The United Kingdom and the European Union are both working towards carbon neutrality by 2050, yet their Emissions Trading Systems (ETS) have remained separate since Brexit, the withdrawal of the UK from the EU back in 2020.
With the UK ETS significantly smaller and more volatile than the EU ETS, discussions are growing around linking the two markets to improve stability and drive decarbonization, according to an analysis by Power Technology, a sister publication of Energy Monitor.
The UK’s weaker carbon prices have led to lower revenues, with forecasts showing a $23.6 million (£19 million) drop compared to previous estimates.
Sam Peacock, Managing Director of Corporate Affairs at SSE, warns that failing to align with the EU ETS could cost the UK up to $12.4 million in lost revenue between 2025 and 2030.
“The situation will get crazier going into 2026 when the European Carbon Border Adjustment Mechanism [CBAM] kicks in,” Peacock was quoted as saying.
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On the contrary, a combined ETS could enhance market stability and ensure more predictable carbon pricing.
“An integrated market would quash volatility concerns, as a larger market creates stronger and more reliable carbon price signals,” said Clarice Brambilla, energy transition analyst at GlobalData.
The EU may be hesitant, as aligning with the UK’s weaker carbon pricing could initially lower its own prices and reduce CBAM effectiveness. However, industries on both sides could benefit from such a move.
UK exporters in carbon-intensive sectors like cement and steel could avoid costly CBAM tariffs, while a stronger carbon price would generate more funding for clean energy investments, similar to the EU’s Innovation Fund.
Renewable energy projects in the North Sea could also benefit from a unified carbon price, simplifying trade and investment.
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Challenges remain, particularly in negotiating a fair carbon price. The UK’s current price of $39.9 (£32) per ton is significantly lower than the EU’s $82.3 (£66) per ton, complicating integration.
While some in the UK may see ETS linking as a political risk, Elisa Fenzi of SSE argues that the UK would not be giving up its sovereignty: “There are policy and legal tools that can make sure that the UK still maintains final say in legislations applied in domestic territory.”
Despite these hurdles, SSE experts believe linking is achievable if both sides negotiate in good faith. With CBAM implementation approaching, delays could mean lost opportunities for investment and revenue.
“We don’t want to wait too long,” Peacock cautioned, highlighting the urgency of a decision.
