UK, EU to Work Toward Linking Carbon Markets at May 19 Summit

(Bloomberg) -- The UK and the European Union are expected to work toward linking their carbon markets at a summit next month, a move that would underline improving relations five years after Brexit.

While the two sides are unlikely to sign a final deal tying together two of the world’s largest carbon markets at the meeting in London on May 19, they may show their commitment to a specified timeframe, according to people familiar with the matter. They will also hold discussions on security and fishing rights, the people added.

The UK and the EU have been working to rebuild their relationship as they confront the upheaval unleashed by Donald Trump’s determination to remake the global trading order and the security architecture for Europe. The US president’s tariff announcement late on Wednesday increases the pressure on both sides and adds to the incentives for them to work together.

Negotiations are ongoing and the fine print needs to be ironed out before any broad agreement is finalized, according to the people, who asked not to be named because the discussions are private. 

The UK will not be providing a running commentary on talks  with the EU, according to a UK government spokesperson.

The UK launched its own separate system after Britain exited the EU five years ago. Utilities that operate in both jurisdictions have long called for the systems to be linked again but remaining as distinct as possible in all sectors was an important issue for the last UK government. 

UK carbon permits trade at a discount to the equivalent in the EU, although the spread has narrowed this year as traders weigh the potential of a link between the two markets. Such a move would bring both sides advantages, including exemptions from carbon border levies for emissions-intensive products and creating a deeper market for the permits.

The EU’s carbon trading system is the world’s oldest and forms a key pillar of the bloc’s green ambitions this decade, delivering a 62% cut in emissions by 2030 for the sectors it covers. 

It’s not clear how long it will take to re-link the systems. It took Switzerland around 10 years, though it’s expected to be a shorter period for the UK given its similar design.

Progress depends on agreement on other issues too. The European Commission, the EU’s executive arm, told member states in March that key parameters to consider for a potential agreement to link the EU and UK ETS would be alignment of the regulatory standards of both jurisdictions and the role of the ECJ, issues that have come in the past in the bilateral talks, people familiar with the matter said.

At the summit, there will also be discussions on security, where an agreement is expected, and fishing rights, the people said.

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