UK ETS–EU ETS Link: The UK-EU summit held on 19th May 2025 in London officially stated the intention of both parties working towards establishing a link between the two carbon markets.
Following Brexit, the UK ETS diverged from the EU ETS for the 2021 reporting year, and although the two systems operate in very similar ways, there has been no official link between them.
The Common Understanding released following the submit discusses a linking agreement that should clearly define the sectors to ‘avoid risks of carbon leakage and competitive distortion’, and mentions the inclusion of electricity generation; industrial heat generation; industry; and domestic and international maritime and aviation, which roughly lines up with the existing scopes of both the UK ETS and EU ETS.
It is thought that a formal agreement will take a couple of years to materialise, as there is no binding legal commitments or specific timelines laid out, and there is still significant work to be done. However, this announcement is a positive step towards alignment that the UK ETS Authority says will ‘bring important benefits to UK business and consumers, as well as supporting investment, growth and a more efficient transition to net zero’.
Swan Energy doesn’t expect to see any significant changes caused by the potential linking agreement in the Monitoring, Reporting and Verification (MRV) process for our client UK or EU operators in the next couple of years and the currently ongoing UK ETS Baselining exercise is not affected.
However, due to recent growing anticipation of such an announcement, change in the markets is already happening, with UKAs rallying >30% since the start of 2025. Once concrete timelines are set out, analysts expect the price discrepancy between UKAs and EUAs to converge further, with delay/ambiguity potentially causing the opposite.
For further information, Section 34-45 of the Common Understanding discusses working towards the linking of the reporting schemes and the UK ETS Authority is holding a UK ETS Linking webinar on 3rd June 2025, sign up here. The Swan Energy team will also be sharing an update about the move towards a UK ETS–EU ETS Link after this webinar.
