On 19 May 2025, the UK and the EU announced plans to link the EU Emissions Trading System ("ETS") with the UK ETS. Concurrently, the European Commission is preparing for a review of the EU ETS slated for 2026 by launching a Call for Evidence and a public consultation, which will be open until 8 July 2025 to gather stakeholder input. In addition, the EU is contemplating further revisions to the EU Carbon Border Adjustment Mechanism ("CBAM") and announced an Industrial Decarbonisation Accelerator Act for Q4 2025. This package of measures will have regulatory and operational implications for EU and non-EU companies.
Linkage of EU ETS with the UK ETS
On 19 May 2025, the United Kingdom and European Union announced the intention to work towards "closer co-operation on emissions through linking our respective Emissions Trading Systems".1 The new partnership would include a mutual exemption from the EU and UK CBAMs, and would be subject to an arbitration-based dispute resolution mechanism, with the Court of Justice of the European Union as the ultimate authority for questions of EU law.2
Further steps are required to formalise this linkage. The UK is also still due to adopt its own CBAM, which is subject to a technical consultation until 3 July 2025.3 The EU process will require the European Commission to seek the authorisation of the Council to progress negotiations.4
Currently, Switzerland is the only non-EEA country with an emissions trading system linked with the EU ETS, an agreement that took several years to negotiate.
Open consultation on EU ETS
As a part of its "Fit for 55" package to reduce greenhouse gas emissions by at least 55% per cent. by 2030, the EU revised the ETS Directive in 2023. This resulted in the extension of the EU ETS to CO2 emissions from fuel combustion in buildings, road transport and small industry ("ETS2") amongst other changes to the system.
To ensure that the EU ETS contributes to the EU's goal of carbon neutrality by 2050 as cost-effectively and efficiently as possible, the European Commission is considering further revisions of certain aspects. The inception impact assessment and consultation published by the European Commission explore various topics, including:5
- Carbon leakage: The Commission is considering how to support industries established within the EU that are not covered by CBAM and avoid the transfer of investments to countries with less strict climate policies in those sectors.
- Carbon removals: The impact assessment would consider (i) how the EU ETS could account for negative emissions created through domestic permanent carbon removals, e.g. GHGs which are permanently stored underground or in products, (ii) whether these emissions are to be addressed under emissions trading or other policies, and (iii) how to ensure that any removals do not offset necessary emissions reductions.
- Municipal waste incineration: As prescribed by the ETS Directive, the Commission is considering the inclusion of municipal waste incineration installations in the EU ETS from 2028. The possibility of including other waste management processes, including landfilling, is also under consideration.
- Linking with other carbon markets: The Commission will consider ways to link the EU ETS with other carbon markets. As noted above, the UK and EU will work together on linking the EU and UK ETS.
- Maritime emissions: A number of proposals are being considered to reduce maritime emissions more effectively within the EU ETS, including the extension of the scope to smaller ships, improvement of procedures where possible (for example, ensuring consistency with other applicable EU legislative acts) and reviewing the ETS in the context of the measures which may be adopted at the International Maritime Organization (IMO) in late 2025.
- Aviation emissions: The scope of the ETS has been temporarily limited to intra-EU flights to encourage the development of an effective global carbon pricing scheme by the International Civil Aviation Organization (ICAO). The Commission is scheduled to publish a report on the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) by mid-2026 to assess its effectiveness.
Revisions to CBAM and the Industrial Decarbonization Accelerator Act
While the revisions to CBAM under the EU Omnibus package released in February remain pending in the legislative process,6 the Commission is also considering a solution to address carbon leakage risks for exports.7 While CBAM currently applies to goods imported into the EU, it does not address carbon leakage risks for in-scope products produced in the EU (and as such subject to the EU ETS) and exported to third countries. The inclusion of a so-called "export rebate" under CBAM was already debated during the initial adoption process of the CBAM but eventually was not included. The proposal has now resurfaced due to the increased focus on maintaining the EU's competitiveness.
A number of other proposals due to be unveiled in the context of the Clean Industrial Deal are likely to impact decarbonisation strategies employed by industries, in conjunction with the above revisions to ETS and CBAM.8
For example, the European Commission has announced that it will propose an EU Industrial Decarbonisation Accelerator Act in Q4 2025. The Act aims to increase demand for clean products made in the EU by adding sustainability, resilience and "made in Europe" criteria to private and public procurement. For industrial products, the Act is expected to propose launching a voluntary carbon intensity label, initially for steel in 2025 to be followed later by cement. As such, the Industrial Decarbonisation Accelerator Act would complement already in force legislation that incentivises the development and labelling of sustainable products such as the EU Ecodesign for Sustainable Products Regulation ("ESPR")9 and the Battery Regulation.10 A public consultation for the Industrial Decarbonisation Accelerator Act proposal will remain open until 8 July 2025.11
Maia Bishop (Associate, Brussels), Kate Malone (Legal Trainee, Brussels) and Ruth Benbow (Knowledge Manager, London) contributed to the development of this publication.
1 See UK Prime Minister's Office, "PM secures new agreement with EU to benefit British people", published 19 May 2025, available here.
2 See "A renewed agenda for European Union – United Kingdom cooperation; Common Understanding", published 19 May 2025, available here, paragraph 34-45.
3 See UK Government, "Draft legislation: carbon border adjustment mechanism", published 24 April 2025, available here.
4 See European Commission, "Questions and answers on the package agreed at EU-United Kingdom Summit", published 19 May 2025, available here.
5 See European Commission, "Call for evidence for an evaluation and impact assessment run in parallel: Review of the ETS for maritime, aviation and stationary installations, and of the Market Stability Reserve", published 14 April 2025, here.
6 See our Alert "EU Omnibus Package: 10 things you should know about the proposed changes to key sustainability legislation", here.
7 See European Commission, "European Steel and Metals Action Plan", published 19 March 2025, available here.
8 See European Commission, "The Clean Industrial Deal: A joint roadmap for competitiveness and decarbonisation", published 26 February 2025, available here.
9 See our Alert "Eight key aspects to know about the EU Ecodesign for Sustainable Products Regulation", published 25 February 2025, available here.
10 See our Alert "New EU Batteries Regulation: introducing enhanced sustainability, recycling and safety requirements", published 2 August 2023, available here.
11 See the European Commission's Call for Evidence on the Industrial Decarbonisation Accelerator Act here.
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