During Prime Minister Keir Starmer’s recent visit to Brussels, he named climate change as a priority area for EU-UK cooperation. Linking the UK Emissions Trading System (ETS) to the EU ETS is a logical first step in achieving this objective.
The ETS is a major component of the EU and UK net-zero transitions. Until 2021, after which the UK set up its own ETS as part of the Brexit process, the EU and UK were part of the same ETS. Linking would absolve UK heavy industry from the EU Carbon Border Adjustment Mechanism (CBAM), which introduces charges and time-consuming and pricey conformity assessment requirements (for example, getting a third party to certify that emissions reported are correct). CBAM charges come into effect in 2026, lending some urgency: ideally, ETS-linking negotiations would be wrapping up already.
A linked ETS would also prevent Northern Ireland, which is part of the UK ETS in most sectors, from having to apply EU CBAM charges. This would solve a host of politically-sensitive trade complexities affecting the (supposedly frictionless) regulatory border between Northern Ireland and the Republic of Ireland.
There are also additional economic arguments for the UK to link – including making the ETS market less volatile, and increasing liquidity.
Unlike many other areas of EU-UK regulatory cooperation, such as agri-food, there is explicit encouragement to link systems in the EU-UK Trade and Cooperation Agreement (TCA). The agreement states that both parties shall ‘give serious consideration to linking their respective carbon pricing systems…’. (Article 392[6]).
But ETS-linking will involve alignment between UK and EU systems, making it an important test case to evaluate prospects for an EU re-set under the Labour government.
" ["align"]=> string(7) "align_l" } ["group_column_2"]=> array(2) { ["text"]=> string(0) "" ["align"]=> string(7) "align_l" } ["_copy"]=> NULL ["group_column_3"]=> array(2) { ["text"]=> string(0) "" ["align"]=> string(7) "align_l" } ["group_core"]=> array(8) { ["layout_label"]=> string(4) "Why?" ["tog_progress"]=> bool(false) ["tog_header"]=> bool(false) ["tog_padding"]=> bool(false) ["tog_background"]=> bool(false) ["tog_restriction"]=> bool(false) ["grp_lifecycle"]=> array(2) { ["datetime_start"]=> string(0) "" ["datetime_end"]=> string(0) "" } ["grp_identity"]=> array(2) { ["id"]=> string(0) "" ["class"]=> string(0) "" } } ["group_header"]=> array(3) { ["title"]=> string(0) "" ["intro"]=> string(0) "" ["align"]=> string(7) "align_l" } ["group_padding"]=> array(2) { ["top"]=> int(1) ["bottom"]=> int(1) } ["group_background"]=> array(2) { ["group_bg_colour"]=> array(2) { ["bg_colour"]=> string(7) "bg_none" ["bg_colour_pct"]=> int(100) } ["bg_image"]=> string(10) "bgimg_none" } ["group_restriction"]=> array(1) { ["role_access"]=> array(2) { [0]=> string(13) "administrator" [1]=> string(9) "developer" } } } } [1]=> array(2) { ["acf_fc_layout"]=> string(11) "layout_text" ["clone"]=> array(11) { [""]=> NULL ["group_bespoke"]=> array(3) { ["style"]=> string(7) "default" ["column_num"]=> string(1) "1" ["width_2_column"]=> string(8) "split-50" } ["group_column_1"]=> array(2) { ["text"]=> string(2020) "The UK cannot unilaterally link to the EU ETS. EU ETS legislation sets out that the EU can mutually recognize other ETS systems (Article 25) by establishing a new international treaty negotiation. On the EU side, this would be led by the Commission, with authorization from the Council, and monitoring by a standing committee. The Commission would also need to meet with Parliament and the Council to report on progress. To approve the agreement, the Council would require a qualified majority, and the Parliament would also need to consent. (see Arts 207, 217, and 218 TFEU)
On the UK side, the treaty ratification process is led by the executive. As set out in the Constitutional Reform and Governance Act 2010 (CRAG), the agreement would be laid before Parliament for 21 sitting days. The House of Commons can delay ratification of treaties, although this has not happened before, and given Labour’s large majority, seems unlikely.
The TCA sets out a presumption that other bilateral agreements concluded between them ‘…shall constitute supplementing agreements to this Agreement, unless otherwise provided for in those agreements. Such supplementing agreements shall be an integral part of the overall bilateral relations as governed by this Agreement and shall form part of the overall framework.’ (Art 2[1]). This raises the possibility that the TCA’s existing mechanisms could provide the framework for monitoring and dispute settlement regarding a linkage agreement. The Trade Specialized Committee on the Level Playing Field, which includes the article calling for carbon price linkage, could then monitor the implementation of the linking agreement, and dispute settlement could take place through existing TCA mechanisms.
" ["align"]=> string(7) "align_l" } ["group_column_2"]=> array(2) { ["text"]=> string(0) "" ["align"]=> string(7) "align_l" } ["_copy"]=> NULL ["group_column_3"]=> array(2) { ["text"]=> string(0) "" ["align"]=> string(7) "align_l" } ["group_core"]=> array(8) { ["layout_label"]=> string(4) "How?" ["tog_progress"]=> bool(false) ["tog_header"]=> bool(false) ["tog_padding"]=> bool(true) ["tog_background"]=> bool(false) ["tog_restriction"]=> bool(false) ["grp_lifecycle"]=> array(2) { ["datetime_start"]=> string(0) "" ["datetime_end"]=> string(0) "" } ["grp_identity"]=> array(2) { ["id"]=> string(0) "" ["class"]=> string(0) "" } } ["group_header"]=> array(3) { ["title"]=> string(0) "" ["intro"]=> string(0) "" ["align"]=> string(7) "align_l" } ["group_padding"]=> array(2) { ["top"]=> string(1) "0" ["bottom"]=> string(1) "1" } ["group_background"]=> array(2) { ["group_bg_colour"]=> array(2) { ["bg_colour"]=> string(7) "bg_none" ["bg_colour_pct"]=> int(100) } ["bg_image"]=> string(10) "bgimg_none" } ["group_restriction"]=> array(1) { ["role_access"]=> array(2) { [0]=> string(13) "administrator" [1]=> string(9) "developer" } } } } [2]=> array(2) { ["acf_fc_layout"]=> string(11) "layout_text" ["clone"]=> array(11) { [""]=> NULL ["group_bespoke"]=> array(3) { ["style"]=> string(7) "default" ["column_num"]=> string(1) "1" ["width_2_column"]=> string(8) "split-50" } ["group_column_1"]=> array(2) { ["text"]=> string(4597) "Linking will require UK alignment with EU methodologies and political will on both sides. The UK would need to establish that its ETS is compatible, mandatory and has an absolute emission cap. In achieving these criteria, it acts in the UK’s favour that the schemes were virtually identical until 2021. As a mandatory cap and trade system, it fits the second two criteria.
The compatibility question becomes more difficult the longer the two sides wait. For a variety of reasons, including the UK Government’s release of a large quantity of additional free allowances to sectors at risk of carbon leakage, the UK ETS price has slumped below that of the EU: at the time of writing, there is a different carbon price from about £36 a tonne in the UK versus £52 a tonne in the EU. The implication for linking negotiations is that the UK has adopted a less strict approach to free allowances, which would need to be brought into line with that of the EU.
Since 2013, the UK introduced a ‘carbon price floor,’ or minimum carbon price, to underpin its ETS price. In the context of the EU, this is an unusual approach: only the Netherlands has also introduced a partial carbon price floor The EU may want to re-open this issue and ask the UK to remove the carbon price floor, which could have significant implications for the UK’s domestic approach.
Finally, the UK and EU have been updating their emission trading systems. While the UK has been consulting on the inclusion of waste and potential greenhouse gas removal techniques, the EU is in the process of revising its system and will develop ETS2 in 2027, which will cover fuel combustion in buildings, road transport, shipping and industrial sectors that fell outside the scope of the current system. Thus it would make the process much easier if both sides can agree that linking of only the sectors covered by ETS 1 is sufficient to waive CBAM.
Another sensitive issue is dispute settlement. ETS linkage is agreed between countries, and if an agreement were linked to the TCA disputes could be handled under its existing dispute settlement mechanism, which would avoid the negative UK headlines that could come with referring disputes to the EU Court of Justice (CJEU). There are also many private actors also involved in buying/selling permits. If, for example, the UK were to ‘de-link’, questions would arise about the jurisdiction of any such claims.
Furthermore, linking negotiations could be bogged down by getting tied to other TCA issues on which the EU wants to see progress, notably fisheries, where existing provisions expire in June 2026.
Political will is the necessary ingredient to overcome any of these issues, and that remains the biggest question mark of all. A case in point is Switzerland, the only country to achieve linking so far. The negotiation famously took almost 10 years, due to political obstacles more than any inherent differences in the systems. Conversely, the UK will need linking negotiations to conclude extremely quickly, as CBAM charges come into effect in 2026. The Swiss example demonstrates why this timeline may seem unrealistic to some.
On the other hand, the urgency of maintaining political equilibrium in Northern Ireland, which only recently re-constituted its Assembly, could increase the flexibility that both sides show in order to reach agreement. The Windsor Framework is a good example of the particular sensitivities of Northern Ireland inspiring flexibilities on both sides.
" ["align"]=> string(7) "align_l" } ["group_column_2"]=> array(2) { ["text"]=> string(0) "" ["align"]=> string(7) "align_l" } ["_copy"]=> NULL ["group_column_3"]=> array(2) { ["text"]=> string(0) "" ["align"]=> string(7) "align_l" } ["group_core"]=> array(8) { ["layout_label"]=> string(14) "Easy or tough?" ["tog_progress"]=> bool(false) ["tog_header"]=> bool(false) ["tog_padding"]=> bool(true) ["tog_background"]=> bool(false) ["tog_restriction"]=> bool(false) ["grp_lifecycle"]=> array(2) { ["datetime_start"]=> string(0) "" ["datetime_end"]=> string(0) "" } ["grp_identity"]=> array(2) { ["id"]=> string(0) "" ["class"]=> string(0) "" } } ["group_header"]=> array(3) { ["title"]=> string(0) "" ["intro"]=> string(0) "" ["align"]=> string(7) "align_l" } ["group_padding"]=> array(2) { ["top"]=> string(1) "0" ["bottom"]=> string(1) "1" } ["group_background"]=> array(2) { ["group_bg_colour"]=> array(2) { ["bg_colour"]=> string(7) "bg_none" ["bg_colour_pct"]=> int(100) } ["bg_image"]=> string(10) "bgimg_none" } ["group_restriction"]=> array(1) { ["role_access"]=> array(2) { [0]=> string(13) "administrator" [1]=> string(9) "developer" } } } } [3]=> array(2) { ["acf_fc_layout"]=> string(11) "layout_text" ["clone"]=> array(11) { [""]=> NULL ["group_bespoke"]=> array(3) { ["style"]=> string(7) "default" ["column_num"]=> string(1) "1" ["width_2_column"]=> string(8) "split-50" } ["group_column_1"]=> array(2) { ["text"]=> string(2579) "It is still uncertain whether the UK will introduce its own CBAM. While formally this is not part of ETS linkage discussions, the issues are connected for a few reasons.
First, the CBAM (at least in the EU) is meant to replace free allowances, and the EU is gradually phasing these out. The UK has produced a consultation document in which it suggested that UK CBAM would be separate from free allowances. We have argued elsewhere this is not the right approach, and this issue will be on the table during EU-UK linking discussions, which will require harmonizing approaches to free allowance allocation.
Second, if the UK doesn’t introduce its own CBAM, and successfully links its ETS to the EU’s, this will likely raise concerns in Brussels about transshipment: goods can come into the UK for free and then move on to the EU without paying CBAM. From this perspective, having a comparable CBAM ‘wall’ around the UK will be of strategic interest to the EU.
Finally, from a firm-level perspective, having to apply two slightly different sets of CBAM requirements for the EU and UK will be a pain. As the EU is a much bigger market (£333 billion versus £21 billion of goods covered by CBAM in 2023), the UK will benefit from emulating its design as closely as possible. Not doing so could create a host of problems for the UK, including a lack of available accreditation services, queuing, increased prices or even firms simply avoiding the UK market as it’s too much trouble.
Unlike ETS-linking, the decision to emulate EU CBAM design can be taken unilaterally, but it would be desirable for firms if both sides would mutually recognize their conformity assessment procedures, such that the same certification services would be accredited to verify both UK and EU CBAM emissions. This will require negotiation. And it’s almost, but not entirely, out of the realm of possibility that UK CBAM design ideas could help the EU streamline some of the teething problems that its CBAM has faced.
" ["align"]=> string(7) "align_l" } ["group_column_2"]=> array(2) { ["text"]=> string(0) "" ["align"]=> string(7) "align_l" } ["_copy"]=> NULL ["group_column_3"]=> array(2) { ["text"]=> string(0) "" ["align"]=> string(7) "align_l" } ["group_core"]=> array(8) { ["layout_label"]=> string(45) "ETS linking is not the same as CBAM alignment" ["tog_progress"]=> bool(false) ["tog_header"]=> bool(false) ["tog_padding"]=> bool(true) ["tog_background"]=> bool(false) ["tog_restriction"]=> bool(false) ["grp_lifecycle"]=> array(2) { ["datetime_start"]=> string(0) "" ["datetime_end"]=> string(0) "" } ["grp_identity"]=> array(2) { ["id"]=> string(0) "" ["class"]=> string(0) "" } } ["group_header"]=> array(3) { ["title"]=> string(0) "" ["intro"]=> string(0) "" ["align"]=> string(7) "align_l" } ["group_padding"]=> array(2) { ["top"]=> string(1) "0" ["bottom"]=> string(1) "1" } ["group_background"]=> array(2) { ["group_bg_colour"]=> array(2) { ["bg_colour"]=> string(7) "bg_none" ["bg_colour_pct"]=> int(100) } ["bg_image"]=> string(10) "bgimg_none" } ["group_restriction"]=> array(1) { ["role_access"]=> array(2) { [0]=> string(13) "administrator" [1]=> string(9) "developer" } } } } } ["group_head_shared"]=> array(2) { ["meta_description"]=> string(0) "" ["toggle_markup"]=> array(0) { } } ["group_sitemap"]=> array(3) { ["sitemap_hide"]=> bool(false) ["change_frequency"]=> string(7) "monthly" ["priority"]=> string(3) "0.5" } ["group_search"]=> array(2) { ["search_hide"]=> bool(false) ["search_term"]=> string(0) "" } ["group_preload"]=> array(2) { ["prefetch_post"]=> string(0) "" ["preload_image"]=> bool(false) } ["grp_publication"]=> array(12) { ["tax_type"]=> int(7) ["publication_origin"]=> string(4) "citp" ["publication_year"]=> string(4) "2024" ["department"]=> string(0) "" ["publication_url"]=> string(0) "" ["publication_pdf"]=> bool(false) ["publication_excerpt"]=> string(237) "Linking the UK Emissions Trading System (ETS) to the EU ETS is a logical first step UK-EU cooperation on climate change, it would also solve sensitive trade issues affecting the border on the Island on Ireland and have economic benefits." ["tax_topics"]=> array(2) { [0]=> int(46) [1]=> int(52) } ["tax_themes"]=> array(1) { [0]=> int(41) } ["authors"]=> array(1) { [0]=> object(WP_Post)#16387 (24) { ["ID"]=> int(250) ["post_author"]=> string(1) "1" ["post_date"]=> string(19) "2022-05-09 12:59:05" ["post_date_gmt"]=> string(19) "2022-05-09 12:59:05" ["post_content"]=> string(0) "" ["post_title"]=> string(13) "Emily Lydgate" ["post_excerpt"]=> string(4035) "