Agreement on UK-EU emissions trading scheme brings light relief for UK industrials

The recent UK-EU ‘Reset’ Summit was intended to address ongoing tensions and grow cooperation on key issues. By these criteria, it was a success and saw the Prime Minister walk away with a deal bringing the two closer together on several important fronts, including food standards, defence, and fishing rights. Another significant outcome was an agreement for greater cooperation on emissions targets. It was more ambitious than expected and widely seen as a win for carbon-intensive industries. The deal sees both sides committing to link up their respective emissions trading schemes (ETS), effectively exempting one and other from upcoming carbon taxes on imported goods, known as carbon border adjustment mechanisms (CBAMs). Downing Street claims this agreement will save UK exporters around £800 million in tax payments that would otherwise go “directly to the EU’s budget.”

The agreement follows intense lobbying from industry bodies, NGOs, and environmental economists, keen to avoid the disruption of a disjointed tax regime. The agreement commits the UK to cap emissions and implement an emissions reduction pathway “at least as ambitious” as the EU’s. The UK’s climate targets are currently more ambitious than the EUs, though future governments may wish to reduce such targets. Unsurprisingly, Reform’s Richard Tice called this clause a “catastrophic surrender”. 

Industry, though, has broadly welcomed the news, highlighting how it will lower trade friction and administrative burdens. Energy UK said the agreement was a “step-change” in the UK’s relationship with the EU, while the CBI called it “a strategic move for our mutual competitiveness”. Some, however, struck a more cautious tone. Despite welcoming the agreement, the Mineral Products Association called on the government to tackle high electricity costs, which it claims are undermining the UK’s international competitiveness. 

Energy prices continue to be a major concern for UK industry. Recent ONS data showed that the UK has some of the highest energy costs in Europe, one of the reasons why total UK production by energy-intensive industries has fallen by one-third since 2021. The Trades Union Congress recently warned that tens of thousands of jobs in core industries such as chemicals, steel, and glass are at risk unless the government steps in to lower energy prices. 

In addition to the ETS agreement, UK industry may have been relieved to hear that the summit saw both sides agree to begin talks on shared involvement in the EU’s internal electricity market. With the current trading mechanism often criticised for its inefficiency, an agreement would make it easier to trade electricity between the two, thus reducing energy prices. The question now is how the UK will balance its environmental goals with the need to preserve industrial security,  and whether the outcomes from this summit are enough to maintain confidence in the UK’s energy-intensive industries, at a time when many are facing an unprofitable, uncertain future.