Source: European Parliament
Since the origin of the EU emissions trading system (EU ETS), the EU has embraced the concept of international carbon markets to reduce greenhouse gas (GHG) emissions globally. The EU-Swiss ETS linkage set a precedent for potential expansion. As the world’s first carbon market, the EU has long led the development of carbon pricing, and the EU’s and UK’s decision to link their systems is a significant endorsement of this approach. This briefing presents an overview of the potential linkage between the EU ETS and the UK’s emissions trading system (UK ETS), following the recent political announcements. The EU and UK have long been committed to addressing the pressing issue of climate change, and the linkage of their ETSs is a crucial step towards achieving this goal. Linking the EU and UK ETSs could generate benefits in terms of sustainable economic growth and improved energy security, and protect the climate. The linkage can also provide a strong political message. The EU ETS and UK ETS share many similarities, including their cap-and-trade design and coverage of key sectors such as energy, industry, and aviation. However, there are also some notable differences between the two systems, such as sectoral scope, market instruments, and price levels. For example, the EU ETS could include the GHG emissions from road transport and heating of buildings (ETS2) in the future, while the UK ETS does not include a similar system. Despite these differences, the UK ETS should fulfil the obligations for linkage with the EU ETS, and analysis suggests that the benefits of linking the two systems could be significant. These benefits include increased market access, reduced carbon leakage, and improved climate action. By linking their ETSs, the EU and UK can create a larger, more liquid market for carbon allowances, which can help to drive down costs and increase investment in low-carbon technologies.