New analysis shows linking the UK and EU emissions trading schemes is legally and technically straightforward

New analysis by Herbert Smith Freehills finds the linking of the UK and EU emissions trading schemes (ETS) is possible outside of the Brexit process. The linking of the schemes is important to provide business and investor certainty, and lower costs. The finding that linking the schemes would not be legally complicated to implement means that the benefits of this would be felt sooner by both UK and EU consumers.

The report considers the legal and practical considerations with linking the two emissions trading schemes and how this might be achieved. Linking the two systems would require an international linking agreement; and amendments to each ETS in order to operationalise a link.

The agreement to link the schemes would not be part of the UK-EU Trade and Cooperation Agreement, so it should be negotiated separately from the Brexit process. The upcoming UK-EU reset summit between Prime Minister Keir Starmer and EU President Ursula Von Der Leyen provides an opportunity for this issue to be progressed.

There is a legal template for the UK and EU to enter into a linking agreement. The EU and Switzerland negotiated a similar linking agreement, which has been fully operational since 2020. This example could provide a template for a new agreement to follow – and notably the similarities between the UK and EU ETS’ should help such an agreement to be negotiated and implemented at pace.

Action in this area would enable the benefits of linkage to be realised. A linked UK and EU ETS would:

- mitigate the impact of the EU CBAM implementation in the UK and reduce regulatory burdens on European importers
- increase the liquidity of the market, improving the trading relationship with the EU without compromising the positions agreed by the UK in the Trade and Cooperation Agreement
- further environmental ambition by helping to reduce the cost of tackling climate change.

To realise the linking of the EU ETS to another ETS, there are three requirements: it is mandatory, it is compatible with the EU ETS, and it is subject to an absolute emissions cap. The UK ETS does meet all three of these conditions, however, certain technical amendments may be required to sufficiently ensure compatibility between the two systems.

Once a link is agreed, it would be a standalone international agreement between the UK and the EU. The agreement could be implemented by a number of statutory instruments in the UK, while on the EU side, the minimal changes could be delivered via the adoption of secondary legislation by the Commission delegated regulation.

Overall, from a legal perspective, today’s report finds it is possible and would not be complicated to implement a link between the two emissions trading schemes.

Silke Goldberg, partner and global head of Herbert Smith Freehills' ESG practice, said: “From a legal perspective, linking the UK ETS and the EU ETS is straightforward. The Trade and Cooperation Agreement encouraging linkage and the design of the two emission trading schemes is very similar. Any amendments required to the UK ETS to ensure its compatibility with the EU ETS could be implemented via secondary legislation; and on the EU side, the amendments required for a link between both ETS to come operational could be implemented via delegated regulation."

Rebecca Sedler, managing director of Interconnectors at National Grid Ventures, said: “Linking the UK and EU ETS is a solution which improves cooperation on energy and climate benefitting UK and EU consumers, while saving the HM Treasury up to £8 billion between 2025-2030.1 We encourage the UK government to start discussions with the EU on linking the UK and EU ETS as soon as practicable. This report shows the steps required.”