UK and EU Seek to Link Carbon Markets in Wider Post-Brexit Reset

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(Bloomberg) — The UK and European Union are expected to signal a new era of climate cooperation by pledging to link their carbon markets to avoid trade levies and reset post-Brexit relations.

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The move comes as part of Monday’s UK-EU summit, which aims to improve relations five years after Britain left the bloc, according to a draft document seen by Bloomberg, laying out a “common understanding” between London and Brussels.

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Tying the two carbon markets together would avert border levies on imports of products like steel and cement from places with less strict CO2 policies. It’s also expected to boost liquidity in the market for carbon permits.

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“This would be a significant step in reducing trade frictions in steel with the EU, our biggest export market,” said Frank Aaskov, director for energy and climate change policy at UK steel. “It also eliminates the risk of costs from the EU carbon border adjustment mechanism, where the burden particularly falls on SMEs.”

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The spread between CO2 prices in the UK and the EU diverged post-Brexit after the bloc put in place strict rules to meet its goal of cutting emissions by 55% by the end of the decade from 1990 levels. Earlier this year, the gap between the two widened to over €40 ($44.74) per ton of CO2, before shrinking to a two-year low of less than €10 as UK permits rallied on speculation of linking markets with the EU.

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Still, any final deal could take years and the draft document, which is still subject to change, does not lay out a timeframe. Negotiations on other aspects of future UK-EU relations are still ongoing.

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For both sides, the clear benefit is easier trade of carbon-intensive goods as they put in place levies to shield their companies from cheap, CO2-intensive competition from abroad. For the EU, linking carbon markets is a relatively easy way to boost post-Brexit cooperation, and could help the continent with its own emissions-cutting ambitions, including through the use of carbon capture and storage in the UK.

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Closer cooperation between Britain and the EU on climate policies comes amid an upheaval in global trade triggered by US President Donald Trump’s tariff war, while his administration is also slashing environmental regulation. The EU has made rolling out carbon markets globally a key pillar of its climate diplomacy.

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“Despite the wider headwinds affecting global trade, there are still gains to be had from closer trading relationships between like-minded partners,” said Vikram Balachandar, a manager at Frontier economics. “It will bring cost savings to UK and EU industry from a more consistent carbon price signal and a much deeper market.”

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The UK launched its own carbon system after exiting the EU and it’s unclear how long it will take to re-link the two markets, although they share a similar design. Any deal would likely require Britain’s carbon market to be “at least as ambitious” as the EU’s, according to the draft.