UK carbon prices surged more than 8% on Monday after the government confirmed it will link its emissions trading system (UK ETS) with the EU’s, sparking fears of rising costs for industry.
The deal – the first major reset of UK-EU trade ties since Brexit – promises closer cooperation on carbon pricing.
The move is aimed at boosting energy security and shielding UK exporters from EU carbon border taxes due in 2026, which the Prime Minister claimed could have cost British firms up to £800 million a year.
But analysts warned it could push our carbon prices sharply upwards.
Shortly after the announcement, benchmark UK carbon contracts jumped 8.4% to £52.40 per tonne, with futures trading around £51.22, still below the EU price but heading closer.
Linking the UK ETS to the EU’s long-running Emissions Trading System (launched in 2005) is expected to improve liquidity and price stability.
But in the short term, it could mean a higher carbon cost burden for UK firms.
A recent report by Frontier Economics suggested the link-up would cut trade frictions and ultimately deliver around £770 million in savings by 2030 – but only once prices stabilise.
The UK launched its own ETS in 2021 after leaving the EU. Since then, prices have been lower than those on the continent, leading to a split market and growing concerns over competitiveness and environmental ambition.
The new agreement marks a key step toward fixing that. But with EU carbon prices still higher, UK emitters may now face an increase in short-term costs as prices converge.
Expect more volatility in the months ahead – and a close watch from industry.
