 is seen as a realistic target, just ahead of the UK’s next general election. If successful, it could set the standard for post-Brexit climate collaboration and inspire broader global market integration.