Businesses Urge UK–EU Carbon Market Link Ahead of May 2025 Summit

With carbon pricing becoming Europe's topline weapon in their climate policy, over 50 businesses and associations are calling the United Kingdom and the European Union to reconnect the carbon markets. Although the two regions currently enjoy independent Emissions Trading Systems (ETS), trade complexity would decrease with coordination in their opinion, eliminate price distinctions, and maintain fairer trade across borders.

The call for renewed talks comes just weeks ahead of a high-stakes UK–EU summit on 19 May, 2025. The joint sign-up by major firms is an indication of growing concern at the economic inefficiencies and climate risk of the region having two discrete carbon-pricing systems. Firms contend that a linked ETS would lower consumers' bills, give certainty to investors, and support the aggregate decarbonisation policy of both the UK and the EU.

Both the UK and EU currently possess their own emissions trading systems. Both systems work by levying a fixed rate per tonne of carbon dioxide produced on major polluters—like factories, power plants, and energy providers. While the underlying objective is identical—to reduce emissions and fulfill climate goals—the split has created different carbon prices and growing competitive imbalance concerns.

One of the greatest challenges of the standalone systems is the widening carbon price gap. Currently, the UK carbon price is approximately £48 per tonne lower than the EU average. This offers an uneven playing field for border-trading firms, where UK firms may find a short-term benefit but possess more long-term trade obstacles, especially with subsequent EU rules.

A particular concern of UK exporters is the EU's Carbon Border Adjustment Mechanism (CBAM), scheduled to come into effect in 2026. The policy will impose carbon duties on imports such as steel, cement, and electricity to prevent carbon leakage and promote cleaner global production. However, without an accompanying carbon market, UK businesses exporting to the EU may end up paying additional carbon taxes—a development that would add costs of doing business and make British exports less competitive.

By harmonizing the UK and EU ETS, businesses contend it would be achievable to converge carbon prices, thereby avert expensive levies under CBAM and reduce overall compliance cost. The move would also avert carbon leakage—risk of industries relocating to areas of cheaper carbon prices—that would damage environmental integrity and economic justice.

Several major European energy companies have supported the demand for interconnection of the systems because of the significance of ensuring against 'competitive distortions' created by price differences. These distortions not only destroy a particular business model but also reduce the overall efficiency of the effort at reduction. It would allow companies to plan more confidently and align their investments with shared net-zero objectives across the continent under one carbon market.

Regulationally, harmonizing the two systems would also make administration smoother and eliminate duplications of reporting requirements for cross-border companies. It would send a powerful message of climate cooperation between the UK and EU at a time when geopolitical and economic uncertainties are about to slow environmental progress.

However, harmonizing the UK with EU carbon pricing may result in a short-term increase in the UK's current carbon prices. That is, more upfront cost for British companies that have energy-intensive businesses. But experts say the short-term costs can be offset in the long term by eliminating EU import tariffs, improving access to trade, and enjoying access to the overall efficiency of a single carbon market.

To policymakers, the shift towards resuming talks on integrating ETS will mean balancing economic competitiveness and climate credibility. It will impact not just price dynamics but also investors' decisions in renewable energy, low-carbon tech, and industrial decarbonisation across the two regions.

Moreover, the move would align with broader EU climate policies and the UK's legally binding net-zero goals. A joint ETS would further embed carbon pricing in cross-border trade and industrial policy, as a central instrument in Europe's decarbonisation effort.

The call to tie the carbon markets demonstrates the expanding role companies are taking in climate diplomacy. Rather than resisting it, many companies now recognize that predictable and fair carbon pricing mechanisms are needed to spur innovation, maintain supply chains, and safeguard competitive advantage in a low-carbon world.

Conclusion
As the UK–EU summit looms, support is gathering for the plan to reunite the two carbon trading schemes. Companies say linking the ETS schemes would align carbon pricing, avoid trade distortions, and aid long-term climate objectives. Although short-term expenses might increase, the long-term economic and environmental advantages might be greater, establishing a precedent for collaborative climate policy in post-Brexit Europe.

Source/Credits:
Source: Reuters
Credits: KnowESG | Published on: 02 May 2025