All information is deemed to be accurate as of 19th May 2025
Today’s UK-EU summit resulted in a significant post-Brexit breakthrough, marking a new phase in the relationships between London and Brussels, on a broad spectrum of topics, ranging from trade to defence.
However, while the summit produced a strong political desire to deepen cooperation on climate action and seek alignment between the UK Emissions Trading Scheme (UK ETS) and the EU Emissions Trading System (EU ETS), today’s announcement stops short of providing defined timelines and a signed agreement.
What was agreed?
At the summit, the EU and the UK announced their decision to work towards establishing a link between their carbon markets.
According to a joint UK-EU statement, the sectors included within the ETS linking agreement will be clearly defined to prevent carbon leakage and competitive distortions. These sectors will encompass electricity generation, industrial heat generation, industry, domestic and international maritime transport, and domestic and international aviation. Additionally, this agreement is set to feature a procedure to expand the list of sectors covered.
What is more, the agreement will have to ensure the dynamic alignment of the UK with the relevant EU rules underpinning the functioning of the ETS link, while respecting the UK’s constitutional and parliamentary procedures.
The UK’s cap and reduction pathway will be guided by its Climate Change Act obligations and Nationally Determined Contributions, ensuring they are at least as ambitious as those of the EU.
Crucially, the agreement will include a financial contribution from the UK to the EU’s relevant costs, and a dispute resolution mechanism with an independent arbitration panel. The EU Court of Justice will remain the ultimate authority for all questions of EU law.
While the declaration does not contain binding legal commitments or specific timelines, it signals a strong intention to align carbon pricing frameworks. Based on our own assessment, the alignment is projected to be implemented no earlier than 2028.
A market landscape still marked by complexity
In the absence of an agreement on formal linkage with clear timelines, the market landscape remains complex for participants. Key points to consider are:
- No immediate price convergence: UK Allowances (UKAs) are likely to continue trading at a discount to EU Allowances (EUAs) given persistent oversupply in the UK ETS in the absence of a Supply Adjustment Mechanism (SAM) – the UK equivalent of the EU’s Market Stability Reserve (MSR).
- Administrative complexity persists: Businesses operating across both jurisdictions will still have to comply with two distinct Monitoring, Reporting and Verification (MRV) frameworks, registry systems, and allowance surrendering deadlines for the foreseeable future. Both the ETSs are considering the inclusion of carbon dioxide removal (CDR) credits, however the approach to inclusion varies. The anticipated efficiency gains of full linkage, such as simplified compliance and cost reduction, have not yet been achieved.
- Investment Funds have built an all-time high net long UKA position of 18.5 Mt (data as of 9th May 2025) in anticipation of linking and price parity. Following this announcement, Investment Fund positioning will be crucial to UKA price movements and some profit taking cannot be ruled out in the absence of a definitive agreement or linking timeline.
- No liquidity benefits: Without allowance fungibility, the two markets remain structurally separate.
CBAM and the urgency of deeper coordination
The joint declaration reaffirms a shared commitment to establish conditions allowing goods from each jurisdiction to benefit from mutual exemptions under the respective EU and UK CBAMs, provided they comply with the relevant provisions of EU and UK legislation. However, the agreement offers no immediate pathway with clearly defined timelines for UK exporters to benefit from EU CBAM exemptions.
Final thoughts
The outcome of the 19th May summit represents a very positive – albeit cautious - first step toward a structural alignment. Yet without a clear timeline or technical milestones, businesses must remain cautious and prepare for volatility in prices as developments unfold. Whilst a full agreement may not have materialised, this summit appears to have been a meaningful first step towards linking.
Reach out to discuss how EU and UK ETS linkage and other policy developments could impact your business and explore tailored strategies to navigate this potential development effectively.
