The European Commission and the government of the UK announced today an agreement to work towards linking their carbon markets through establishing a link between their emissions trading systems (ETS), which have been developing separately since Brexit.

Under the envisioned linkage agreement, carbon allowances issued by the EU or UK could be recognized as complying with the greenhouse gas emissions trading system of the other jurisdiction.

The announcement forms part of a new series of agreement reached at the first ever EU-UK summit on Monday, covering areas ranging from security and defense and migration to energy and climate change policies.

Established in 2005, the EU ETS puts a price on carbon emissions for key GHG intensive sectors, including electricity and heat generation, oil refineries, steel, cement, paper, chemicals, and commercial aviation, among others. The EU ETS is expected to generate revenues of approximately €40 billion from 2020-2030. In 2023, the EU Commission adopted the Carbon Border Adjustment Mechanism (CBAM), effectively a carbon tax on imported goods, aimed at avoiding “carbon leakage,” a situation in which companies move production of emissions intensive goods to countries with less stringent environmental and climate policies, by equalizing the price of carbon paid for EU products operating under the EU ETS with that paid for products produced in other countries.

Following Brexit, the UK launched its own Emissions Trading Scheme in 2021 to replace its participation in the EU’s ETS. The UK has also announced plans to introduce its own CBAM in 2027.

According to the announcement, an agreement to link the ETSs would look to create the ability to enable mutual exemptions of goods originating in the respective jurisdictions from being subject to the EU and UK CBAMs, and should cover sectors including electricity generation, industrial heat generation, industry, maritime transport and aviation, with a procedure to be put in place to expand to additional sectors.

Notably, the EU-UK statement outlining the goal to work towards linking the emissions trading systems stipulates that the UK’s ETS cap, and its emissions reduction pathway “should be at least as ambitious as the European Union cap and the European Union reduction pathway.”

In a statement announcing the agreement, EU Commission President Ursula von der Leyen said that the EU and UK “are both committed to leading by example on the path to net zero. Von der Leyen added:

“And that is why we have also agreed to work towards linking our emission trading system. A larger integrated system is a big step forward in decarbonisation and creates a level playing-field.”