[co-author: Isobel Moffatt]
The agreement promises to unlock market and investment opportunities and facilitate greater UK-EU collaboration.
The UK and EU reached a landmark agreement at the UK-EU Summit to reintegrate their emissions trading systems (ETS) and explore the recoupling of their electricity markets. These strategic initiatives are intended to streamline operations, stabilise prices, and strengthen energy security across the UK and EU.
ETS
The EU and UK agreement to relink carbon trading markets1 aims to enhance efficiency by providing liquidity and reducing administrative burdens and trade frictions. Notably, the agreement will also grant UK and EU exporters mutual exemptions from their respective Carbon Border Adjustment Mechanisms (CBAM) — a carbon tax on imports that is expected to come into force in 2027 in the UK and 2026 in the EU. This carbon tax is designed to ensure foreign producers pay an equivalent carbon price as domestic players to prevent “carbon leakage”, whereby domestic carbon prices inadvertently push emissions abroad. To facilitate this integration, the UK agreed to cap its greenhouse gas emissions and align its emissions reduction pathway to ensure the UK approach is “at least as ambitious” as that of the EU.
This removal of tariffs is anticipated to avoid regulatory trade complexities with Northern Ireland, which remains part of the EU ETS. The UK government also indicated that it expects to unlock significant revenue streams by aligning its (currently lower) carbon allowance prices with those of the EU. For industry, this may result in higher UK carbon prices but lower hedging costs.
Stakeholders hope that establishing the legal framework for the unified ETS will be straightforward, however, rules dealing with registry operations, price discovery mechanisms, supply adjustments, and allocation methodologies, among others, are yet to be considered. It is expected to take between one and two years to negotiate.
Electricity Markets
Both sides have agreed to investigate the potential for unrestricted electricity trading through reintegrating the UK into the EU’s internal energy market. UK participation in the EU’s power trading platforms in all timeframes is expected.
Crucially, this initiative will address post-Brexit inefficiencies in interconnector use that have driven up prices and restricted North Sea investment. With the UK’s interconnection capacity projected to grow from 4GW to 18GW by 2032,2 these inefficiencies are expected to become even more disruptive. Efficient interconnector networks — facilitated by greater private investment and the integration of day-ahead and intraday trading — have been identified as key to meeting the UK’s 2030 clean power goal3[iii] and driving down electricity prices and decarbonisation costs.
The success of a North Sea project often hinges on its ability to export power to multiple locations, as well as efficient cross-border capacity allocation and pricing. Recoupling the EU and UK electricity markets will incentivise the development of interconnector networks across the region, in turn driving joint investment in the North Sea. Collaborating on cross-border projects, such as renewable power generation, hydrogen pipelines, interconnectors, and carbon capture and storage, promises to improve cost efficiencies and project bankability. We expect further details of joint North Sea development to be discussed during the North Sea Summit later this year.
Supporting this initiative, the Summit announced that the UK and EU will also continue technical regulatory exchanges on emerging energy technologies, including hydrogen, carbon capture, utilisation, and storage, and biomethane, further advancing the collaborative framework for innovation and sustainability.
Implications for Businesses
The reintegration presents both challenges and opportunities for businesses. Companies active in the UK will need to adapt to new regulatory frameworks and more closely align with EU standards. From a technical perspective, energy companies will need to invest in trading algorithms required to trade in the EU power markets as well as adjust various commercial contracts to reflect the corresponding operational changes.
However, a relinked ETS also promises to simplify compliance by aligning regulatory standards. Exporters will benefit from exemptions to the CBAM regimes through reduced trade costs and new market opportunities. Further, there is potential for a more stable environment for businesses, facilitating long-term planning and greater private investment in carbon management strategies.
The benefits of integrating electricity markets combined with the commitment to ongoing technical regulatory exchanges on new energy technologies could deliver significant opportunity for cost, knowledge, and technology sharing across borders. Stakeholders hope that the UK’s participation in the EU power market and related industry groups will drive innovation and collaboration, acting as a catalyst for further private investment in the sector.
Latham and Watkins will continue to monitor developments in relation to energy and carbon policy in the UK and EU.
