EU And UK To Link Carbon Markets In Climate Deal

In a major step that may have a big impact on international climate policy and transboundary carbon regulation, the European Commission and the UK government said on Monday they are planning to connect their own respective emissions trading schemes (ETS) as part of a broader deal. The deal, announced at the first-ever summit between the EU and the UK, seeks to combine the two regions' carbon markets to strengthen action on climate and economic convergence.

Once completed, the connection will enable carbon allowances from the EU or UK schemes to be recognized between them. This will enable permits purchased in one regime to be used to meet emissions requirements in the other. The step is set to create increased market efficiency, lower administrative costs, and help towards overall greenhouse gas emission reductions in accordance with the Paris Agreement.

This collaborative development is part of a broader collection of agreements on a number of urgent matters, such as security, migration, defense, energy, and climate change. The climate portion of the agreement is of special interest, as it embodies a mutual commitment by the EU and the UK to reaching net zero emissions and upholding high environmental standards, even in their post-Brexit separation.

The European Union's ETS, launched in 2005, is the global largest and first carbon market. It accounts for significant greenhouse gas-emitting industries like electricity and heat production, oil refining, steel, cement, paper, chemicals, and aviation. The scheme puts a ceiling on overall emissions and provides firms with the ability to sell and buy carbon allowances, and hence, imposes a price on carbon pollution. The EU ETS has been a vital instrument in assisting the bloc toward decarbonisation, and it is expected to raise revenues of approximately €40 billion between 2020 and 2030.

In an attempt to avoid "carbon leakage" – a situation in which companies shift production to nations with more relaxed climate policies – the EU also introduced the Carbon Border Adjustment Mechanism (CBAM) in 2023. The mechanism works similarly to a carbon tax imposed on foreign products, so that foreign goods do not gain a comparative advantage over EU-made products subject to carbon pricing.

The UK, following its withdrawal from the EU, introduced its own ETS in 2021. This was aimed at replicating a large number of the EU's system features but also being adjusted to reflect national priorities. Consistent with this, the UK has also announced its willingness to establish its own CBAM by 2027. The suggested coordination of the two ETSs would lead to reciprocal exemptions from these border taxes for trade in goods between the two jurisdictions, thus facilitating frictionless trade while maintaining robust climate policies.

The EU-UK declaration delineates that the UK emission cap and reduction plan should be at least as ambitious as the EU's. This provision reinforces the EU's commitment to retaining a high degree of climate ambition and makes sure that the associated market will not lead to the waterdown of environmental goals.

The sectors to be covered in the initial linkage include electricity production, industrial heat production, industry, maritime shipping, and aviation. Crucially, there is also a provision for deepening this cooperation further to other sectors in the future, showing the dynamic nature of emissions regulation and the increasing importance of climate change mitigation.

European Commission President Ursula von der Leyen welcomed the deal as a "big step forward" for the EU and UK's joint pathway to decarbonisation. In her speech at the summit, she pointed out the symbolic and real benefit of this collaboration, saying, "The EU and the UK are both determined to lead by example on the net-zero path. A bigger integrated system is a big step forward in decarbonisation and levels the playing-field."

The move marks a new era in EU-UK relations, most importantly in relation to climate and environment cooperation. In addition to the obvious advantage of market integration, it also paves the way for other regions contemplating similar frameworks and partnerships to address the world climate challenge.

As talks continue and the technical details of the linkage are sorted out, the stakeholders in both markets will be closely monitoring. The integration, when well-done, could make carbon pricing more effective, encourage cleaner industrial habits, and boost an equitable, harmonized climate policy environment in Europe.