EU Council greenlights UK carbon market linkage negotiations

EU member states approved a mandate to begin negotiations with the UK on linking their emissions trading systems, the EU Council said in a draft decision Nov. 12.

The decision to move ahead with ETS linkage talks was made at a meeting attended by the ambassadors of EU countries, but negotiations took longer than expected, lasting several days.

UK carbon prices have rallied in recent days, settling at GBP57.58/mtCO2e ($75.60/mtCO2e) Nov. 12, up 1.02% from the previous day, according to Platts, part of S&P Global Commodity Insights.

"EU ministers agreed to approve the linking mandate, formal approval [is expected] on Nov. 17," a carbon trader active in the UK carbon market said.

The two jurisdictions agreed to work toward linking the two carbon markets during a summit held earlier in May, and in July, the European Commission recommended an opening of the negotiations.

Marie Bjerre, Minister for European affairs of Denmark, said she is hopeful that these negotiations will be finalized swiftly.

“Last May, we agreed with the UK to open a new chapter in our relationship. With [this] decision, we now set out to deliver concrete results. Agreement on these areas will lead to important reductions in the burdens faced by businesses in both the EU and in the UK and will benefit our consumers," she said in a statement Nov. 13.

CBAM exemption

The alignment of the two compliance carbon markets would also create mutual exemptions from their respective carbon border taxes. However, the EU's Carbon Border Adjustment Mechanism begins its definitive phase from Jan. 1, 2026, while the UK's CBAM starts a year later in 2027.

"Linking ETS would facilitate trading of emissions allowances between the EU and the UK, contribute to the common sustainability goals and avoid carbon leakage between the two parties," the EU Council added in a statement Nov. 13.

Many carbon analysts and traders widely expect the harmonization process to be complex and time-consuming, with some predicting it could take several years to complete.

"The Government has made progress in achieving its reset objectives. It has negotiated a security pact with the EU. It has also secured the EU's agreement … to link the UK and EU Emissions Trading Schemes," the UK's European Affairs Committee said in a report published Nov. 12 addressing the progress made in terms of UK-EU relationships.

The prospect of linking has supported prices for UK Allowances, as linking with the EU market could lead to tighter supply with the introduction of a mechanism akin to the Market Stability Reserve, a tool used to regulate supply and demand dynamics in the EU ETS. There is no equivalent for the MSR in the UK ETS, and the market remains oversupplied.

The spread between EU Allowances and UKAs has widened over the past weeks amid a lack of updates on the prospective link, with less than two months to go before the EU's CBAM comes into effect.

Platts assessed the EUA-UKA spread at Eur16.69/mtCO2e Nov. 12, widening 4.51% day over day despite the news.

UK and EU carbon prices diverged significantly in 2023 and 2024, but the spread has narrowed significantly this year.

UKAs were trading at a Eur22/mtCO2e discount to EUAs in 2024, reversing the premium they commanded before February 2023. However, the spread has tightened since news of the linkage between the two carbon markets first emerged in early 2025.