EU and UK launch talks on linking carbon markets

The European Union will begin talks with the United Kingdom on linking markets that price carbon emissions. An agreement could significantly reduce post-Brexit friction, stabilise energy markets and facilitate cross-border trade. For businesses, it would mean less administration, more predictable carbon prices and a simpler Carbon Border Adjustment Mechanism (CBAM).

The European Union has taken another step towards closer cooperation with the United Kingdom. Ministers from the member states have approved a mandate to begin negotiations on two important agreements, including one to link the European and UK emissions trading schemes (ETS).

If the negotiations succeed, they could significantly reduce the friction that has persisted between the EU and the UK since Brexit, while strengthening climate and energy cooperation on both sides.

According to Danish Minister for European Affairs Marie Bjerre, the aim is to turn the political gesture made at this year’s EU–UK summit into tangible results. The EU wants to ease the burden on businesses and stabilise market conditions, which have faced considerable uncertainty in recent years.

Linking the ETS: a common carbon price and stronger investment signals

Both jurisdictions already operate their own emissions allowance markets, but their rules and price signals are not aligned. Linking the markets would bring several benefits: a common price across both markets, a lower risk of emissions-intensive production relocating, and greater stability for investors planning low-carbon projects in energy, industry and transport.

The parties will have to decide which sectors the link would cover. It is expected to include not only electricity generation and industry, but possibly aviation and maritime transport as well. For European and UK businesses, aligned rules would mean simpler long-term planning and lower regulatory risk.

Impact on CBAM: UK goods could be exempt

Linking the ETS would also have a direct impact on the EU’s carbon border charge, known as CBAM. It currently applies to UK products because carbon prices in the EU and UK are not harmonised. If the two markets are linked, the EU could exempt UK goods from the charge.

This is particularly important for exporters of steel, cement, aluminium, fertilisers and electricity. Businesses on both sides are urgently awaiting clearer rules. The issue is politically sensitive, however: the UK wants to retain regulatory autonomy, while the EU is pushing for high standards.

Possible agreements between the EU and the United Kingdom are primarily an effort to find practical solutions to problems that have affected trade, energy and regulatory stability since Brexit. Linking the ETS would make planning easier for businesses on both sides and reduce administrative costs.