On 12 November, the EU-UK Emissions Trading System (ETS) linking process took an important step forward as the Council approved the linking mandate, authorizing the European Commission to begin formal negotiations with the United Kingdom. The draft decision now awaits formal adoption and is on today’s agenda of the Economic and Financial Affairs Council (ECOFIN). Adoption is expected to be procedural and could take place as early as today, or at the latest during the General Affairs Council meeting on 17 November.
The UK Allowance (UKA) market reacted positively to the news.
The Dec-25 UKA contract rose nearly 2% after market opening, reaching GBP 59 on ICE, before easing to GBP 58 by 11:00 CET - up about 0.5% on the day. This brief rally likely reflects cautious optimism among traders, given that the linking negotiations are expected to be lengthy. ClearBlue maintains its view that a final linking agreement will likely be completed by 2028.
This latest development follows the publication of the draft Council Recommendation on 16 July, in which the European Commission invited the Council to authorize the opening of linking negotiations. The proposal designates the Commission as the Union’s negotiator, outlines negotiation directives, and identifies the committees to be consulted. It also emphasizes that linking the EU and UK ETS would promote a level playing field and help reduce the risk of carbon leakage.
The EU’s linking mandate further clarifies the issue of CBAM (Carbon Border Adjustment Mechanism) exemptions. Under the “Level Playing Field Benefits” section, it states: “As a result, once the agreement is in force, the CBAM regulation would not apply to goods originating in the United Kingdom. Equally, the United Kingdom would not apply its own CBAM to goods originating in the Union.”
Uncertainty remains
However, uncertainty remains regarding whether the UK will be exempt from the EU’s CBAM, which is set to enter its definitive phase in January 2026. Since the linking agreement is unlikely to be in force by then, the exemption may not yet apply.
According to media reports, a European Commission spokesperson confirmed: “The decision to launch negotiations on linking does not affect the start date of CBAM for the UK on January 1. Under the current rules, an exemption from CBAM cannot be granted before a linking agreement enters into force.”
The progress in ETS linking talks has also been acknowledged by UK authorities. On 12 November, the UK’s European Affairs Committee stated in a report that “The Government has made progress in achieving its reset objectives. It has negotiated a security pact with the EU. It has also secured the EU's agreement to link the UK and EU Emissions Trading Schemes.” Based on current information, the UK does not intend to publish its own negotiation mandate for linking the two ETS systems.
Next Steps
In the near term, the ongoing negotiations are expected to increase volatility in the UKA market. A key indicator to monitor is the net-long position of investment funds in UKAs. As of 7 November, funds held 20.17 million tonnes in net length, slightly down from the recent record of 21.98 million tonnes. Most of these holdings are long positions, which have been steadily increasing since mid-July, reflecting continued optimism about the linking process and future UKA prices.
The year 2026 is also projected to be the first “short” year since the market’s launch, adding to the overall bullish sentiment. Some profit-taking may take place as there will likely be no linkage-related announcements for a while. Meanwhile, the government's responses to consultations to reform the UK ETS market are still pending but are being worked on despite the linking negotiations.
ClearBlue Markets will continue to closely monitor upcoming discussions and keep clients informed of any key developments.