No CBAM exemption for UK before definitive phase begins: Hoekstra

UK companies face potential costs from the EU's Carbon Border Adjustment Mechanism from Jan. 1 despite ongoing negotiations that could eventually exempt them from this landmark carbon policy, the bloc's climate chief said Dec. 17.

Speaking at a press briefing, EU Climate Commissioner Wopke Hoekstra said linking the EU and UK emissions trading systems would likely eliminate British companies' need to comply with the bloc's CBAM, but ruled out any waiver before the policy's definitive phase begins next month.

"So we are in very good conversations with our UK friends and counterparts on how to link our ETS system with theirs," he said.

"We're not exempting anyone. The moment we will be fully linking those two, it is likely that there will be an exemption at that point in time," Hoekstra added, referring to ongoing negotiations to connect the EU Emissions Trading System with the UK ETS.

However, he emphasized the EU must proceed "step-by-step" and cannot change the order of implementation.

Linking progress

This comes as EU member states approved a mandate to begin negotiations with the UK on linking their emissions trading systems in November. The two jurisdictions agreed to work toward linking the two carbon markets during a summit held in May, and in July the European Commission recommended opening the negotiations.

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

Hoekstra suggested the immediate impact on UK companies would be limited due to the country's decarbonization progress.

"If you look at how decarbonized the UK is already at this stage, the price that they will be paying is actually minimal," he said, noting that CBAM calculations use the latest average electricity grid mix.

UK and EU carbon prices diverged significantly in 2023 and 2024, but the spread had narrowed significantly earlier in the year when linkage reports first emerged. The spread has widened again over the past weeks amid a lack of updates on the prospective link, with less than a month to go before the EU's CBAM comes into effect.

Platts, part of S&P Global Energy, assessed UK Allowances at GBP59.49/mt CO2e ($79.32/mt CO2e) on Dec. 16, while EU Allowances were assessed at Eur87.49/mt CO2e ($102.51/mt CO2e). UK and EU carbon prices had moved in opposite directions since 2023, with UK Allowances trading at a Eur22/mt CO2e (GBP18.50/mt CO2, $24.80/mt CO2) discount to EU Allowances in 2024, reversing the premium they commanded before February 2023.

Electricity impact

This development has been closely followed by the electricity industry in the EU and the UK. Electricity imported into the EU will become subject to the CBAM from 2026 onward.

British electricity exports have quadrupled since 2020. 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.

Several energy companies and clean industry associations have been pressing the European Commission to temporarily exempt UK electricity trade from the EU's CBAM, warning that current rules threaten to drive up wholesale power prices across Northwest Europe and undermine market efficiency.

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