EU and UK negotiate ETS linking – A new path out of CBAM

A new push for climate-related market integration

On July 16, 2025, the European Commission proposed a negotiation mandate aimed at formally linking the EU Emissions Trading System (ETS) with the UK ETS. If successful, the United Kingdom would become the first third country to be exempt from CBAM obligations not through a special exemption, but through formal regulatory alignment - a shift that could significantly reshape the CBAM landscape for businesses on both sides of the Channel.

Two systems – many similarities, decisive differences

Since Brexit, the EU and the UK have operated separate emissions trading systems. While Northern Ireland continues to follow the EU ETS for electricity trading, the rest of the UK has run its own ETS since 2021. Despite a similar foundational structure, the two systems have diverged over time - particularly regarding sectoral coverage (for example, the EU ETS will include maritime and extended aviation from 2024) and the allocation of emission allowances. CO₂ prices also differ considerably. For cross-border businesses, this has created additional reporting obligations, dual system logic, and a lack of regulatory synchronisation. Long-term investment decisions have become more complex - both for British industries and European importers.

CBAM exemption through system linking

The CBAM Regulation explicitly allows for exemptions for imports from countries with formally linked ETS systems - provided that ambition levels are comparable and enforcement mechanisms are equivalent. That is precisely the goal of the proposed agreement. For companies, this would mean: no more CBAM reporting for UK-origin goods, no need to purchase CBAM certificates, and no additional carbon border costs. EU exports to the UK would likewise be free from UK border carbon measures - a fair two-way mechanism.

Requirements: dynamic alignment and robust governance

The Commission’s mandate outlines clear conditions: the UK must commit to a dynamic alignment with the EU ETS, ensuring that future regulatory adjustments are adopted in lockstep. Legally robust structures must also be in place - including dispute resolution mechanisms, monitoring, and, where necessary, cross-sector countermeasures in case of non-compliance. The agreement would cover sectors including industry, electricity, aviation, and maritime - the core sectors of both ETS regimes. Caps and reduction trajectories must be at least as ambitious as those of the EU to ensure mutual recognition of allowances and to exempt trade flows from CBAM obligations.

A real gamechanger for companies

Once implemented, such a linking would not only eliminate costs and reporting burdens - it would also simplify procurement planning. Particularly in carbon-intensive sectors like steel, aluminium or cement, competitive advantages could emerge from CBAM-free access to UK supply chains. However, this remains a forward-looking scenario. Until an agreement is concluded and in force, standard CBAM rules apply. UK-origin goods remain subject to full reporting and certification requirements. CBAM becomes geopolitical – and strategic The planned ETS linking illustrates how CBAM has evolved into a geopolitical policy tool. Regulatory alignment leads to economic benefits. For companies, this is a signal: climate policy is increasingly negotiated internationally, and national markets are being embedded into multilateral frameworks.

Conclusion

The prospect of an ETS link between the EU and the UK is more than a technical issue. It marks a new phase of regulatory integration - with direct implications for CBAM, trade flows, and business strategies. Those who bring clarity early will not only avoid risk but also unlock new opportunities.

Support with strategic alignment

If you want to understand how an ETS link might affect your CBAM obligations, supply chains or procurement strategy, feel free to reach out directly at helge@kolum.earth.