Getting ready for more EU-UK carbon, electricity alignment? Timing of this deal could be vague because it's subject to global negotiation (4)

By Mathew Carr and sources

May 19, 2025 — UK carbon futures jumped 8% today on planned stronger linkages with the EU program after CarrZee’s initial story published 12 minutes before the market open at 7am.

Link to post and docs:

https://www.linkedin.com/posts/tim-atkinson-241741a_ukeu-summit-key-documentation-activity-7330209990231605248-IfyC?utm_source=share&utm_medium=member_desktop&rcm=ACoAAABDFPoBgHumx3ZdSjfazWpK-9npAVNndZI

and here

https://www.gov.uk/government/publications/ukeu-summit-key-documentation

Countries are still negotiating wider carbon market and trade deals over the next few weeks and months, which might explain why the timing of the EU-UK deal is vague.

UK doc (I think) — explainer …see three docs in notes below, for convenience:

EU and UK agreed docs

Redshaw Advisors, by email, 9:51am London time:

The EU-UK summit takes place today and the outcome will have implications for both the UKA and EUA price. We have summarised our thoughts on price impacts, and what you can do to manage the risk, below.

Price expectations post – EU/UK summit

For businesses, particularly those currently exposed to the UK ETS, linkage will have substantial implications. Linking the schemes would drive UKA prices, currently trading at an ~£11 discount, to parity with EU Allowance (EUA) prices and could have a smaller downward pressure on EUAs too. Such a price change will significantly impact costs. However, pricing parity would help shield UK exporters in EU CBAM covered sectors from the costs associated with the EU CBAM which kick in next year.

Conversely, if the negotiations fall apart and linking is taken off the table, the Investment Funds who have built long UKA positions on the expectation of linking will be forced exit their positions, leading to a downward correction for UKA price. Since January’s low, UKA prices have climbed by more than 70%, largely fuelled by the expectation of linking. So our expectation is for as much as £15 of downside that could take UKAs back down to the year’s low.

Of course, those are the two extreme outcomes, with anything in between possible. Ultimately, the strength of any linking statement that emerges will determine the movement in UKA price.

Managing the risk

With such large swings in price a possibility, but with the outcome almost impossible to call, there is no ‘correct’ way to manage the risk. The price swings are likely to be rapid following any news, limiting the ability to react to the information before the price moves. In addition, managing the risk is individual to each company’s exposure and appetite to take risk.

However, companies that are behind on this year’s hedging (we are 5 months into 2025 and ideally they should be hedged for this period already) then taking at least some risk off the table before the summit is prudent.

If a company is ahead on hedging, they can probably afford to be a little more relaxed, some post-summit downside could be possible either because the negotiations have not gone well or due to profit taking from Investment Funds.

Anything in between, it is a ‘stick or twist’ gamble.

Bloomberg publishes this on its website, 7:24am (not sure when its terminal customers got it).

https://apple.news/A_ZleZ4YxSIOYmw4DBXcuwQ

From earlier story:

Grok and friends unedited BEWARE

Keir Starmer’s post-Brexit deal, as discussed in various sources, does not explicitly confirm a full merger of the UK and EU carbon markets. However, there are strong indications of negotiations and plans to link the UK’s Emissions Trading Scheme (ETS) with the EU’s ETS, which would involve closer alignment and cooperation, though not necessarily a complete merger.

Key Points:

Intent to Link Carbon Markets: Multiple sources report that Starmer’s government is actively pursuing talks to relink the UK ETS with the EU ETS. This is seen as a critical step to address issues like the EU’s Carbon Border Adjustment Mechanism (CBAM), which could impose taxes on high-emission imports like steel and aluminum if the UK’s carbon pricing remains significantly lower than the EU’s. Linking the schemes would help align carbon prices and potentially exempt UK industries from CBAM tariffs.
Economic and Environmental Rationale: The linkage is considered essential for securing manufacturing jobs, particularly in industries like steel (e.g., Scunthorpe steel plants), and for facilitating the energy transition. Brexit disrupted carbon markets, making energy more expensive and cross-border carbon transport impossible, so a linked ETS could lower costs and enhance energy security.
Challenges and Criticisms: Posts on X and some web sources highlight concerns about sovereignty, with critics arguing that linking the ETS could subject the UK to EU regulations and oversight by the European Court of Justice (ECJ). For example, a post by @JimFergusonUK claims this move would mean “accepting rulings from a foreign court.” However, these claims are often politically charged and lack confirmation from primary sources.
No Full Merger Confirmed: While linkage is under discussion, a full merger—where the UK ETS would dissolve into the EU ETS—is not explicitly mentioned. The UK established its own ETS post-Brexit in 2020, and current talks focus on integration or harmonization rather than subsuming the UK system entirely.
Ongoing Negotiations: As of May 19, 2025, negotiations for the broader UK-EU reset deal, including carbon market linkage, were described as “going down to the wire” ahead of a key summit. Issues like fishing rights and youth mobility were also contentious, suggesting that the carbon market linkage is part of a complex package deal.

Current Status:

The UK and EU are in talks to align their carbon markets, with a focus on linking the ETS systems to address trade and climate challenges.
No definitive agreement on a full merger has been confirmed in the available sources, and the outcome likely depends on the results of the May 19, 2025, summit in London.
The linkage, if agreed, would likely involve closer coordination and price alignment but maintain the UK ETS as a distinct entity, at least in the short term.

Sentiment on X:

Posts on X reflect mixed sentiments. Some, like @SPGCIEnergy, note industry support for ETS integration due to cost savings, while others, like @KathrynPorter26, point to rising UK carbon prices (e.g., above £50/t) as evidence of Starmer’s harmonization efforts with the EU’s higher prices (£58.85/t). Critics like @JimFergusonUK frame it as a “betrayal” of Brexit sovereignty. These posts are inconclusive without official confirmation but highlight the polarized debate. �BABYPOST:0⁊

Conclusion:

Starmer’s post-Brexit deal does not currently merge the UK and EU carbon markets but includes negotiations to link the UK ETS with the EU ETS. This linkage aims to align carbon pricing and address trade barriers like CBAM, but a full merger is not explicitly supported by available evidence. The final outcome depends on ongoing talks, with significant implications for UK industry, energy costs, and sovereignty debates. For the latest developments, you may want to check official statements from the UK government or EU following the May 19, 2025, summit.