The EU and UK are nearing an agreement to link their carbon markets, and a draft declaration prepared ahead of the bilateral summit in Brussels on 20 November would backdate an exemption from the bloc’s Carbon Border Adjustment Mechanism for British companies to January 2026, according to Carbon Pulse. For exporters, importers and compliance buyers on both sides of the Channel, a retroactive exemption would reshape the cost of carbon covered trade flows worth billions of euros a year, though the legal steps to activate it remain incomplete.

What the draft declaration says

The draft declaration, prepared ahead of the summit and seen by Rapporteur, frames the CBAM exemption for British companies as effective from January 2026, according to Carbon Pulse. That date matters because January 2026 is when the EU mechanism’s definitive phase is scheduled to begin, requiring importers to purchase CBAM certificates corresponding to the embedded emissions in covered goods, minus any carbon price already paid in the country of origin, according to SBS.

The linkage itself has been building for some time. Both sides made a political commitment to link the schemes at their bilateral summit on 19 May 2025, and POLITICO reported on 7 October that negotiators had reached agreement on connecting the two emissions trading systems, according to CBAM-Assured and SBS. The agreement is not yet legally binding: implementation depends on formal legal texts, ratification and domestic legislation in both jurisdictions, according to SBS.

A 7.28 billion euro trade flow at stake

The exposure behind the exemption is concentrated and large. The EU imported 7.28 billion euros of CBAM covered goods from the UK in 2025, making the UK the third largest origin by value, most of it iron and steel, according to CBAM-Assured. Without a linked system, UK exporters in sectors such as steel, cement, aluminium and fertilisers would face carbon border charges when selling into the EU, and Energy UK has estimated these costs could reach 800 million pounds a year by 2030, according to SBS.

The pressure runs both ways. The UK is preparing its own border adjustment mechanism, scheduled to start on 1 January 2027 and initially covering aluminium, cement, fertiliser, hydrogen, and iron and steel, according to SBS. Without linkage, manufacturers risked paying twice for the same emissions, once under their domestic carbon pricing system and again at the border, according to SBS.

The carbon market priced the deal in early

Traders treated the linkage reports as credible well before any signature. The price gap between UK and EU allowances narrowed by about 29 per cent, almost 5 euros, in two days of trading in early October, according to CBAM-Assured. The two markets have operated separately since the UK established its own system in 2021 after leaving the EU scheme, and an allowance purchased in one system cannot currently be used for compliance in the other, according to SBS.

A full link would restore fungibility between the two allowance markets, which is the precondition for the mutual border exemptions. The UK government has stated that linking the two systems could create the conditions for those exemptions, according to SBS.

Neither border charge switches off automatically. On the EU side, UK goods stop needing certificates only once the UK is listed in Annex III of the CBAM regulation, which requires a delegated act the Commission can adopt only where an agreement fully links the two systems, the carbon price is effectively charged and no rebates undo it, and Parliament or Council can object for up to four months, according to CBAM-Assured.

On the UK side, the Finance Act 2026 lets the Treasury exempt goods from countries with a linked ETS, but only through regulations the House of Commons must approve first, and no draft has been laid, according to CBAM-Assured. HMRC’s policy summary still states that no jurisdictions are exempt, so until the legal steps on each side complete, the EU CBAM applies to UK goods and the UK CBAM will apply to EU goods from 2027, according to CBAM-Assured.

What to watch

The first checkpoint is the summit itself on 20 November: whether the declaration is confirmed as drafted and whether the January 2026 backdating survives the final text. The second is the delegated act process in Brussels, including the four month objection window, and the laying of Treasury regulations in Westminster.

In parallel, the UK rulebook is moving on its own track. The regulations covering the CBAM rate calculation and carbon price relief, SI 2026/809, cleared their Commons committee on 12 October with full approval due by 20 October, and ministers have said illustrative CBAM rates will be published very shortly, according to CBAM-Assured. For compliance teams, the operational advice holds until a link takes legal effect: keep recording the origin of every consignment and keep gathering verified emissions data, because any future exemption will turn on origin, according to CBAM-Assured.