During the May 19 landmark EU-UK Summit aimed at restoring relations, both parties agreed to pursue the linkage of the EU and UK ETS markets. This linkage would exempt goods traded between the two regions from the Carbon Border Adjustment Mechanism (CBAM).
“The Common Understanding” document, jointly released by both parties, outlines the key features that a future linkage agreement should contain.
The Scope
The sectoral coverage should align with the current scope of both markets, including electricity, industrial heat, industry, domestic and international maritime transport, and aviation. Notably, aviation refers to both domestic and international operations, reflecting the Commission’s intent to expand the aviation scope. A process for potential future scope expansions should also be defined.
The Cap
The UK’s emissions cap and reduction pathway will remain guided by the UK’s Climate Change Act and its Nationally Determined Contributions (NDCs). However, the document states these "should be at least as ambitious as the European Union cap and the European Union reduction pathway"—a position previously expressed by EU Commissioners when asked about their conditions for linkage.
The UK's Role in Legislative Processes
The document emphasizes that the UK should be involved at an early stage in shaping future legal acts. While the UK would not gain the right to participate in the Council or its bodies, the European Commission should involve the UK in early legislative discussions.
Despite a clear intention to move forward with linking the markets, no timeline or definitive next steps were provided. ClearBlue assesses that full linkage is unlikely before the end of the decade, as the UK ETS would need to align more closely with the EU ETS first. Historical context also suggests complexity: negotiations to link the EU and Swiss ETS took nearly 10 years. However, in this case, a shorter timeline is expected since the EU is already exploring market linkages through the 2026 Market Review to preserve market liquidity. It remains unclear how a linkage occurring after 2027 would affect CBAM obligations.
ClearBlue views the linkage agreement as bullish for UKA prices and neutral for EUA prices in the short term. Long-term impacts will depend on the timing of the linkage and the technical details on cope coverage, cap alignment, etc. By the end of the decade, the UK ETS cap is projected to be tighter than the EU ETS cap. While market liquidity in the EU ETS would improve post-linkage, we expect limited price impact on EUAs, given the anticipated increase in the cap and the coal phase-out in the UK power sector. Detailed pricing forecasts are available in ClearBlue's reports for clients.
Market reactions to the announcement have been mixed. Investor expectations were high, as reflected by record net long positions among investment funds. Last week, UKA Dec-25 prices saw a 5.90% week-on-week decline, likely driven by profit-taking ahead of today’s EU-UK Summit. As Monday's agreement did not involve a linking timeline, the UKA prices might start being driven by the market fundamentals, if no further announcements are made anytime soon. Further, UKA Dec-25 price gained 7% as Bloomberg reported that both parties’ commitment to linkage was seen in the draft document of the summit. The large spike likely signals that some short positions were built up last week and were squeezed following Bloomberg's article. Any additional announcements related to the UK-US trade agreement, broader macroeconomic sentiment, or the implementation of the Supply Adjustment Mechanism will also continue to influence price movements.
The UK ETS Authority will host a webinar on Tuesday, 3 June, to give an overview of the agreement and answer any arising questions. The registration link can be found here.
ClearBlue Markets will be following the further linkage developments closely and will publish further analysis on the topic.
If you have any questions about our estimates or need any additional market information, please contact us.