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Major industry groups urge UK, EU to agree emissions trading link before COP26

Highlights

Polluters and clean energy join forces urging carbon market links

Linking to improve liquidity, price discovery, cut costs

Joined up markets would send signal on Paris Agreement's Article 6

A coalition of more than 40 major industry associations from Europe and the UK has urged leaders from both regions to link up their respective emissions trading systems before the COP26 climate summit in November.

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The call comes as carbon markets face a crunch moment in 2021 in terms of the role they will play in global efforts to reach net-zero emissions by 2050.

"If the UK wants to reach net-zero, linkage to the EU ETS is key," the International Emissions Trading Association said in a statement April 15.

"It will allow emissions reduction targets to be reached more quickly, easily, and at better value. A larger market means a better market with more liquidity, fewer competitive distortions which damage industry, and more decarbonization opportunities," said Adam Berman, European policy director at IETA.

The UK left the EU Emissions Trading System at the end of 2020 and launched a domestic ETS in January 2021, with trading set to start in May. The UK's ETS is designed to mirror many aspects of the EU system to avoid unnecessary disruption for the operators of UK-based power plants, factories and airlines.

Neither side has yet moved to propose linking the systems, although both agreed to give serious consideration to linking as part of their agreement on a future trading relationship.

IETA made the call with other industry groups in an open letter to European Commission President Ursula von der Leyen and UK Prime Minister Boris Johnson.

The letter was signed by major industry associations including Eurelectric, Eurogas, Energy UK, Oil & Gas UK, UK Petroleum Industry Association, Wind Europe, Renewable UK and the European Federation of Energy Traders.

As such, the call for linked markets reflects alignment across a broad swathe of industry, uniting major polluting industries with clean energy developers and energy trading groups.

Cheaper decarbonization

"In choosing an ETS over a carbon tax, the UK has shown that carbon markets offer cheaper, more efficient, and legally binding decarbonization," said IETA' s Berman.

However, linking carbon markets requires political will and alignment of climate goals, he said.

"Given the similarities between the UK and EU's carbon trading regimes, there should be no two emissions trading systems that are easier to link," he said.

The advantages of linking including liquidity, price discovery, and the ability to attract CO2 emissions abatement from across Europe rather than just in the UK, he said.

"It would also create a level playing field in terms of carbon pricing, avoiding competitive distortions, and leading to aligned cost implications for industry across the UK and European Economic Area (EEA)," said Berman.

A UK-EU link would also send a strong political signal ahead of this year's COP26 United Nations climate talks to be held in Glasgow in November, IETA said.

"Linking the UK and EU ETS ahead of COP26 would reaffirm the UK and EU as climate leaders, and demonstrate strong advocacy for international carbon markets," the group said.

"A linking agreement between the UK and EU would show commitment to Article 6 of the Paris Agreement in a year during which the EU hopes to help finalize the Article 6 framework as a key outcome of COP26, thus ensuring that the EU can lead by example in respect to the international climate agenda," it said.

Linking could also allow the UK to reach its 2050 net-zero emissions reduction target faster and more cost-effectively, it said.

Article 6 of the Paris Agreement outlines a system of emissions trading between governments, meaning emissions reductions would take place where the cost is lowest, slashing the global bill for getting to net-zero.