A report by economic consultancy firm Frontier Economics has revealed that combining the UK and EU emissions trading markets could save the UK government up to £8 billion between 2025 and 2030.
The research, carried out on behalf of Centrica, Drax, Equinor, National Grid, SSE, and Uniper, explores the potential benefits of joining the UK and EU carbon markets. When the EU Emissions Trading Scheme was established in 2005, the UK was a part of it but began operating its own emissions trading scheme following its withdrawal from the EU.
The report reveals that, with UK carbon prices trading at a significant discount to the EU rate since Spring 2023, the negative impact on UK revenues from trading carbon allowances could be significant if this trend continues. Frontier Economics predicts that with the current price trading gap remaining stable at the June 2024 average of £13/tCO2, the UK could lose around £3.5 billion between 2025 and 2030. If the price gap grows to its September 2023 peak of £31/tCO2, this could cost the UK Treasury as much as £8 billion.
Furthermore, the EU Carbon Border Adjustment Mechanism (CBAM) legislation due to come into force in 2026 will force carbon imports into the EU to pay a “top up” to the EU emissions trading scheme price. As a result, UK carbon exporters to the EU could pay as much as £800 million into the EU budget by 2030. The introduction of the CBAM will also remove any competitive advantage for price differences between the UK and EU, with the UK’s planned introduction of its own CBAM by 2027.
The report recommends that the UK and EU link their emissions trading markets, restoring them to be similar to how they functioned before the UK departed from the EU. Frontier’s analysis suggests that a linked scheme would provide more stable pricing and reduce the risk of carbon price volatility damaging the decarbonisation aims of both the UK and EU.
Additionally, the report’s authors note that the benefits of linking the scheme do not just extend to the UK, but also to the EU, stating “A linked market would support efficient financial risk management for UK and EU participants, supporting industrial competitiveness, by creating a combined carbon market with even more depth than either market standing alone.”
“In addition to these benefits, as part of a broader EU-UK reset, linking the schemes could be a powerful way for the UK and EU to signal intent on global climate leadership.
