Policy & Compliance
the EU. This levy is intended to discourage the relocation of energy-intensive production to countries with less stringent climate policies – a phenomenon commonly referred to as carbon leakage. After leaving the EU, the UK diverged from the EU carbon markets and launched its own ETS scheme in 2021, with plans to introduce its own CBAM in 2027. Arguably, the divergence of the EU and UK carbon markets has created barriers to decarbonisation and barriers to trade. The UK ETS is approximately 10 times smaller than the EU ETS. This difference in size makes the UK ETS less liquid, more volatile and has historically resulted in a higher carbon price than that of the EU ETS – leading to reduced incentives to invest in decarbonisation. Furthermore, as the UK is now treated as a third country, UK exporters have been subject to the EU CBAM carbon levy when exporting certain goods into the EU, creating an additional cost for UK exporters. £800 million saving Linking the UK and EU ETS could resolve these issues by providing the UK with access to the largest carbon market in the world and exempting UK exporters from paying the carbon levy – which could amount to £800 million per annum by 2030. Consequently, the linking of carbon markets could provide a strong impetus for decarbonisation while removing costly barriers to trade for UK exporters. Despite the headlines, it should be emphasised that the agreements on linking UK and EU carbon markets are framed in general terms and the negotiations on the specific details will likely unfold in the coming months. These negotiations should include provisions on the mutual recognition of carbon allowances, the specifics of CBAM exemption, and how alignment will be achieved, given that the UK and EU no longer share legislative processes. BIFA will continue to monitor these developments and inform its membership of any upcoming changes.
Linking the UK and EU ETS would give the UK access to the largest carbon market in the world and exempt UK exporters from paying the carbon levy The EU and UK explore linking carbon markets
O n 19 May 2025, the UK and the EU held their fi rst UK-EU Summit since the UK exited the EU in January 2020. The summit was viewed as a key part of the current government’s strategy to reset the UK’s relationship with the EU. A broad range of issues were discussed, including the con fl icts in Ukraine and the Middle East, irregular migration and cooperation on trade and the environment. Several initial agreements were made across these policy areas, which were grouped together as areas of “Common Understanding between the European Commission and the UK”. Area of common understanding One such area of common understanding was the intention to link the EU and UK carbon markets, as outlined in the extract from the document published by the European Commission below: “Therefore, the United Kingdom and the European Commission should work towards establishing a link between carbon markets by
way of a European Union-United Kingdom agreement linking the United Kingdom Emission Trading Scheme (UK ETS) and the European Emission Trading System (EU ETS).” https://ec.europa.eu/commission/ presscorner/detail/en/statement_ 25_1267 The EU ETS was introduced in 2005 and is the world’s first —and largest— carbon market. It is designed to reduce industrial emissions from energy-intensive industries by following a ‘cap and trade’ approach. Each year, the EU sets a cap on the amount of CO 2 that can be emitted; this cap decreases annually, and each company is required to hold a European Emission Allowance (EUA) for each tonne of CO 2 it emits. These EUAs are either purchased or received for free and can then be traded on a secondary market. In addition to the EU ETS, the EU introduced the EU Carbon Border Adjustment Mechanism (EU CBAM) in May 2023. The purpose of the EU CBAM is to reinforce the EU ETS by applying a carbon levy to certain high-energy goods imported into
“ The linking of carbon markets could provide a strong impetus for decarbon- isation while removing costly barriers to trade for UK exporters
July 2025 | 17
www.bifa.org
Made with FlippingBook Annual report maker