EU ETS Linkage Could Enhance UK Carbon Market Options
The UK's carbon market is tightening sharply as the country enters the second half of the decade. Fewer allowances will be available each year under the UK Emissions Trading Scheme, and regulated businesses will face a smaller pool of domestic compliance options. At the same time, the government is negotiating to link the UK ETS with the EU system. If successful, that linkage would allow firms to use allowances from either market, potentially easing cost pressures and stabilising prices as the cap falls.
This matters because the UK has already committed in principle to pursue linkage, but the final terms are still being worked out. The timeline, technical design, and scope of mutual recognition remain open questions. For businesses covered by the scheme, the outcome will shape compliance costs, capital planning, and cross-border trade risk through the next decade.
The UK ETS launched in January 2021 after the country left the EU's carbon market. Initially, the scheme mirrored many features of the EU system, but the government has since reset the cap to align more closely with domestic net-zero targets. The current phase runs to 2030, and the cap has been cut substantially to reflect the UK's steeper decarbonisation trajectory.
Understanding the scale of that reduction is essential. The government reset the total cap for 2021 to 2030 at 936 million allowances, representing a 30% cut over the phase. By 2030, the annual cap will fall to approximately 50 million allowances. That decline is faster than the EU's trajectory and reflects the UK's legally binding commitment to reduce emissions by 68% on 1990 levels by 2030.
Coverage expanding to new sectors and emissions sources
The government is also widening the scope of the scheme. Domestic maritime emissions will enter the UK ETS in 2026, followed by energy from waste and waste incineration facilities in 2028. These additions will bring new participants into the market at precisely the moment when the overall cap is shrinking most quickly.
For existing participants, the combination of a tighter cap and broader coverage means greater competition for a smaller number of allowances. Prices in the UK ETS have historically tracked the EU system, but divergence has begun to emerge. A narrower domestic market increases the risk of volatility, particularly if sector-specific demand spikes or if policy changes create short-term imbalances.
Consequently, the prospect of linkage with the EU ETS has become commercially significant. Linkage would allow firms in both markets to use allowances issued by either system for compliance. It would also tend to align prices, reducing the risk of sharp divergence between UK and EU carbon costs.
UK and EU agree to pursue market linkage
The political groundwork is already in place. On 19 May 2025, the UK and EU agreed at a bilateral summit to work toward linking the two emissions trading schemes. Both sides published a Common Understanding setting out their intent, and formal negotiations opened shortly afterward. The European Commission received a mandate from the EU Council in November 2025 to begin technical talks.
The European Parliament has noted that the EU may complete linkage with the UK before 2030. The EU has already linked its ETS with Switzerland, and the framework for connecting carbon markets is established. However, significant design differences remain between the UK and EU systems, and negotiators must resolve questions about scope, mutual recognition, and price alignment before linkage becomes operational.
Specifically, the two schemes do not yet cover identical sectors. The EU ETS includes aviation and will soon incorporate shipping under separate regulations. The UK is adding maritime and waste sectors on a different timeline. These mismatches create technical challenges for mutual recognition, particularly around allowance fungibility and compliance timelines.
Moreover, the UK and EU markets have begun to show price divergence. Although both systems started from a similar base, the UK's faster cap reduction and smaller market size have created conditions for independent price movements. Linkage would tend to eliminate that divergence by allowing arbitrage, but only if the legal and technical frameworks allow free movement of allowances.
What linkage means for compliance costs and planning
For regulated firms, linkage would offer several advantages. First, access to a larger pool of allowances would reduce exposure to UK-specific price spikes. The EU ETS is substantially bigger than the UK system, and linking would effectively give UK participants access to deeper liquidity and a broader compliance market.
Second, linkage would simplify cross-border operations. Many UK firms already operate facilities in the EU or trade with EU counterparts. A linked market would reduce the need to manage separate compliance strategies in each jurisdiction. It would also reduce the administrative burden of tracking and surrendering allowances from different sources.
Third, linkage could improve the predictability of carbon costs. A larger, more liquid market tends to exhibit lower volatility than a smaller one. For firms making long-term capital investments, that stability matters. Projects with multi-decade payback periods need reliable carbon price forecasts, and a linked market would provide a more robust basis for those projections.
However, there are trade-offs. Linkage would expose UK firms to policy decisions made in Brussels. Changes to the EU ETS design, such as adjustments to the Market Stability Reserve or decisions about free allocation, would directly affect the UK market. Businesses would need to monitor regulatory developments in both jurisdictions, and the UK government would lose some autonomy over domestic carbon pricing.
Additionally, linkage does not eliminate the tightening cap. The UK ETS will continue to shrink through 2030 regardless of whether linkage proceeds. Firms will still need to reduce emissions or purchase allowances, and the overall supply of UK allowances will keep falling. Linkage would provide access to EU allowances, but those allowances are also becoming scarcer as the EU pursues its own 2030 and 2040 climate targets.
There is also the question of timing. Negotiations are ongoing, but no final agreement has been published. If linkage is delayed beyond the mid-2020s, UK firms will face several years of a standalone, tightening market before gaining access to the EU system. That could create a period of elevated costs and uncertainty, particularly for sectors entering the scheme for the first time in 2026 and 2028.
Key details about the UK ETS and linkage timeline
- The UK Emissions Trading Scheme began operating in January 2021 after the UK exited the EU ETS.
- The current phase runs from 2021 to 2030, with the cap set at 936 million allowances over the period.
- The government has reduced the cap by 30% across the phase, bringing the annual cap to approximately 50 million allowances by 2030.
- Domestic maritime emissions will be added to the scheme in 2026, followed by energy from waste and waste incineration in 2028.
- The UK and EU agreed in principle to pursue ETS linkage at a summit on 19 May 2025, and formal negotiations are underway.
- The European Council authorised the European Commission to open linkage talks in November 2025, and the European Parliament has indicated linkage may be completed before 2030.
- Linkage would allow firms to use allowances from either the UK or EU system for compliance, potentially aligning carbon prices and reducing the risk of divergence.
Considering the commercial and strategic implications
Businesses covered by the UK ETS should begin scenario planning now. The trajectory of the cap is known, and the expansion of coverage is confirmed. However, the timing and terms of EU linkage remain uncertain. Firms should model compliance costs under both scenarios: a standalone UK market through 2030, and a linked market from the late 2020s onward.
For sectors entering the scheme in 2026 and 2028, early preparation is particularly important. Maritime operators and waste facility managers will need to establish monitoring, reporting, and verification systems well before their compliance obligations begin. Those systems take time to develop, and delays can lead to penalties or unplanned costs.
Similarly, firms with cross-border operations should assess how linkage might affect their overall carbon strategy. If linkage proceeds, it may make sense to consolidate compliance management across UK and EU facilities. If linkage is delayed or fails, separate strategies will be necessary. Either way, clarity on internal governance and decision-making processes will reduce friction when policy details are finalised.
There is also a broader strategic question about carbon pricing and competitiveness. The UK ETS is part of a wider package of climate policies, including the Carbon Border Adjustment Mechanism in the EU and potential border measures in the UK. Linkage could reduce some of the friction between these systems, but it will not eliminate the need for businesses to understand and manage multiple overlapping frameworks.
Furthermore, the UK government has indicated interest in expanding the scheme to include engineered greenhouse gas removals. If that proceeds, it would create new compliance options but also new complexity. Firms should track these consultations and consider whether emerging removal technologies could form part of their long-term decarbonisation plans.
Finally, businesses should engage with the policy process. The government has consulted on ETS design in the past and is likely to seek input on linkage terms and future expansions. Early engagement allows firms to shape the details of the scheme in ways that reduce compliance costs and align with commercial realities. It also ensures that sector-specific concerns are understood by policymakers before final decisions are made.
We work with businesses to navigate the UK ETS and other carbon pricing mechanisms through our compliance support services, helping firms establish reporting systems, manage allowance strategies, and prepare for regulatory changes. For companies facing multiple environmental obligations, our net-zero program provides integrated support across carbon measurement, reduction planning, and compliance management.
Where to find official guidance and updates
The UK government publishes detailed information about the UK ETS, including guidance on participation, monitoring, and reporting, through the Department for Energy Security and Net Zero. Official policy updates, consultations, and cap adjustments are announced via the same channel.
For developments on EU linkage, the European Commission provides regular updates on the EU ETS and international cooperation. The European Parliament also publishes briefings on linkage negotiations and the broader context of EU carbon markets.
Businesses can access technical guidance on emissions monitoring and verification through the UK ETS monitoring and reporting framework, which sets out the requirements for regulated installations. The Environment Agency and equivalent regulators in Scotland, Wales, and Northern Ireland provide jurisdiction-specific support and enforcement information.
For sectors entering the scheme in 2026 and 2028, the government has committed to publishing transitional guidance and sector-specific rules well in advance of compliance deadlines. Firms should monitor official channels for those publications and ensure internal teams are prepared to implement new requirements as they take effect.