“Closer co-operation on emissions through linking our respective Emissions Trading Systems will improve the UK’s energy security and avoid businesses being hit by the EU’s carbon tax due to come in next year – which would have sent £800 million directly to the EU’s budget,” UK Prime Minister Keir Starmer’s office said in a press release.
The Common Understanding noted that both countries share the view that a link between the carbon markets would create a “level playing field” and would give effect to Article 392(6) of the UK-EU Trade and Cooperation Agreement.
Article 392 requires each party to have an effective system of carbon pricing that covers greenhouse gas emissions (GHG) from electricity generation, heat generation, industry and aviation.
UK and EU to cooperate on carbon pricing
Meanwhile, Subsection 6 outlines that both the UK and EU should cooperate on carbon pricing and consider linking their respective systems in a way that preserves their integrity and increases effectiveness.
Monday’s announcement states that the UK and EU will now work toward establishing a link between carbon markets through connecting the UK ETS and the EU ETS, which creates the conditions for goods origination in the UK and EU to benefit from mutual exemptions from the respective EU and UK Carbon Border Adjustment Mechanism (CBAM) policies. Broadly speaking, this means that goods that fall under each region’s CBAM would have no charges under the scheme because of the ETS linking.
The UK was at risk of losing £3.5 billion-8 billion ($4.7 billion-10.7 billion) in revenue from 2025 to 2030 if it remained outside the EU carbon market, since UK ETS allowance prices are lower than those in the EU, a UK Energy report from October 2024 showed.
“The UK Emissions Trading Scheme is ten times smaller, more volatile and, since mid-2022, has been priced lower than the EU ETS… A lower UK carbon price leads to reduced revenues for Treasury and lessens the incentive to decarbonize,” the report reads.
For example, in January 2025, UK ETS allowance (UKA) prices were just around £32.57 per tCO2e. In contrast, EU carbon emissions allowance (EUA) prices hovered around €71.52 ($74.06) per tCO2e in January, peaked at over €81 per tCO2e in mid-February and then dropped below €60 per tCO2e in early April.
In recent weeks, EUA prices have been trading around €70 per tCO2e, while UKAs have been lower at around £50 per tCO2e.
Last month, the UK published draft primary legislation for its CBAM, which will become effective from January 1, 2027, which would involve using the previous quarter’s average UK ETS auction price to calculate liabilities under the mechanism.
Under and EU-UK ETS linkage, this price would then be equal to the liabilities calculated under the EU’s CBAM, which is currently set to come into force from January 1, 2026.
“This is a welcome win for EU-UK diplomacy. Industry has been calling for alignment and simplification of carbon pricing arrangements for years. This provides clarity and reduces CBAM-related regulatory burden for the UK industry. However, much of the details still need to be ironed out; expect potential sticking points to be policy around free allocations, price stability mechanisms and future cap setting,” Fastmarkets chief economist Stuart Evans said.
“We estimate that the EU CBAM could affect over £5 billion of UK exports, primarily in the UK steel and aluminium industries. With over 45% of exports from CBAM covered sectors going to the EU, linking will substantially reduce the potential for CBAM-related trade disruptions,” Evans added.
Sectors falling under the linked UK-EU ETS will be clearly defined to avoid risks of carbon leakage and competitive distortions.
The Common Understanding noted sectors falling under its ambit will include electricity generation, industrial heat generation (excluding the individual heating of houses), industry, domestic and international maritime transport and domestic and international aviation, but there is scope for this to expand.
The agreement also ensures the “dynamic alignment” of the UK with relevant EU rules underpinning the functioning of the ETS.
The UK’s emission cap and its reduction pathway will still be guided by the UK’s Climate Change Act and Nationally Determined Contributions (NDC) and the agreement noted these should be at least as ambitious as the EU’s comparable policies. The UK’s latest 2035 NDC target is to reduce GHG emissions by at least 81% compared with 1990 levels, with the figure not including aviation or shipping.
Meanwhile, the EU has yet to submit its latest NDC to the United Nations Convention on Climate Change (UNFCCC).
The agreement also provides for “appropriate financial contributions” from the UK to support the EU’s work in this policy area. The UK will also be involved in decision-making processes with the EU in fields covered by the agreement.
Steel safeguard measures
“British steel exports are protected from new EU rules and restrictive tariffs, through a bespoke arrangement for the UK that will save UK steel £25 million per year,” Keir Starmer’s office added.
The UK is currently subject to steel safeguards measures in the EU. Out of 28 steel product categories covered by safeguards, the UK has tariff rate quotas (TRQs) on 19 steel product categories, including hot-rolled coil, cold-rolled coil, galvanized and organic coated coil.
In 2024, the UK’s total steel exports amounted to 2.7 million tonnes, with top export markets being the Netherlands, Ireland, Spain, Turkey, Belgium and the US, International Trade Administration statistics show.
To the EU alone, the UK exported 1.35 million tonnes of carbon steel in 2024, according to Eurofer, which accounts for 50% of the country’s exports.
The existing EU steel safeguards measures have been in place since 2018, intended to protect EU steelmakers from a potential surge in imports. The current measures were set to run until June 30, 2026.
However, after the current measures lapse, the EU “cannot leave [its] domestic market unprotected in the fact of surging imports, declining consumption,” a source familiar with the matter said.
Therefore, in the third quarter of 2025, the Commission will propose long-term measures based on tariff rate quotas replacing the steel safeguards as of July 1, 2026, providing an equivalent level of protection against negative trade-related effects caused by global overcapacities, the Commission informed in the Steel and Metals Action Plan published in March.
“The timing of the proposal will ensure that the new measure will be in force in time to replace the current safeguard and provide the same degree of defense against negative trade-related effects caused by global overcapacities,” the document said.
The Commission also plans to launch a safeguard investigation into ferro-alloys and aluminium.
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