UK Scrambles to Link Carbon Market with EU, Risking $1B Tax Hit

• The UK is negotiating with the EU for a temporary exemption from the carbon border tax.
• For the EU, linking its carbon market with that of the UK is less of a priority.
• Many problems, including technical challenges, beset the UK government.

The European Union’s (EU) new carbon tax regime, which will start in 2026, has been breathing down the UK government’s neck for some time now, as it needs to act swiftly to avoid extra carbon tax costs of around $1 billion a year.

The EU's new tax policy, the carbon border tariff, will be levied on goods imported into the EU, including steel and cement. This ensures that all businesses outside the EU's jurisdiction also pay for their carbon emissions.

To avoid this extra tax, the UK immediately needs to link its carbon trading market with that of the EU. Recently, as part of improving post-Brexit relations, the UK and the EU have been working in tandem towards this link, which has often been fraught with challenges for Britain.

READ MORE: Businesses Call for UK–EU Carbon Market Connection

According to experts, the linking could take many more years, possibly until 2028 or even 2030. This is predominantly due to technical and policy challenges that must be resolved, as their systems have different sets of rules and mechanisms to control prices and supply. For example, they differ on how many free carbon permits should be given to businesses.

The UK government has said it would take the necessary steps to link the two systems at the earliest but has not specified a deadline. Some experts say the deal could be inked within six months if there is enough political motivation, although the process remains technically complex.

Talks are also ongoing between the two parties for a temporary exemption from carbon border tax, so that UK businesses are not on the back foot or unfairly penalised before the link is established.

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Incidentally, the linking process is less of a priority for the EU, as its carbon market is ten times larger than the UK’s. EU lawmakers say this move is more beneficial for the UK than for the EU.

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Source: Reuters