EU and UK agree on negotiation framework: What ETS linking means for CBAM

A new push for climate cooperation after Brexit

With the announcement of a future ETS linking, the EU and the United Kingdom have officially agreed on a joint framework to begin negotiations on integrating their emissions trading systems. After years of reserved bilateral relations following Brexit, this marks a fresh start: one of deeper cooperation in climate policy – with potential consequences for companies subject to CBAM. The goal of the planned linking is the gradual integration of the UK ETS into the significantly larger EU Emissions Trading System. As part of the understanding, both sides have expressed the intention to allow for mutual exemptions from CBAM charges once technical implementation has been achieved. For businesses on both sides of the Channel, this could be a decisive turning point – even if a concrete timeline remains undefined.

The Swiss model as a blueprint – with important differences

The EU has already gained experience with ETS linking: since 2020, the Swiss Emissions Trading System has been connected to the EU ETS. Negotiations began in 2009, concluded in 2017, and, after extensive technical and political coordination, resulted in the mutual recognition of allowances and rules. This so-called “static alignment” came at the cost of significant administrative complexity, as every change to the EU ETS required an update to the bilateral agreement. For the UK, the EU now envisages a “dynamic alignment”. This would mean that the UK continuously aligns with developments in the EU ETS – a more flexible and considerably faster approach. As such, the technical integration of the UK ETS into the EU framework could proceed much more quickly than in the Swiss case. However, this also presents legal and political challenges regarding the supremacy of EU law.

Economic implications of ETS linking

A full linking between the UK ETS and the EU ETS would have far-reaching economic implications. At present, prices for UK emissions allowances are significantly lower than those in the EU. For UK exporters, this means that their goods could face a CBAM surcharge based on the higher EU carbon price – despite being subject to domestic carbon pricing. This not only undermines competitiveness in the EU market but also creates regulatory uncertainty. Linking the systems would eliminate this discrepancy and lay the foundation for CBAM exemptions for UK exports. The EU ETS would also benefit clearly from such integration. A joint, cross-border market boosts liquidity in emissions trading, improving price stability and increasing efficiency. Moreover, integrated trading allows for better harmonisation of emissions data across national borders – a critical prerequisite for transparency and trust in the integrity of the system. Linking would thus be a logical step towards a stronger and more cohesive European carbon market.

CBAM exemptions in sight – but without a firm timeline

Perhaps the most significant prospect for affected companies lies in the potential CBAM exemptions. Once the linking is technically in place, UK-based companies could be exempt from CBAM obligations – similar to the current situation for imports from Norway or Switzerland. Likewise, imports from the EU into the UK would no longer be subject to the forthcoming UK CBAM. But as of now, the timeline for technical implementation remains unclear. Many market analysts do not expect full integration before 2028. While the political will is clearly expressed, a binding roadmap has yet to be announced. It is also uncertain whether there could be a transitional exemption or temporary recognition prior to full technical implementation. This will be a critical factor in determining whether UK firms are exempt from CBAM charges starting in 2026 – or if a transitional period of double burden lies ahead.

What does this mean for companies?

For businesses engaged in trade between the UK and the EU, this development introduces a new layer of planning uncertainty. While the political commitment to linking is clear, the risk of double CBAM costs remains until implementation is complete. At the same time, the proposed dynamic approach opens the door to smoother integration than seen in the Swiss example. What is certain is that companies already collecting emissions data, analysing global supply chains, and keeping a close eye on their carbon costs will benefit from potential linking – both from a regulatory and financial standpoint. At the same time, companies must carefully account for transitional risks, particularly with regard to CBAM reporting obligations and allowance costs.

Conclusion

With their political commitment to linking their emissions trading systems, the EU and the UK are sending a strong signal for climate-related market integration. However, many technical and legal questions remain, and operational caution is still advised. For CBAM-liable companies, the development is nonetheless significant: those who prepare strategically and early can benefit from potential exemptions – and bring regulatory clarity to a complex landscape.

Support for strategic alignment

If you would like to understand how future ETS linking could affect your CBAM obligations or how to prepare your supply chains accordingly, feel free to reach out to us at helge@kolum.earth.