The UK and EU emissions trading systems will be linked in the future

The European Union and the United Kingdom announced plans at the end of May to link their emissions trading systems (ETS). The aim is to make trade between the EU and the UK more efficient.

The integration of the EU ETS and UK ETS will allow mutual recognition of emissions allowances, enabling cross-border trading in ETS allowances. Practical effects could include increased market liquidity and lower costs for businesses seeking to limit exposure to carbon price volatility, the ESG News website reported.

Whether the two systems will be fully linked now depends on the United Kingdom’s future position on its climate targets, which should be at least as ambitious as those of the EU. This is a condition for linking with the EU ETS under European law.

If successful, the United Kingdom would become only the second country outside the European Economic Area, after Switzerland, to link its ETS with the EU’s. The UK launched its ETS in 2021 in response to Brexit.

A significant incentive for both sides is the prospect of mutual exemption from their respective carbon border mechanisms (known in the EU as CBAM). These mechanisms impose a carbon levy on imports of products and commodities based on their carbon intensity.

The aim of CBAM is to prevent “carbon leakage”—the relocation of high-emission production to jurisdictions with less stringent climate policies. An exemption would ease the regulatory burden on exporters and strengthen trade relations between the United Kingdom and the EU.

The sectors initially targeted by the link between the two ETS include electricity generation, heavy industry, aviation and maritime transport. The link will subsequently be extended to other sectors, including those covered by the so-called ETS2, which covers emissions from buildings, transport and potentially the incineration of municipal waste.

Meanwhile, the European Commission is also considering reforming the CBAM and preparing a new Industrial Decarbonisation Accelerator Act, aimed at boosting demand for clean industrial products made in the EU. These initiatives point to broader regulatory pressure to harmonise and strengthen carbon pricing across Europe.

Although formal talks and consultations are still under way, the proposed ETS link signals a move towards greater coordination of climate policy between the EU and the United Kingdom. The next steps include technical talks on putting the ETS link into operation, according to a timeline to be announced later this year. The European Commission will now ask the Council for authorisation to begin formal negotiations on a linking agreement.