Britain is facing a challenging race to link its carbon market with the European Union’s Emissions Trading System (ETS) within the next seven months to avoid facing the EU’s carbon border tariff starting in 2026. This tariff could cost UK companies around £800 million ($1.08 billion) annually, particularly impacting imports of steel, cement, and other carbon-intensive goods.
The UK and EU announced last month their intention to integrate their carbon markets as part of a “reset” in relations post-Brexit, but no detailed timeline or steps have been set. Experts say full linkage is complex and likely to take several years, with the earliest possible completion around 2028, though 2029 or 2030 is more probable.
To achieve linkage, the UK must revise its national carbon trading regulations, align its emissions permit auctions with EU rules, and adjust its emissions caps. There are also differences in how free CO2 permits are allocated and mechanisms to stabilize permit prices: the EU uses a “reserve” to adjust supply, which the UK lacks, while the UK has a cost containment mechanism acting as a price ceiling.
Industry voices suggest these technical hurdles are manageable with sufficient political will. Some argue an agreement could be reached within six months and operational by 2028, while others recommend the UK seek a temporary exemption from the EU carbon border tax if negotiations extend into 2026.
The UK plans to introduce its own carbon border tariff in 2027. Meanwhile, the EU may not be in a hurry since the UK’s carbon market is less than one-tenth the size of the EU’s, meaning the linkage would primarily benefit UK businesses by giving them access to a more liquid market. The EU’s motivation is to expand global carbon pricing to reduce greenhouse gas emissions and avoid competitive distortions.
In summary, Britain must quickly overcome technical and regulatory challenges to link its carbon market with the EU’s by the end of 2025 to avoid over $1 billion in annual carbon border tax costs starting in 2026, but experts consider this a difficult target to meet within the short time frame.