Brussels and London are expected to open formal negotiations next week on linking their emissions trading systems, a step that would reconnect the EU’s carbon market with the UK’s post-Brexit scheme and could remove a major new cost for British exporters under the EU’s carbon border levy.
The talks would aim to create “mutual recognition” of carbon allowances: an emissions permit issued under the EU Emissions Trading System (EU ETS) would be accepted for compliance in the UK scheme, and UK allowances would be accepted in the EU market. Linking carbon markets is permitted under EU law via agreements with third countries, and the EU already has a linking agreement with Switzerland that offers a reference point for governance and technical alignment.
The immediate commercial driver is the EU’s Carbon Border Adjustment Mechanism (CBAM), which enters its definitive regime from 1 January 2026 after a 2023–2025 transitional phase. CBAM applies to imports of selected carbon-intensive goods and is designed to ensure imported products face a carbon cost comparable to that paid by EU producers under the EU ETS.
Under CBAM’s timetable, importers will begin reporting and compliance for 2026 emissions, with the first requirement to surrender CBAM certificates scheduled for 30 September 2027 for emissions embedded in goods imported during 2026. EU measures adopted during the run-up to 2026 have delayed the start of certificate sales, but not the underlying obligation to account for 2026 emissions.
EU Climate Commissioner Wopke Hoekstra told Reuters that the EU and UK will launch negotiations next week, describing the move as part of a wider effort to rebuild cooperation after Brexit. UK officials have not publicly confirmed the exact start date, but have reiterated their intention to reach a linking agreement.
The financial exposure for UK industry is concentrated in sectors covered by CBAM, including steel and cement. Reuters reported that British businesses have urged a rapid deal, with around £7 billion of UK exports potentially affected. Separately, the UK government has estimated the CBAM could cost British industry about £800 million a year if the UK remains outside an exemption pathway.
Brussels has rejected the idea of a temporary carve-out for the UK while negotiations proceed. Hoekstra said in December that the EU would not exempt the UK from CBAM until carbon markets are actually linked, and he indicated the process could take more than a year.
On the EU side, member states authorised the European Commission in November 2025 to open negotiations with the UK on both an agri-food arrangement and ETS linkage. The Council said that linking the EU and UK ETS would allow goods from both parties to qualify for mutual exemptions from each other’s carbon border measures, signalling that CBAM treatment is central to the mandate.
The political groundwork was laid at the EU–UK summit in London in May 2025, when the European Commission and the UK government agreed in a “Common Understanding” to work towards linking their carbon markets. The UK government’s published UK ETS policy overview references that summit and the earlier commitment in the 2021 Trade and Cooperation Agreement to cooperate on carbon pricing and give serious consideration to linking systems.
Technically, linking would require substantial alignment. The EU ETS and UK ETS share a cap-and-trade structure, but differ in market design details and in the way supply is managed, including UK price containment mechanisms and the scope and pace of cap reduction. Analysts have also pointed to a likely convergence in carbon prices: in March 2025, Reuters reported that UK carbon prices were materially below EU levels, implying upward pressure on the UK price if a full link is implemented.
Another consideration is that carbon border policies are not only an EU instrument. The UK is developing its own CBAM-style approach from 2027, which increases the relevance of “mutual exemptions” and comparable carbon pricing for bilateral trade in emissions-intensive goods. UK policy updates in late 2025 noted that ETS linkage has implications for managing risks as the scheme evolves.
For UK exporters, the near-term issue is timing. CBAM’s definitive phase has begun, while the EU and UK are only now moving into formal negotiations on linkage. Unless an agreement can be reached and implemented quickly, UK firms exporting covered products into the EU are likely to face CBAM-related administrative requirements and, ultimately, certificate costs tied to the EU ETS carbon price for 2026 imports.
