The launch of negotiations between the European Union (EU) and the United Kingdom to link their emissions trading systems (ETSs) marks a dual victory for both the economy and the environment. As part of a broader set of agreements announced on May 19, this move will ease bilateral trade, reduce the economic cost of decarbonization, and reinforce ambitious emissions reduction pathways
What does the agreement cover?
The linking would mean, in concrete terms, that companies in each jurisdiction could trade emissions allowances with companies in the other jurisdiction, resulting in a single market price. The UK’s emissions cap and reduction pathway will be based on its own climate laws and Paris Agreement commitments but must be at least as ambitious as the EU’s. The UK will be consulted early in the development of EU legal acts related to the ETS and will provide a financial contribution to cover relevant EU policy costs.
What are ETSs, and what does linking them mean?
ETSs place a cap on emissions from specific economic activities. To emit greenhouse gases (GHGs), regulated operators must obtain credits — called allowances — for every tonne they emit. These allowances are either auctioned by the government or given to operators for free, effectively placing a price on emissions, as those allowances can then be traded between operators.
Carbon pricing is a highly effective approach to climate change mitigation, and ETSs are the most common form of pricing (covering ~18% of world emissions), followed by carbon taxes. After leaving the EU, the United Kingdom exited the EU ETS and set up its own system. Together, they cover 2.6% of world emissions.
When multiple ETSs are linked, operators can trade allowances across the systems. This also means that all participants face the same carbon price for emitting an additional tonne of carbon. Linking is complex, as it requires coordination on how each system operates, especially on how quickly their caps (the total amount of GHG emissions allowed) decline. Still, successful linkage examples exist, such as the EU and Swiss ETSs and the systems in California and Quebec.
Why is linking good for trade?
The EU and the United Kingdom both have carbon border adjustment mechanisms (CBAMs) set for full implementation in January 2026 and 2027, respectively. This means imports to both countries will soon face carbon-related charges to match domestic carbon prices.
Beyond the financial cost, compliance involves complex product-level emissions reporting. Because the UK ETS currently has a lower carbon price than the EU ETS, introducing carbon border fees would have probably meant CBAM payments for British goods at the EU border. Both CBAM frameworks include provisions to exempt jurisdictions linked through ETSs.
Under a linkage, no carbon fees would be paid for products traded between the two, which is particularly relevant for British exports to the EU — and, importantly, no emissions reporting would be required. Keir Starmer highlighted that linking would prevent British firms from paying GBP 800 million to the EU’s carbon tax.
While technically accurate, this does not mean that the British firms would be off the hook for their emissions: this carbon price would need to be paid to the British government. The real benefit lies in removing the heavy administrative burden related to emissions reporting at the product level, a key criticism of CBAMs.
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Why does linking reduce the cost of decarbonization?
If, for example, the United Kingdom and the EU both aim for a 5% cut in emissions, unlinked systems require each to achieve that reduction domestically. With linked systems, there is a more cost-efficient route: the jurisdiction with lower emission reduction costs reduces more emissions, while operators in the other jurisdiction buy additional allowances.
This system allows the same overall reduction at a lower total cost. His Majesty’s Treasury estimates that the United Kingdom would decarbonize less and buy more allowances from the EU, leading to mutual gains — specifically, a 0.1% GDP boost for the United Kingdom. This framework mirrors the classic Economics 101 principle of “gains from trade.” A further benefit is that a larger, linked market is more liquid, and its carbon price is more stable in the face of shocks.
Why is linking good for climate action?
Both the EU and the United Kingdom aim for net-zero by 2050, but political pressure risks undermining ambition along the way. In July 2023, the UK ETS Authority unexpectedly announced the release of 53.5 million unallocated allowances for 2024–2027 — about half a year’s emissions — while in September, several net-zero policies were rolled back, including the delay of the petrol and diesel car phase-out.
These moves weakened industry confidence in the government’s ambition and lowered Britain’s carbon price. Similar pressures could hit the EU.
Linking ETSs typically requires agreement on coordinated emissions cap trajectories since one side loosening its cap would flood the other’s market with cheap allowances. This mutual constraint helps safeguard long-term climate ambition.
In its statement, the European Commission stressed that the United Kingdom’s cap trajectory will need to be at least as ambitious. It will be crucial for the final agreement to incorporate such mutual reassurances. While nothing will ever prevent the EU and the United Kingdom from jointly bowing to political pressure, at least such mechanisms should prevent them from doing so unilaterally.
All these reasons point to one conclusion: linking ETSs is a good move for both the economy and the environment. Policies that deliver benefits on multiple fronts deserve strong support.
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This article was originally published by the International Institute for Sustainable Development (IISD) and is republished here as part of an editorial collaboration with the IISD. It was authored by Antoine Bonnet.
