UK Urgently Seeks Carbon Market Link with EU to Avoid $1 Billion Tax

The United Kingdom is hurrying into negotiations with the European Union in order to connect its carbon market to the EU's Emissions Trading System (ETS) to prevent the need to pay close to $1 billion every year in carbon border levies from 2026. The EU's new carbon border levy will be applied on high-carbon imports like steel and cement, so that non-EU companies also pay for the carbon content of their products.

To avoid this extra cost, the UK has to quickly connect its carbon market with that of the EU. This is one of the steps towards improving post-Brexit relations in general, but the process has been hesitant due to several technical and policy concerns. The UK and EU systems have different regulations and mechanisms, ranging from disagreements about the number of free carbon permits that companies ought to receive. These differences have held up the process of linking, something some analysts estimate will take until 2028 or even 2030 to complete.

Though the UK government ensured that it will do everything to launch this link at the earliest, no timeline has been indicated. Some think the deal should be finalized within six months if there is political willpower, but technical issues are a major setback. Meanwhile, negotiations are going on to facilitate a temporary exemption from the carbon border levy to avoid unfairly penalizing UK businesses until the link is live.

The joining process is less imperative for the EU, whose carbon market is about ten times that of the UK. The measure is seen by EU legislators as being more advantageous to the UK than the EU. The UK, however, is proceeding to stay away from expensive tax consequences and keep its industries competitive.

In short, UK action to connect its carbon market to the EU's ETS is key to avoiding a substantial new tax burden through the EU's carbon border adjustment mechanism. Technical and policy differences between the schemes complicate the task, but negotiations and temporary relief from tax aim to minimize disruption to UK firms in transit.

Source: Reuters, published in KnowESG