The European Union and the United Kingdom are one step away from merging their carbon emissions allowance markets. Nearly six years after Brexit, London is effectively rejoining the European system to cut trading costs and spare businesses from new taxes.
According to Bloomberg, the agreement could be announced formally at the summit on November 20. Negotiators have settled almost all disputed points, including emissions caps and the volume of free allowances. The only unresolved issue remaining is the rules governing financial derivatives.
The market union will allow corporations to meet regulatory requirements with permits from either system. The main goal of this integration is to avoid the EU’s Carbon Border Adjustment Mechanism (CBAM). But Brussels has set a tough condition: the British will have to fully synchronize pricing with the EU and abandon any preferential discounts on emissions.
Markets are already pricing the deal in. December UK permits (£64.81 per tonne) have started rapidly closing the gap with the European benchmark (€86.55). ABN Amro analysts predict the gap will disappear within a couple of years, which will noticeably raise environmental costs for British plants.
The principle of the future union is already set: from 2031, the volume of UK allowances will be tightly linked to the European one and will amount to 7.1% of the EU supply. The deal now needs political approval, and Brussels has pragmatically tied the final signing to concessions from London on agricultural trade standards and youth mobility programs.
