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What is an Emissions Trading System (ETS)?
An ETS is a ‘cap and trade’ scheme that aims to cut down on environmentally polluting carbon emissions by capping the total emissions companies can produce. It also puts a price on each ‘unit’ of carbon emitted, which firms have to pay, with money going towards helping the UK to meet its climate and net zero targets. Businesses buy and trade allowances covering the emissions they produce, creating a financial incentive to decarbonise.
What have the UK and EU agreed so far?
Since Brexit, the UK and the EU have run separate emissions trading schemes, adding extra costs and complexity for businesses on both sides of the Channel.
At the inaugural UK-EU Summit in May 2025, the two sides agreed in principle to link their schemes, as part of the wider Common Understanding on UK-EU cooperation. The agreement is not yet legally binding as the technical detail of a full linkage agreement is still being negotiated.
What does the new UKTBC report recommend?
The report, UK-EU Energy Cooperation: Emissions Trading Systems and the Electricity Market, sets out key recommendations, including that the UK Government and EU should:
- Continue to deepen energy cooperation to deliver affordable, clean, secure energy for businesses and consumers,
- Jointly discuss and consult on any future expansion of ETS coverage,
- Agree a reciprocal exemption from each other’s carbon border taxes (CBAMs) while a full ETS linkage agreement is finalised.
What is a CBAM, and why does it matter?
A Carbon Border Adjustment Mechanism (CBAM) is a tax applied to imported goods, based on the carbon emitted by producing them, designed to stop ‘carbon leakage’. This is when companies move their production overseas to countries with weaker emission constraints.
The EU’s CBAM came into force in January 2026, meaning UK imports to the EU are already subject to an additional charge. The UK will bring in its own CBAM in January 2027, which will impact EU imports to the UK.
Linking the UK and the EU’s ETSs creates the conditions for a mutual CBAM exemption, but only once the agreement enters into force through legislation in Parliament. The report argues that the UK and EU should agree a reciprocal exemption to cover the period between the ETS agreement being signed and entering into force. Without this exemption, UK exporters and businesses face charges on energy-intensive goods sold into the EU.
How much could this cost UK businesses?
Without a mutual exemption or finalised linkage agreement, the report warns UK firms could face up to £800 million in charges by 2030 on energy-intensive exports to the EU, damaging competitiveness at a time where businesses already face high energy costs and other inflationary pressures.
Which parts of the UK would benefit most from an ETS agreement?
A UK-EU ETS agreement would be particularly valuable for regions producing energy-intensive industrial goods, supporting the Government’s own industrial strategy goals.
More broadly, independent research has shown that deeper UK-EU integration delivers particular benefits for key manufacturing regions who would see a huge regional economic upswing, including:
- Yorkshire: at least £641m
- The Midlands: at least £1.38bn
- The North East: at least £216m
What’s the risk of further delay?
With the UK-EU Summit postponed until after the summer, campaigners are urging both sides to agree to a mutual CBAM exemption and finalise the ETS agreement as quickly as possible, to avoid months of uncertainty and rising costs for UK operators in the meantime.
What would this mean for the electricity market?
Beyond ETS linkage, the wider energy cooperation agenda includes securing UK participation in the EU’s internal electricity market, which would improve efficiency, reduce costs, and strengthen energy security on both sides. Negotiations for UK participation in the EU’s internal electricity market were formally launched in March 2026, and are ongoing.