EU and UK strike deal to link emissions trading schemes

The EU and UK have agreed to link their respective emissions trading schemes (ETS), avoiding extra costs for UK exporters and paving the way for cross-border carbon storage.

The European Commission and the UK government agreed yesterday at the UK-EU Summit to start connecting their cap-and-trade systems to stabilise and strengthen carbon prices, as well as exempting UK exporters from the EU’s Carbon Border Adjustment Mechanism (CBAM). This is expected to save UK companies £800 million by 2030.  

“Emissions trading is one of our most powerful tools to decarbonise industry and achieve our net zero goals,” the UK government said in a statement, adding that linking the UK and EU ETS will provide a cheaper path to net zero and support investment in clean technologies.

The European Commission agreed that “a functioning link between carbon markets would address many of the issues raised in respect of trade and a level playing field”, though it warned that “the sectors falling in the scope of the ETS linking agreement should be clearly defined to avoid risks of carbon leakage and competitive distortions”.

Among others, the EU wants the linked ETS  to cover electricity and industrial heat generation, industry, domestic and international maritime transport and domestic and international aviation.

Commenting on the announcement, Yan Qin, Principal Analyst at ClearBlue Markets said: “This might still be a long procedure given all the technicalities, but the collaboration EU/UK will already inject positive momentum into global carbon pricing and support the construction of carbon markets and linking elsewhere.”

Cross-border carbon storage

In addition to cost savings and a stronger carbon price, the EU-UK ETS linkage is expected to bring benefits for the carbon capture and storage market. The UK government noted that CO2 storage is a growth industry in the UK “with enormous potential for investment and jobs”, and that linking emissions trading systems will allow EU emitters to store carbon in the UK, making the industry more competitive.

The Carbon Capture and Storage Association (CCSA), a European entity accelerating the deployment of carbon capture, utilisation and storage (CCUS), welcomed the deal, highlighting that cross-border cooperation on a Europe-wide CO2 storage market can help reduce transport and storage costs by 28% or €16 per tonne, resulting in €2.7 billion in annual savings. 

Olivia Powis, CCSA CEO, said: “The outcomes of the EU-UK Summit mark a pivotal moment for Europe’s climate ambition. A linked EU-UK Emissions Trading System alongside a comprehensive CBAM, would not only enhance the efficiency of carbon pricing but also provide a clear, stable signal to industry, crucial for unlocking long-term investments in CCUS technologies. For sectors that are hard to decarbonise, CCUS will play a critical role in meeting net-zero goals. A unified carbon market can reduce fragmentation, lower compliance costs, and help ensure that carbon abatement happens where it’s most cost-effective.”