EU and UK Will Work to Link Carbon Markets as Part of Post-Brexit Reset

May 21, 2025

EU and UK Will Work to Link Carbon Markets as Part of Post-Brexit Reset

British and European Union officials announced on Monday that they will work towards linking their respective carbon markets following a U.K.-EU political summit aiming to boost post-Brexit trade and policy cooperation.

In a nine-page “common understanding” statement, the British government said that it will work with the EU Commission “towards establishing a link between carbon markets by way of a EU-U.K. agreement linking the U.K. Emissions Trading Scheme and the EU Emissions Trading System.”

There was no indicated timeline on how long linkage or linkage negotiations between the two governments will take.

U.K. carbon allowances (UKAs) climbed higher on Monday’s news, with the OPIS-assessed benchmark December 2025 UK allowance trading as high as £52.40/mt ($70.09) in the early hours of trading.

Benchmark UKAs have already surged in price this year from a low of £31.925/mt ($42.64) on January 17 in the wake of media reports suggesting that the British government aimed to include ETS linking as part of a broader economic reset with the EU.

OPIS assessed benchmark December 2025 UKAs at £51.255/mt on Monday, or up £2.015 from Friday’s assessed price.

The equivalent European Union December 2025 carbon allowance (EUAs) did not jump on the news, registering an intraday trading high of €72.46/mt ($81.43), lower than OPIS’ assessment on Friday. OPIS ultimately assessed EUAs at €70.29/mt on Monday, or down €2.615 from Friday’s assessed price.

Guadalupe Ruiz, principal data scientist at OPIS’ CAMIRO, said that she expects the OPIS-assessed price gap between EUAs and UKAs — which as of Monday stood at €9.38 — to “gradually narrow” as linkage talks progress.

“The confirmation of these talks marks a significant step toward market integration, harmonized carbon pricing and regulatory alignment between the two systems,” Ruiz said. “While this development is an important milestone, the path forward remains uncertain. The draft negotiating framework — still subject to revision — does not outline a specific timeline, and a final agreement could take years to materialize.”

‘Common Understanding’ Memo Lays Out Steps, Details Scant

A “functioning link” between the two ETSs would help the EU and UK address issues in trade and also provide a “level playing field” between them, the British government said Monday.

Any link between their carbon markets “should not constrain the EU and the U.K. from pursuing higher environmental ambition, consistent with their international obligations”, the U.K. government statement added.

Linkage between the two carbon markets would also help to create mutual exemptions for goods covered by the two government’s carbon border tariffs, the statement said.

The EU is set to implement its carbon border adjustment mechanism (CBAM) next year, requiring EU importers to pay for the embedded carbon emissions in goods from the cement, steel, aluminium, hydrogen, electricity, and fertilizer sectors.

The U.K. is set to implement its own CBAM in 2027 that will largely mirror the EU’s carbon tariff.

Any carbon market linkage agreement should include similar sectors such as: electricity generation, industrial heat generation, industry, domestic and international maritime transport, and domestic and international aviation.

The EU and UK ETSs currently apply different rules to the maritime sector. The EU already requires ship operators to pay for 70% of their emissions produced this year and all of their emissions in 2026. The U.K. government recently announced its decision to include domestic maritime shipping in 2026, though it is still not known whether there will be a gradual or complete inclusion starting next year.

Any such agreement should also leave the door open to expand the coverage of the carbon markets, the statement said.

The understanding also noted that the U.K. should contribute financially to ETS policy-related costs borne by the EU.

Lastly, the two governments agreed that the U.K. should get started and “contribute appropriately” and to “dynamically align” with the EU, given that it is no longer a member of the EU.

“The European Commission should consult the U.K. at an early stage of policy-making,” the paper said. “These rights would not extend to participation in the work of the [EU] Council or its preparatory bodies.”

Reporting by Humberto J. Rocha, hrocha@opisnet.com
Editing by Anthony Lane, alane@opisnet.com