All information is accurate as of 14th May 2025
The EU-UK summit scheduled for 19th May 2025 in London has garnered significant attention due to expectations of an announcement regarding an agreement on linking the UK Emissions Trading Scheme (UK ETS) with the European Union Emissions Trading System (EU ETS). This potential alignment marks a pivotal step in post-Brexit climate collaboration, creating considerable opportunities and implications for companies active in both markets.
With Brexit leading to the EU ETS, Europe's primary tool for climate action, being divided, approximately 10% of the emissions it covered became regulated under the UK ETS at the start of 2021. While politically necessary, this created increased complexity for businesses and introduced additional administrative tasks for those operating in both the UK and EU.
Adding to this complexity, currently both the EU and the UK are implementing Carbon Border Adjustment Mechanisms (CBAMs). These mechanisms aim to prevent carbon leakage by imposing additional costs on imports from nations with less stringent emissions mitigation policies. This shared ambition regarding CBAMs have reignited discussions around reuniting the EU and UK ETS.
On 20th March 2025, the UK Government formally announced it was "actively considering" linking the UK ETS with the EU ETS, responding to recommendations from the EU-UK Parliamentary Partnership Assembly, which met in Brussels on 17th March 2025. The Assembly advocated seriously examining ETS linkage, as initially outlined in the EU-UK Trade and Cooperation Agreement (TCA) signed on 30th December 2020 and implemented from 1st May 2021.
Despite the potential benefits, key differences between the UK and EU systems remain a challenge. Most notably, the UK ETS lacks a Market Stability Reserve (MSR), a crucial component of the EU ETS that helps manage oversupply of allowances. Without a similar tool, the UK ETS has accumulated a surplus of allowances, resulting in persistently low UK Allowance (UKA) prices. To address this, the UK government is considering introducing a Supply Adjustment Mechanism (SAM), similar to the MSR. The consultation for SAM concluded on 11th March 2024, and the market is keenly awaiting the government's final decision.
A major benefit of linking the UK and EU ETS is the expansion and increased liquidity of the market. Combining these schemes would enlarge the trading pool significantly, offering improved price stability, reduced volatility, and enhanced market efficiency. For multinational companies, a unified scheme would simplify compliance, reducing administrative costs and complexity associated with managing two separate trading systems.
For businesses, particularly those currently exposed to the UK ETS, this linkage carries substantial implications. Linking the schemes would drive UKA prices, currently trading at an €11 discount, to parity with EU Allowance (EUA) prices, and could have a smaller downward pressure on EUAs too. Such price changes would significantly impact costs. However, pricing parity would help shield UK exporters in EU CBAM covered sectors from the costs associated with the EU CBAM which kick in next year.
Additionally, this alignment underscores the joint commitment of both the EU and UK to achieve ambitious climate targets and address climate change proactively. The alignment also signals leadership on the international stage, demonstrating the efficacy and importance of emissions trading as a key tool in global climate mitigation efforts.
In summary, a successful announcement regarding an agreement on linking the EU and UK ETS at the summit on 19th May would mark a critical step towards coordinated climate action between both entities. Companies must proactively manage the forthcoming adjustments in carbon market dynamics, preparing strategically for potential price increases.
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.
