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Sir Keir Starmer is looking to relink the UK and EU emission trading schemes in a sign of the prime minister becoming more ambitious over his “reset” of relations with Brussels ahead of a key meeting next week.
On February 3 Starmer will become the first British leader since Brexit to attend a meeting of the European Council’s 27 EU leaders, an informal gathering in Brussels devoted to defence and security co-operation.
With a planned EU-UK summit in the spring to discuss a wider review of post-Brexit relations, Starmer and his ministers are discussing new ways of building co-operation with Britain’s biggest trading partner.
Since Brexit, when the EU and UK separated their carbon markets, UK permits have traded at a significant discount to those traded in the EU.
Relinking the schemes would deepen the liquidity of both markets and help both sides with the transition to net zero, according to consultancy Frontier Economics.
It would also make it possible to avoid border frictions caused by the EU and UK imposing carbon border adjustment mechanisms, or CBAMs — a tax on carbon-intensive imports such as steel, cement and fertiliser.
Two EU officials with knowledge of the discussion said the UK has requested that ETS linkage and CBAMs are included on the agenda for the spring summit, expected in March or April.
Last week Nick Thomas-Symonds, Cabinet Office minister overseeing the reset discussions, said Britain would look to link to the EU’s emissions trading scheme to avoid disruption to UK business.
He told the House of Commons business and trade committee: “Linking our respective systems is absolutely what the ambition is.”
Meanwhile, chancellor Rachel Reeves signalled on Sunday that Britain would consider joining an EU customs framework with neighbouring countries. She has also supported Britain aligning permanently with EU rules in established industries such as chemicals.
She said she was “absolutely happy” to look at the idea of Britain joining the Pan-Euro-Mediterranean convention, a customs agreement between the EU and 20 countries, including in the Middle East and Balkans.
It comes as EU diplomats warned that unless Starmer showed more ambition, his reset would do little to boost the UK economy. “None of this would have any impact on growth,” said one.
Labour’s general election manifesto last year ruled out Britain rejoining the single market, customs union or adopting free movement, but Starmer and Reeves are now looking to show that the reset can yield economic gains.
One senior UK government official said: “British business wants to avoid any kind of cliff edge or extra costs. We are looking for win-win solutions to build confidence and relinking our carbon markets falls into that category.”
The UK government has been under mounting pressure from industry to announce it will align its ETS scheme with the EU’s scheme in order to remove additional border bureaucracy. There are also growing concerns, for example in the steel industry, about the impact of a decision to introduce the UK’s CBAM in 2027 — a full year later than the EU tax.
Adam Berman, director of policy at lobby group Energy UK, said relinking the UK and EU carbon markets was “the only solution that protects British industry from the incoming EU CBAM. Divergence for the sake of divergence won’t do anything to bring down energy bills or make British businesses more competitive — problems that ETS linkage can help to solve.”
A government spokesman said: “Under the terms of the Trade and Cooperation Agreement, the UK government and EU agreed to consider linking our respective carbon pricing schemes and to co-operate on carbon pricing.”
But the issue is likely to be the subject of a difficult negotiation. A leaked internal document setting out the EU’s negotiating positions last month said the majority of EU states were open to linkage, but on condition that the UK submitted to “full dynamic alignment” with EU law, which would require the UK to replicate relevant EU legislation on the UK statute book.
Donald Trump’s administration has indicated it views carbon border taxes as discriminatory and that they could be subject to retaliation under plans the US president has ordered to be drawn up “within 60 days”.
Sir Ed Davey, Liberal Democrat leader, has urged Starmer to be more ambitious with his UK-EU reset, and wants Britain to rejoin the customs union.
“It is clear they are ready to talk seriously, they are worried about Trump too,” he told the Financial Times. “This is the moment for Labour to take a risk, be ambitious and go for a deal that can actually jump start the economy.”
Labour’s manifesto set out limited ambitions for a reset, including a deal to facilitate trade in animal and plant products, the mutual recognition of professional qualifications and a deal to allow UK artists to tour freely across the EU.
Brussels will demand a number of concessions from the UK in exchange for any deal, including continued access to British fishing waters. “There’s nothing without fish,” said one EU official.
The EU is also demanding a bilateral “youth experience scheme” to allow under-30s to be able to travel and work in the UK and the bloc. Starmer has promised not to reintroduce free movement, but British officials believe some kind of compromise may be possible.
Andrew Griffith, Conservative shadow business secretary, said: “We must avoid undoing Brexit by the back door by aligning with the EU’s low growth model.”
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