EU and UK Forge Historic Pact to Link Emissions Trading Schemes

UK exporters have just dodged a financial bullet worth nearly £800 million a year in carbon border taxes, thanks to a landmark agreement between the UK and EU to link their Emissions Trading Schemes (ETS). The deal was sealed at the much-anticipated UK-EU ‘Reset’ Summit, hosted by Prime Minister Keir Starmer in London on 19 May—a summit widely viewed as pivotal in delivering the Labour Government’s ambitious economic growth agenda.

Why does this matter? 41% of the UK’s goods exports head straight to the EU, but export growth has been underwhelming. With carbon-related costs threatening to become another barrier, aligning both ETS frameworks was desirable and urgent.

For context, the ETS operates as a ‘cap and trade’ system, placing a ceiling on emissions from energy-intensive sectors and allowing companies to buy or sell allowances. While the EU’s ETS has been running since 2005 (and is the oldest in the world), the UK set up its version post-Brexit. Until now, however, the two systems have differed significantly in both scope and pricing.

Enter the Carbon Border Adjustment Mechanisms (CBAMs)—a safeguard to ensure foreign companies don’t undercut EU firms bound by stricter emissions rules. CBAMs force importers to pay the same carbon price domestic manufacturers face, creating a more level playing field.

With the EU set to launch its CBAM officially on 1 January 2026 and the UK to follow with its own in January 2027, businesses on both sides were facing overlapping and potentially conflicting carbon pricing regimes.

Fortunately, that chaos has been averted. The UK’s Department for Business and Trade estimates that aligning the ETS schemes will save UK exporters an eye-watering £800 million in the first year of the EU’s CBAM rollout. Moreover, UK steel exports have received a special carve-out agreement, expected to save an additional £25 million by shielding them from punitive EU tariffs. But the reset summit didn’t stop at carbon.

The Aldersgate Group’s executive director, Rachel Solomon Williams, said the agreement “was heartening”. She elaborated: “Enhanced cooperation on carbon pricing will deliver clear benefits for businesses, reducing administrative burdens, lowering costs, easing trade friction, and supporting both the UK and EU in meeting their decarbonisation goals… Timely progress is vital to provide the policy certainty that businesses and investors need.”

“Closer alignment between UK and EU carbon markets is a welcome step in the growing coverage of robust carbon pricing globally,” added BeZeroCarbon co-founder Sebastien Cross.

“Well-functioning ETSs put a real price on polluting and drive hundreds of billions of dollars’ worth of capital into the net-zero transition. Both the UK and EU should also align to send a strong signal on a role for removals and international credits in the future of compliance schemes.”

In a separate breakthrough, the UK struck a permanent Sanitary and Phytosanitary (SPS) agreement with the EU that eliminates many routine health checks on plant and animal products. These checks had been clogging supply chains and causing border chaos since Brexit. Their removal is expected to ease the burden, particularly on smaller retailers who had resorted to shifting product lines toward domestic goods to avoid the hassle.

Even the long-contested fishing rights issue was brought to the table. The UK and EU agreed on a twelve-year deal, ensuring that EU boats can’t ramp up their fishing in British waters while maintaining UK access to EU waters. Still, the National Federation of Fishermen’s Organisations has voiced cautious optimism, saying the real value of the deal depends on the fine print.

The UK government projects that combined ETS and SPS agreements could inject nearly £9 billion into the UK economy by 2040. That’s not just policy alignment—it’s a strategic realignment with high economic stakes and real climate consequences.

The Institute for European Environmental Policy UK’s executive director, Ben Reynolds, said:  “The agreement to link ETSs and CBAMs underlines this joint climate ambition and determination, and increases regulatory certainty for business working across Europe and removes the risk of additional costs to British exporters.

“We look forward to seeing the detail of the veterinary agreement on SPS standards, and what this might mean for pesticide and animal welfare regulations, with the UK and EU taking different approaches since Brexit.

“We also welcome the commitment for more regular exchanges, lacking in recent years, between the EU and UK on joint strategic interests, which we believe, as indicated today, should include climate and environment policy. This would provide space for further discussions on UK alignment with EU standards in some areas that would be beneficial to the environment, the public and ease trade barriers, such as chemicals, circular economy and air quality legislation, whilst retaining the freedom to go higher in those areas where the UK wants to take a more ambitious approach. This should also include consideration to rejoin other forums for sharing data, such as the European Environment Agency and Eionet.”