Brussels and London are in the final stages of negotiations to link their respective greenhouse gas emissions trading systems. Nearly six years after the launch of the standalone UK Emissions Trading Scheme (UK ETS) following Brexit, emission allowances could soon be mutually recognized across the English Channel. The agreement is set to be a centerpiece of the upcoming EU-UK leaders’ summit scheduled for November 20. According to Bloomberg, negotiators have already reached consensus on emission caps, supply management mechanisms, and free allocations, leaving the regulatory treatment of derivatives as the final unresolved issue.
For multinational corporations operating across both jurisdictions, linking the EU ETS—which has operated since 2005 and covers roughly 10,000 installations across power generation, steel, cement, fertilizers, and aviation—with the UK market promises streamlined compliance and potential cost efficiencies.
Pathway to CBAM Exemptions
Market integration holds critical implications for trade in goods subject to the Carbon Border Adjustment Mechanism (CBAM), which levels the playing field between domestic producers and foreign competitors regarding carbon costs. Merging the two trading schemes could substantially reduce administrative burdens and financial levies in bilateral trade, especially as the UK prepares to launch its own national CBAM equivalent at the beginning of 2027.
However, trade barriers will not vanish overnight. Under EU law, before the European Commission can issue a separate legislative act exempting the UK from CBAM, both ETS markets must be fully integrated and maintain rigorous, transparent carbon pricing without preferential rebates.
Price Convergence and Regulatory Alignment
Financial markets are already pricing in the prospective deal, with the valuation gap between UK and EU carbon permits steadily narrowing since initial political declarations were made. Moutaz Altaghlibi, an economist at ABN Amro, estimates that UK carbon prices will converge even further toward EU levels over the next two years—a trend that simultaneously poses a risk of higher compliance costs for certain British manufacturers.
The draft framework also establishes tight regulatory alignment. While the EU will recognize British emission caps set for 2028–2030, starting in 2031 the annual volume of allowances issued under the UK ETS will be strictly capped at 7.1% of the total EU ETS issuance. Furthermore, London will be required to dynamically align its regulations with future EU legislative updates. Although the final pact requires formal ratification by both sides—including approval from the European Parliament and EU member states in the Council—and is politically tied to broader agreements on sanitary and phytosanitary (SPS) standards and youth mobility, negotiators have left the door open for the provisional application of its core provisions.
