In a major development for climate policy and trade, the European Commission has officially proposed a Council Recommendation to initiate formal negotiations with the United Kingdom on linking the EU Emissions Trading System (EU ETS) with the UK ETS. The long-anticipated move carries important implications for cross-border climate compliance and the Carbon Border Adjustment Mechanism (CBAM).
CBAM Exemption Now Officially Tied to ETS Linking
The Commission’s proposal, published under COM(2025)408, confirms what many policy observers and market participants have speculated:
Once the UK and EU formally link their ETS systems:
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The CBAM will no longer apply to UK-origin goods entering the EU.
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The UK’s own CBAM will equally not apply to EU-origin goods.
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This reciprocal exemption is clearly stated in the draft under the “Level Playing Field Benefits” section and is fully aligned with Article 2(6) of the CBAM Regulation (Regulation (EU) 2023/956). This clause enables exemption from CBAM duties for countries with an equivalent carbon pricing system linked to the EU ETS.
What the Linking Agreement Entails
According to the Commission’s document, the proposed linking arrangement would guarantee:
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Equal ambition in decarbonization targets between the EU and the UK.
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Regulatory alignment to all relevant EU ETS rules.
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Shared scope for covered sectors, with one notable exception: individual heating installations, which are covered under the UK ETS but not under the EU system.
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Strategic Objectives: Climate + Competition
The Commission’s stated rationale for the move is clear and threefold:
1. Prevent carbon leakage by ensuring that businesses in the UK and EU face similar carbon costs.
2. Avoid distortions of competition caused by overlapping or conflicting carbon pricing regimes.
3. Guarantee a level playing field for operators on both sides of the Channel.
What Comes Next?
The Council will now consider the Recommendation and decide whether to grant the Commission a formal mandate to negotiate with the UK. If approved, the agreement would represent the first formal ETS linkage since Switzerland, and could serve as a model for future climate diplomacy with other jurisdictions.
