On 19 May 2025, the UK Prime Minister hosted the President of the European Council and the President of the European Commission (Commission) in London for the first UK-EU summit since the UK’s departure from the EU. Amongst the various agreements, this included a new common understanding between the Commission and the UK, outlining conclusions from recent exploratory talks aimed at enhancing bilateral cooperation. Although primarily a political document, the common understanding affirms that both the UK government and the Commission will move forward swiftly on its commitments, adhering to their respective legal frameworks and procedures. This agreement spans multiple areas of potential collaboration, including a proposed link between the UK Emissions Trading Scheme (UK ETS) and the EU Emissions Trading System (EU ETS).

For a UK-EU ETS linking agreement to be established, the Commission must propose a mandate and secure authorisation from the Council to initiate negotiations with the UK. The common understanding sets out some of the foundational elements of this potential agreement, including:

  • Carbon Border Adjustments: The agreement aims to create conditions for goods to be mutually exempt from both the UK and EU Carbon Border Adjustment Mechanisms.
  • Sector Scope: Industries covered would include electricity generation, industrial heat production (excluding individual home heating), industry, domestic and international maritime transport, and aviation. The framework would also allow for future expansion of the sector list.
  • Regulatory Alignment: The UK would dynamically align with EU rules underpinning the ETS link and be involved in shaping relevant EU legal acts at an early stage— although such rights would not extend to participation in the work of the Council or its preparatory bodies.
  • Dispute Resolution: The mechanism would include an independent arbitration panel, with the Court of Justice of the European Union remaining the final authority on all matters of EU law.

While further details remain to be clarified, this common understanding marks a significant development in post-Brexit climate policy relations, reinforcing the commitment to a more integrated carbon market.