UK Allowances (UKAs) surged the morning of 28 January, with the Dec-25 contract price climbing as much as 13%, following a Financial Times report that UK Prime Minister Keir Starmer aims to relink the UK and EU Emissions Trading Systems (ETS). While rumors of a potential linkage have circulated for some time, this marks the first official indication from the prime minister, pointing to the possibility of near-term negotiations. This sharp price rally comes after UKA prices started the year at near-record lows.
According to the Financial Times, linkage discussions are expected during the upcoming EU-UK summit in the spring as part of efforts to strengthen ties. Some officials suggest that integrating the two ETS programs is already on the agenda. Earlier this month, a coalition of EU member states expressed conditional support for the linkage, contingent on preserving the Court of Justice of the European Union’s role in interpreting Union law and developing an enforcement mechanism to address potential non-compliance. Additionally, the European Commission has emphasized that linkage would require alignment between the ambition levels of the UK ETS and the EU ETS, particularly given the significant disparity in allowance prices.
The conversation around linkage has gained momentum not only due to weak UKA prices and liquidity challenges but also because of the potential impact on UK industries from the EU’s Carbon Border Adjustment Mechanism (CBAM), which is set to phase in starting in 2026. By comparison, the UK CBAM is slated to begin in 2027. Linking the two ETS programs could reduce costs and bureaucracy for businesses while mitigating risks of disruption to existing cross-border electricity flows.
Despite today’s market reaction, the road to linkage is expected to be a long one. ClearBlue Markets projects that the finalization of such an agreement is unlikely until later this decade. However, this development signals the UK government’s intent to strengthen its ETS framework.
Recent UK ETS Commitments of Traders data indicates that investment funds currently hold net long positions of 7.85 Mt in the market—30% below the November 2024 high. ClearBlue anticipates this number will grow as investors position themselves ahead of the expected linkage discussions in March and April. Additionally, market participants will closely monitor any government responses to last year’s market reform consultations.
ClearBlue Markets will continue to provide updates as the situation evolves. Stay tuned for more insights on this and other key developments in carbon markets.