EU and UK Take Step to Link Carbon Markets in Post-Brexit Climate Push

Five years after Brexit split their carbon markets, the EU and UK are charting a path to reunite them. On May 19, 2025, at the first-ever EU-UK summit in London, leaders announced plans to link their Emissions Trading Systems (ETS), a move that could reshape carbon pricing and trade across Europe. This agreement, hailed as a “new chapter” by European Commission President Ursula von der Leyen, promises to align climate ambitions while easing burdens on businesses. But with the UK’s emissions targets under scrutiny and political tensions lingering, can this deal deliver the unified carbon market Europe needs?

A Bridge Over Brexit’s Divide

The EU ETS, launched in 2005, is the world’s oldest carbon market, covering high-emission sectors like power, steel, cement, and aviation. It caps emissions and lets companies trade allowances—one ton of CO2 per allowance—driving cuts through market incentives. Since Brexit, the UK has run its own ETS, launched in 2021, which mirrors the EU’s but is smaller and less liquid, with prices often lagging. In January 2025, UK allowances cost £32.57 per ton, while EU prices hit €71.52, per Fastmarkets, creating trade distortions.

The summit’s joint statement, announced by von der Leyen and UK Prime Minister Keir Starmer, commits both sides to work toward mutual recognition of carbon allowances. This would let EU and UK firms trade credits across borders, boosting market efficiency.

A larger, integrated system creates a level playing field and drives decarbonization.” Starmer echoed this, calling it a “win-win” that avoids “stale Brexit debates.”

A linked ETS could also exempt UK exporters from the EU’s Carbon Border Adjustment Mechanism (CBAM), a carbon tax on imports set to fully roll out in 2026, saving British firms up to £800 million annually, per the UK government. The EU, in turn, could dodge the UK’s planned CBAM by 2027.

“We’re committed to leading on net zero,” von der Leyen said.

Why This Matters

A unified ETS could be a game-changer. The EU ETS, covering 40% of the bloc’s emissions, generated €38 billion in 2023, funding green projects, per the European Commission. Linking with the UK’s market would increase liquidity, stabilize prices, and cut compliance costs for multinationals like Tata Steel or British Airways operating in both regions. It’s a lifeline for UK exporters, who faced £7 billion in trade at risk from the EU’s CBAM, per GOV.UK.

The deal also sidesteps carbon leakage—when firms move dirty production to lax jurisdictions—by aligning carbon costs.

Julia Michalak of the International Emissions Trading Association called it “a powerful move toward cost-effective climate action,” unlocking economic benefits through a larger market.

Ellie Belton from E3G noted it “boosts low-carbon investment and streamlines trade,” vital as Europe aims for a 55% emissions cut by 2030.

But there’s a catch: the UK’s emissions cap and reduction path must be “at least as ambitious” as the EU’s, per the agreement. The EU targets a 62% cut from 2005 levels by 2030; the UK’s Climate Change Act aims for 68% by 2030, but its smaller market and volatile prices raise doubts. A UK Energy report warned the UK could lose £3.5-8 billion by 2030 if left out of the EU market, pushing prices up 8% after the announcement.

Read more: UNDP’s AI Champion Una Boosts Pacific Green Energy Push

The Political and Practical Hurdles

Brexit’s shadow looms large. The deal sparked backlash from Brexiteers like Nigel Farage, who called it a “surrender,” and the right-wing press, with headlines like “Starmer’s Surrender” in the Daily Mail. The fishing industry, stung by a 12-year EU access deal, adds to the noise, with the Scottish Fishermen’s Federation calling it a “horror show.”

Practically, linking ETSs is no cakewalk. The UK ETS, covering waste incinerators by 2028, differs in scope and pricing from the EU’s. Harmonizing rules—especially on sectors like oil, gas, and carbon capture—needs detailed guidance, with the UK’s Offshore Petroleum Regulator already drafting sector-specific rules. The EU insists on “dynamic alignment” with its standards, overseen by the European Court of Justice, which could irk Brexit hardliners.

Skeptics question the deal’s scope. Mujtaba Rahman of Eurasia Group called it “not a very tasty cake,” noting Britain’s weakened post-Brexit leverage. The Office for Budget Responsibility predicts Brexit will shave 4% off UK GDP by 2035, and this deal—projected to add £9 billion by 2040—won’t reverse that. Still, 83% of UK businesses want smoother EU trade, per a 2024 CBI survey, and farmers like NFU’s Tom Bradshaw see it easing post-Brexit export woes, down 21% since 2018.

Explore OneStop ESG Marketplace: Carbon capture

What’s Next?

The EU and UK will start technical talks to link ETSs, targeting sectors like electricity, heavy industry, maritime, and aviation, with room to expand. Mutual CBAM exemptions hinge on alignment, requiring the UK to match EU ambition—a tall order if political winds shift.

For companies, this signals stability. A linked ETS could lower carbon costs for UK steelmakers, who’d otherwise face €60-80 per ton under the EU CBAM, and boost renewables, as WindEurope’s Giles Dickson noted for North Sea wind projects. Investors, with 76% prioritizing ESG per a 2024 BCG report, see predictable carbon pricing as a green light for long-term bets. But if talks stall or the UK’s targets lag, the deal could unravel, leaving exporters exposed.

Starmer’s balancing act—delivering climate progress without rekindling Brexit wars—will be tested. For now, this step toward a unified carbon market shows the EU and UK can move past old grudges.

As von der Leyen put it, “We’re opening a new chapter.” Whether it’s a bestseller or a footnote depends on what comes next.

Explore ESG Solutions on our marketplace - OneStop ESG Marketplace.

Keep abreast of the top ESG Events on OneStop ESG Events.

OneStop ESG Educate: Your go-to source for top ESG courses and training programs tailored to your needs.