The EU and UK agreed to work towards linking their respective emissions trading systems (ETS), as part of their common understanding agreement concluded at a summit in London today.
"The European Commission and the United Kingdom share the view that a functioning link between carbon markets would address many of the issues raised in respect of trade and a level playing field," the agreement states.
A linking agreement should exempt both jurisdictions from their respective carbon border adjustment mechanisms, according to the common understanding, and the linked systems should cover power and industrial heat generation, and domestic and international maritime and aviation emissions.
The statement specifically states that any link "should not constrain the European Union and the United Kingdom from pursuing higher environmental ambition". It also underlines that the UK ETS's supply cap and its emissions reduction pathway are "guided by" the country's Climate Change Act and nationally determined contributions to the Paris climate agreement, and that these should be "at least as ambitious" as the EU's.
The UK has legally binding targets to cut its greenhouse gas (GHG) emissions by at least 68pc by 2030 and 81pc by 2035, both compared with 1990 levels. The EU aims to cut its net GHG emissions by 55pc by 2030, and is yet to set a 2035 target. Both jurisdictions are targeting net zero emissions by 2050, while they share the "same interests" in addressing climate change, commission president Ursula von der Leyen said today.
Linking the systems would "save British businesses £800mn in EU carbon taxes", UK prime minister Keir Starmer said today, without specifying a timeframe for the savings.
A study commissioned by a range of utilities and published last week found that linking the two systems would save up to €1.2bn on lower hedging costs resulting from improved market liquidity and lower bid-offer spreads.
Today's agreement provides no timeline for linking the systems. The process to negotiate and link the Swiss ETS to the EU's scheme took almost 10 years.
Alongside plans to work towards linking the EU and UK ETS, the jurisdictions also alluded in the agreement to continuing "technical regulatory exchanges" on energy technologies including hydrogen, carbon capture and storage and biomethane.
And they will "explore in detail the necessary parameters" for the UK's potential participation in the EU's internal power market.
