EU and UK move towards identical Emission Trading Systems (ETS) and Carbon Border Adjustment Mechanisms (CBAM)
In a significant development for global trade and carbon pricing, the European Union (EU) and the United Kingdom (UK) are progressing towards linking their Emissions Trading Systems (ETSs). This alignment is expected to bring mutual exemptions from Carbon Border Adjustment Mechanism (CBAM) charges on traded goods between the two markets.
The commitment to link ETSs was made public at the EU-UK Summit in May 2025, with both sides agreeing to avoid double compliance and lower administrative burdens for businesses operating across both markets. Negotiations are ongoing, with further progress expected in late 2025 and 2026.
Currently, the EU ETS carbon prices stand at around €70 per tonne, compared to about £40 per tonne on the UK ETS. Aligning these prices is proving challenging due to potential resistance from certain UK sectors. However, linking ETSs would narrow the scope of CBAMs affecting UK-EU trade. Harmonised reporting, verification, and streamlined importer authorisation are also in development to ease compliance and reduce trade friction.
The EU's CBAM is already in force and requires quarterly reporting from affected importers. The UK announced a CBAM that will apply from 1 January 2027. The UK's proposed CBAM legislation includes a de minimus threshold, a "free allocation adjustment", a criminal offence for fraudulent evasion, and "group treatment" for connected liable persons.
The EU has introduced a new de minimis mass threshold of 50 tonnes for CBAM, exempting 90% of importers, primarily small and medium-sized enterprises and individuals, from CBAM rules. Simplification measures for the EU CBAM were endorsed by the European Parliament on 22 April 2025.
The streamlining of the EU and UK ETS is likely to encourage greater investment from businesses into emission reduction measures and remove barriers to investment in UK sectors where excess red-tape has previously disincentivized EU investors. The linkage of ETSs could result in significant cost savings for both UK and EU exporters.
As the landscape of sustainability law continues to evolve rapidly, businesses may have to grapple with yet more changes. Our firm, at the forefront of these developments, is ready to help businesses navigate the fast-changing sustainability regulations. Fabian Trotman Drake and Mia Clothier, trainee solicitors at our firm, contributed to this Insight. This is the first in a series of UK-focused Insights looking at environmental marketplaces, including voluntary carbon and nature markets.
References: [1] European Commission. (2025). Proposal for a Regulation of the European Parliament and of the Council on the EU Emissions Trading System (EU ETS). [2] HM Government. (2025). Carbon Border Adjustment Mechanism: UK Legislation. [3] European Parliament. (2025). Report on the Proposal for a Regulation of the European Parliament and of the Council on the EU Emissions Trading System (EU ETS). [4] House of Commons Library. (2025). Carbon Border Adjustment Mechanism: UK-EU Linkage.
- The linking of Emissions Trading Systems (ETSs) between the European Union (EU) and the United Kingdom (UK) could potentially lead to a surge in investment from businesses into emission reduction measures in both countries, as they aim to lower costs and streamline compliance processes.
- The alignment of carbon prices between the two ETSs would likely impact the finance and energy sectors, as businesses might need to reassess their energy usage and emission strategies to ensure compliance with the updated pricing regulations.
- The development of mutual exemptions from Carbon Border Adjustment Mechanism (CBAM) charges on traded goods between the EU and UK markets is expected to benefit the environmental-science industry, as it could reduce the administrative burdens associated with CBAM compliance and encourage more environmentally-friendly practices within the business sector.
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