UK, EU agree to link carbon trading systems to ease trade barriers

European Commission President Ursula von der Leyen (left) and UK Prime Minister Keir Starmer (right). (Photo: Ursula von der Leyen's Facebook)

Despite the delayed implementation of the EU’s Carbon Border Adjustment Mechanism (CBAM), the United Kingdom has moved forward to align its carbon market with the EU’s.

UK and EU reached an agreement to establish a framework compatible with their respective Emissions Trading Systems (ETS) on May 19, which includes defining CBAM exemptions and mutual recognition of emission allowances. The goal is to mitigate the potential trade friction caused by differing carbon regulations.

Post-Brexit climate cooperation: UK moves toward EU ETS linkage

Following Brexit, the UK withdrew from the EU ETS in 2021 and launched its own emissions trading system that same year. Both systems operate under a cap-and-trade model, where a total emissions ceiling is set and gradually reduced over time. Companies must comply with emission limits; those that exceed allowances must purchase additional permits on the carbon market, while those under the limit can sell their surplus.

Under the new agreement, businesses operating within either jurisdiction will be exempt from CBAM obligations. The sectors prioritized for inclusion are power generation, industrial heat generation, manufacturing, and both domestic and international shipping and aviation. The framework is expected to expand to other sectors over time. Harmonizing regulatory standards and addressing the legal role of the European Court of Justice were key points during the UK-EU negotiations.

Julia Michalak, EU Policy Director at the International Emissions Trading Association (IETA), welcomed the agreement, emphasizing that a unified carbon market can deliver significant economic benefits. She noted that aligning systems would reduce compliance costs and lower trade barriers for carbon-intensive goods. According to UK government estimates, linking with the EU ETS could save UK exporters up to £800 million (about USD 1 billion) in carbon border taxes.

The UK government estimates that linking with the EU carbon market could save UK exporters substantial carbon tariffs, potentially up to £800 million. Pictured is the Port of Liverpool, UK.(Photo: Peel Ports）

A steppingstone toward UK’s own CBAM

Despite the progress, no formal timeline has been established. The process could be lengthy; for example, it took nearly a decade for Switzerland to link its carbon market with the EU. According to carbon market intelligence firm Veyt, the constructive tone of the talks is promising, but completing all regulatory alignment before the UK's CBAM launches in 2027 will be a significant challenge.

Analysts suggest that linking the two markets could drive up UK carbon prices, eventually bringing them closer to EU levels. While this may temporarily increase costs for UK firms, the long-term savings from CBAM exemptions could outweigh the short-term impact.

Beyond carbon market integration, the UK and EU have also committed to ongoing cooperation in clean energy technologies. The agreement outlines plans for continued regulatory dialogue on hydrogen, carbon capture and storage (CCS), and biomethane, part of a shared effort to meet climate goals.

Source: Reuters, Carbon Herald, Argus Media, Bloomberg