EU Clears Path for Talks to Link Carbon Markets with UK, But Levy Relief Still Years Away

EU member states have agreed to begin negotiations with the UK on linking their carbon markets, Denmark’s EU presidency said on Wednesday-marking a significant step in rebuilding post-Brexit relations. A linked system would exempt both sides from imposing carbon border tariffs on each other, a key incentive for British industries facing rising compliance costs.

Ambassadors unanimously backed the move in a closed-door meeting, and formal approval by EU ministers on Monday is expected without changes. However, the linkage is unlikely to materialize soon enough to shield UK firms from the EU’s incoming carbon border levy, which takes effect on January 1 for imports such as steel and cement. The UK government estimates the levy could cost its companies around £800 million annually.

Because aligning the two carbon markets will take several years, British firms will still face the EU levy until the systems are fully linked. The UK is preparing its own carbon border tax, due to start in 2027.

Formal negotiations on EU–UK ETS linkage would reduce friction between two of Europe's largest carbon-priced economies. But the multi-year implementation timeline means UK industries will face the EU CBAM through the intervening period, with the £800 million estimated annual cost falling primarily on steel, cement, aluminium and fertiliser importers. The UK's own carbon border tax, taking effect from 2027, adds further complexity for cross-border trading.

For businesses operating across both regimes, the interim period requires active management: robust emissions accounting to minimise CBAM exposure, hedging strategies that reflect divergent EU/UK allowance prices, and preparation for the eventual linked-market architecture. The Swiss-EU linkage precedent from 2020 provides a working template for how such arrangements can operate at scale.

For energy-intensive industrials, carbon-market participants and their financial and legal advisors, Cognitud's climate action, market intelligence and sustainability due diligence teams help clients evaluate CBAM exposure across supply chains, structure carbon-cost pass-through strategies, and prepare disclosures aligned with EU ETS, UK ETS and CSRD requirements that increasingly demand quantified carbon-price and transition-risk analysis.