
A UK-EU emissions scheme merger may be on the cards. What might it mean for the South West?
Today, Keir Starmer will become the first British leader since Brexit to attend a meeting of the European Council’s 27 EU leaders, with energy high on the agenda.
The UK government is reportedly exploring linking its emissions trading system with the EU's scheme, marking a potential significant shift in post-Brexit relations.
“I do want to see a close relationship on defence and security, on energy, on trade and our economy”, Starmer told reporters yesterday.
Cabinet Office minister Nick Thomas-Symonds has been more explicit: “Linking our respective [emissions trading] systems is absolutely what the ambition is”, he recently told the House of Commons business and trade committee.
What's this all about, and what might it mean for the South West?
Trading carbon: a tale of two systems
Launched in 2005, the EU Emissions Trading System (ETS) is the world’s first carbon market and among the largest. It is based on the UK’s pilot of such a scheme in 2002.
The system applies to key sectors - including electricity and heat generation, industrial manufacturing, aviation and maritime transport - which account for around 40% of total greenhouse gas (GHG) emissions in the EU.
Through the scheme, polluters are made to pay for their emissions via so-called “emission allowances”, with one allowance giving the right to emit one tonne of CO2 eq. Allowances are sold at auction and may be traded among companies. Total GHG emissions of installations are limited by a cap which decreases over time.
Since Brexit, the UK has operated its own system, similar to the EU model.
However, the UK market has struggled with volatility due to its smaller size - it's approximately ten times smaller than the EU's system. Meanwhile, an imbalance between supply and demand in the UK market has kept carbon allowance prices, and therefore incentives to decarbonise, low.
Unlike the EU scheme, which uses its Market Stability Reserve to remove 24% of calculated market surplus annually, the UK has no transparent mechanism to stabilise the prices of allowances by adjusting supply.
In addition to these structural challenges, the EU’s incoming carbon border adjustment mechanisms (CBAMs) - which place a tax on carbon-intensive imports such as steel, cement and fertiliser - are set to throw more sand into the gears of UK-EU trade, with non-EU energy providers potentially obliged to pay a carbon price despite being 100% clean. That's because electricity trading makes it difficult to track the origin of each electron, so the EU has adopted a benchmark system to calculate the carbon-intensity of electricity production outside of its regulatory area.
Is alignment the answer?
The UK currently has 9.8 gigawatts of interconnection capacity with European countries, highlighting the deep integration of energy markets despite Brexit.
A merger of each union’s energy systems would create deeper liquidity and more stable carbon prices, while eliminating the need for complex carbon border adjustments associated with the EU’s CBAM initiative. It would also support both sides to transition to net zero at a lower cost.
Sam Peacock, managing director of corporate affairs, regulation and strategy at multinational energy company SSE, estimates that the UK could lose up to £10bn in revenue between 2025 and 2030 by not aligning with the EU ETS. “The situation will get crazier going into 2026, when the European Carbon Border Adjustment Mechanism [CBAM] kicks in.”
However, there are challenges.
Market disruption and the implementation of new administrative systems would create temporary costs, despite positive long-term savings.
On the EU side, carbon price convergence resulting from a merger would mean reduced revenues. Though, according to Clarice Brambilla, energy transition analyst at GlobalData, the move would support both parties to meet their climate targets and "reduce competitive disadvantages between companies that operate within both jurisdictions."
The challenge for the UK government, as in so many areas of collaboration with the EU, is finding a landing zone which does not appear to concede unreasonable levels of UK policy sovereignty to Brussels.
A leaked internal document recently revealed EU states’ openness to linkage, provided the UK agree to “full dynamic alignment”.
In other words: the UK would be obliged to replicate any future changes to EU regulatory laws within the scope of the ETS. This would ensure consistency across the system, with both parties adhering to the same rules and standards.
The alternative to dynamic alignment is so-called static alignment, where the adoption of each new EU directive by the non-EU state must be negotiated.
According to Aslak Berg, research fellow at the Centre for European Reform, the EU's experience of static alignment with Switzerland "has proved so cumbersome in practice that both parties have agreed to switch to dynamic alignment in the ongoing negotiations for a new Swiss-EU framework agreement".
"The EU", Berg concludes, "is therefore unlikely to ever offer this type of alignment again."
Impact on the South West
The South West region of the UK is rapidly emerging as a highly significant player in the country's renewable energy sector, projected to deliver up to 11% of the UK's low carbon electricity capacity by 2035 according to research by Great South West.
With 360 operational clean energy projects, and a further 175 in development, the region boasts a diverse energy portfolio, including onshore and offshore wind, nuclear power (Hinkley Point C), strong wave and tidal energy potential and the UK's only operating geothermal plant at Cornwall's Eden Project.
Linking the UK and EU emissions trading schemes could therefore bring many tangible benefits to the region, including encouraging investments in homegrown clean energy projects, higher revenues for renewable infrastructure via stronger carbon prices and improved competitiveness by making UK renewable exports exempt from the EU CBAM.
These benefits, which would bring positive impact across the UK, would be magnified in the South West given the region's sectoral strength in renewable energy innovation.
This would support the call to policy makers by Tech South West, put forward in the 2024 Look South West prospectus, to "capitalise on the region’s natural geography and resources to invest in renewable energy."
Beyond Brexit: political realities
The primary obstacles to linking the two systems may be political rather than technical, with the UK government navigating a domestic tightrope between economic reality and a reluctance to appear to be "rejoining" EU mechanisms.
A visa-based youth mobility scheme with the EU - which the UK already offers to citizens of Australia, Canada, New Zealand, Uruguay and South Korea, among other nations - has been roundly rejected by both Labour and Conservative governments. “We are not going back into free movement”, Home Secretary Yvette Cooper told the BBC in September.
Meanwhile, Brussels is wary - both publicly and in private - of allowing the UK to "cherry-pick" areas for alignment.
Should politicians manage to reach an agreement, there are precedents for success. Non-EU members Iceland, Liechtenstein, Norway and Switzerland already participate in the EU energy scheme.
Whether the EU would be willing to replicate such an offer for the UK remains to be seen.
Image credit: Grahame Jenkins on Unsplash.