Electric Power, Energy Transition, Carbon, Emissions

May 16, 2025

Emissions trading, CBAM and electricity in scrutiny ahead of UK-EU Summit

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HIGHLIGHTS

UK industry calls for ETS integration to achieve cost savings

Carbon traders grow cautious over prospects as UKAs dip

Electricity and CBAM will also be addressed during negotiations

Industry groups are pressing the UK government to align its compliance carbon market with the EU Emissions Trading System, cautioning that a lack of action could lead to hefty costs for British exporters and heightened price volatility.

This appeal comes as both parties prepare to convene for the UK-EU Summit in London on May 19 to bolster their cooperation on trade policy, security, and defense. Additionally, some advancements are anticipated in the areas of energy, carbon markets and electricity collaboration.

But many carbon and energy markets participants and analysts are adopting a more circumspect stance, saying the lack of progress on an integrated carbon market could trigger a selloff in UK Allowance prices.

Industry pressure

A new study commissioned by major European energy companies, including Uniper, EnBW, RWE, and SSE, found that linking the ETSs could deliver up to Eur770 million ($862 million) in transaction cost savings by 2030 through improved market liquidity alone, with potential savings reaching Eur1.25 billion if market liquidity deteriorates.

"Linking will also reduce price volatility, which should also contribute to reduced costs of risk management for ETS participants, further supporting industrial competitiveness," the report published by consultancy Frontier Economics said.

This comes as UK and EU carbon prices diverged significantly in 2023 and 2024, with UKAs trading at a discount of almost Eur22/mtCO2e to EU Allowances. Prior to February 2023, UKAs were trading at a premium to EUAs.

This year, prices for UKAs have climbed sharply due to a potential linkage with the EU ETS, with the UKA December 2025 contract hitting a 22-month high in early May.

Platts, part of S&P Global Commodity Insights, assessed UKAs at GBP48.93/mtCO2e ($65.03/mtCO2e) on May 15, while EUAs were assessed at Eur73.32/mtCO2e ($82.09/mtCO2e).

Dan Maleski, a senior environmental markets adviser at Redshaw Advisors, said linking the two emissions trading systems would significantly enlarge the trading pool.

This would "improve price stability, reduce volatility, and enhance market efficiency," he said.

UKAs dip ahead of summit

However, UKAs have fallen slightly ahead of Monday's UK-EU summit, as market sources grow cautious of a clear-cut linkage agreement with defence and security issues overshadowing discussions.

"Word on the street is the UK and the EU are at an impasse on negotiations, and linkage discussions are not progressing much past the 'concept' stage. Hence, the UKA sell off," a UK-based trader told Platts.

UKAs for December 2025 were trading at GBP49.70/mtCO2e at 11:42 am British Summer Time, down almost 5% week over week, Intercontinental Exchange data showed. This comes after Platts assessed the UKA nearest December price at GBP52.57/mtCO2e on May 12, the highest for the rolling front-December product since July 2023.

There have also been concerns from market participants that the process would be lengthy amid a need to harmonize various market mechanisms.

"[A] 10-year timeline for linkage is not unlikely," the trader said. "Nobody can hold the price up that long. [The] UK is keen as mustard, the EU seems less enthusiastic and more interested in arms deals and student visas."

CBAM concerns

The urgency of alignment has also intensified as the EU prepares to implement the definitive phase of its Carbon Border Adjustment Mechanism from January 2026 on carbon-intensive imports.

"Linking the UK and EU ETS would lead to carbon price convergence between the two jurisdictions, and exempt UK companies from the EU's CBAM," Energy UK said in a report. Without an agreement, UK businesses could face payments of up to GBP800 million annually to the EU by 2030, the trade association said.

For businesses, particularly those currently exposed to the UK ETS, this linkage carries substantial implications, according to Maleski.

"Pricing parity would help shield UK exporters in EU CBAM-covered sectors from the costs associated with the EU CBAM which kick in next year."

The UK government will also implement its own CBAM on imports of emissions-intensive products such as aluminum, cement, fertilizers, hydrogen and iron and steel, starting Jan. 1, 2027, one year after the EU's CBAM.

Electricity trade

Electricity imported into the EU will become subject to the CBAM from 2026 onward.

British electricity exports have quadrupled since 2020, totalling GBP545 million in 2024, according to Chris Aylett, research fellow at Chatham House. He cites negative impacts from future CBAM charges in a report by consultancy Afry.

Currently, Great Britain is a net importer from Continental Europe (France, Belgium, Netherlands, Denmark and soon Germany), but a net exporter to Ireland.

The impact of the CBAM is expected to rise during the phase-in period due to Britain's growing wind capacity and forecasts of rising UK electricity exports.

Flows on the nine GB interconnectors with the EU already change direction frequently, depending on spot market signals.

The UK's exit from the EU in 2021 also led to a decoupling of trading on those cables, with transmission capacity now secured explicitly, mainly via the Joint Allocation Office, while daily auctions on spot exchanges are held at different times.

European Commission President Ursula von der Leyen emphasized the importance of regulatory certainty on electricity trading rules for investors in big North Sea wind projects during her speech at the IEA Energy Security Summit in London on April 23, highlighting the detrimental impact of uncertainty on electricity trading.

She urged collaboration with the UK, saying "certainty is something we can deliver; the EU framework offers what investors are looking for" in terms of electricity trading and North Sea wind investments.

                                                                                                               


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