The UK-EU ETS agreement: What it is and how it will affect UK businesses

Following the UK-EU Reset Summit on 19 May, the UK and the EU have agreed to link their Emissions Trading Schemes (ETS) – a move that promises significant financial savings, simplified compliance for UK businesses, and more aligned action on climate change.

What is an ETS?

An ETS is designed to reduce greenhouse gas (GHG) emissions over time by capping the volume of emissions that businesses are allowed to emit, and auctioning allowances that permit a certain level of further emissions. Over time, this cap shrinks and fewer auctions take place, driving up prices and incentivising decarbonisation. 

The EU’s ETS was established in 2005, while the UK’s developed after Brexit. While both follow similar frameworks, there have been differences in pricing and scope, which has created uncertainty for cross-border operations. Chiefly, the UK’s ETS market is around 10 times smaller than the EU’s, meaning it has lower liquidity and more volatile carbon prices.

Additionally, both the UK and EU are set to introduce Carbon Border Adjustment Mechanisms (CBAMs) in the coming years. This is a policy designed to prevent ‘carbon leakage’ – where companies move production to countries with lower emissions standards to avoid tightening climate regulation – and essentially imposing a carbon price on selected imported goods. 

The UK-EU ETS linkage agreement will address these challenges.

What does the UK-EU agreement involve?

The proposed agreement aims to create a more ‘level playing field’ for trade, enabling emission allowances to flow between UK and EU systems, allowing for more consistent carbon pricing and mitigating the risk of redundant costs from CBAM. A UK business will be able to trade emissions units comparable to the EU market, and vice versa, and goods that fall under each region’s CBAM will be exempt from charges.

The agreement is expected to save UK exporters £800 million, and prevent the loss of £3.5-£8 billion to the UK economy from 2025 to 2030. It’s a separate international treaty to the Trade and Cooperation Agreement (TCA) and will be governed by its own dispute resolution mechanism – it’s not the same as rejoining an EU institution.

How will it affect UK businesses?

Initially, the agreement will cover: electricity generation; industrial heat generation (excluding domestic heating); industry, domestic and international maritime transport; and domestic and international aviation. However, there is scope for this to expand.

UK exporters to the EU account for more than 40% of the country’s goods trade. Without this agreement, these businesses faced the possibility of dual pricing from both UK ETS rules and the EU’s CBAM, which stood to impact competitiveness, particularly in carbon-intensive sectors.

As well as cost savings, the agreement means streamlined compliance, fewer audits and more pricing certainty, with fewer barriers to international growth. On a wider scale, this alignment will enable a more cohesive approach to decarbonisation and climate action.

How has industry responded to the agreement?

Linkage is broadly supported by most industries covered by the UK ETS, with many trade bodies and unions long since championing such an agreement.

Stuart Evans, chief economist at cross-commodity price reporting agency Fastmarkets, calls the agreement a “welcome win” for UK-EU diplomacy. “Industry has been calling for alignment and simplification of carbon pricing arrangements for years,” he says. “This provides clarity and reduces CBAM-related regulatory burden for the UK industry.

“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.”

When will the UK-EU ETS agreement come into effect?

The agreement timeline is unclear at this stage – details need to be ironed out and we can expect potential sticking points around future cap setting and price stability measures.

A previous linkage agreement between the EU and Switzerland took several years to negotiate, however this was significantly hindered by a Swiss referendum on freedom of movement within the EU during this time. Also, the relationship between the UK and EU is different, with the UK government clearly prioritising a ‘reset’ and both regions under legally-binding targets for net zero by 2050.

However, we know that the EU plans to apply its CBAM to the export of certain UK goods from 1 January 2026. While the final agreement may not be in place by this date, there may be an interim agreement negotiated. We will keep you updated as developments take place.