EU, UK near post-Brexit carbon market linkage deal - Bloomberg

The European Union and United Kingdom appear to be close to an agreement that would reconnect their carbon emissions trading markets, according to Bloomberg. This potential deal could ease trade costs and boost liquidity, according to sources familiar with the negotiations. The agreement could be unveiled at a summit on November 20, nearly six years after Britain launched its own emissions trading system after Brexit.

Negotiators have agreed on elements such as emissions limits, permit supply controls, and free allowances. However, rules for financial derivatives remain pending.

Connecting the markets would permit companies to utilize permits from either system to fulfill regulatory requirements, streamlining compliance for businesses operating in both areas. This could eventually cease carbon border charges on qualifying trade, though exemptions would not become automatic. To qualify for an exemption from the European Union's Carbon Border Adjustment Mechanism, Britain must set up full market linkage and uphold effective carbon pricing without preferential rebates.

The EU's border carbon rules went into effect this year, while Britain's equivalent is slated to commence in January 2027.

Carbon prices have already aligned as anticipation of the deal increased. British December allowances closed at £64.81 per metric ton on Friday, compared to €86.55 for benchmark EU permits. ABN Amro anticipates the price differential to further narrow over the next two years, possibly elevating compliance costs for British entities. The proposed framework would acknowledge British emissions caps through 2030. Post-2031, UK permit issuance would be capped at 7.1% of the EU system's allowance supply.

Britain is also required to establish a market stability reserve containing at least 29.5 million allowances upon the deal's implementation. The agreement necessitates approval from British and EU authorities, including the European Parliament and EU member states. Negotiators may provisionally implement the arrangement prior to complete execution, although its entry into force hinges on separate agreements concerning agricultural trade standards and youth mobility.