Linking the UK and EU Emissions Trading Schemes (ETS) could deliver shared benefits to the EU and UK, supporting industrial competitiveness relative to wider international markets. This includes cost savings of up to €770 million by 2030 through improved market liquidity alone. 

The UK and EU currently operate two “cap and trade” schemes for carbon trading, both of which aim to reduce emissions cost-effectively. While their design is already closely aligned, they currently operate independently following the UK’s exit from the EU. 

Our study builds our previous analysis about the ETS, and finds that re-establishing a formal link between the two markets could deliver substantial benefits on both sides: 

Key findings 

• Up to €770 million in transaction cost savings by 2030, driven by greater liquidity and increased market depth. These benefits could reach €1.25bn [~£1.05bn] if liquidity falls from today’s levels.
• Reduced price volatility, contributing to reduced costs of risk management for ETS participants.
• Lower overall compliance costs for emitters in both systems as a result of improved access to allowances and greater trading flexibility. 
• Reduced trade frictions, since ETS linking would mean that Carbon Border Adjustment Mechanisms (CBAM) would not apply on EU-UK trade. This includes avoiding potential distortive effects from the EU’s CBAM in the power sector, such as increases in power prices for power markets importing power from GB and increased curtailment of renewables in Great Britain (GB). 

Vikram Balachandar, Manager in Frontier's Brussels office commented: "Despite the wider headwinds affecting global trade, there are still gains to be had from closer trading relationships between like-minded partners. Linking carbon pricing schemes is a great case study. It will bring cost savings to UK and EU industry from a more consistent carbon price signal and a much deeper market, meaning lower costs of managing risks related to the carbon price."

Looking ahead 

Given the close design similarities of the two schemes, linking negotiations could be initiated at the EU-UK Summit on 19 May. Agreeing a link ahead of global climate negotiations (COP30) later this year could be a powerful way for the UK and EU to demonstrate global climate leadership."

This report was commissioned by EDF, EnBW, RWE, SSE, and Uniper. 

Click here to read the full report: The shared benefits of linking EU and UK carbon markets: Supporting mutual EU and UK competitiveness and climate goals