EU's Decision to Deny UK CBAM Exemption Until ETS Linkage (2025 Analysis)

This analysis is based on the Reuters report [1] published on December 17, 2025, where EU Climate Commissioner Wopke Hoekstra ruled out a temporary CBAM exemption for the UK until their ETSs are linked. CBAM, part of the EU’s Fit for 55 package, is set to impose emissions fees on imported steel, cement, and downstream metal products from January 2026, with compliance certificates due by September 2027 [2][3]. Post-Brexit, the UK operates its own ETS (UK ETS) separate from the EU ETS; in May 2025, both sides agreed to work toward ETS linkage by a 2026 EU-UK summit [3]. The UK government projects CBAM will cost its domestic industries £800 million annually [2]. The EU’s decision means UK exporters face immediate compliance costs, putting them at a disadvantage compared to EU competitors or countries with linked ETSs (e.g., Norway) [0].

1. Policy Precedent for Third Countries
   : The EU’s stance reinforces that CBAM exemptions are contingent on ETS linkage, not ongoing negotiations, impacting nations like the US, Canada, and Japan currently engaging with the EU [4].
2. Supply Chain Ripple Effects
   : Beyond direct UK exporters, upstream raw material suppliers (e.g., iron ore) may face reduced demand, while downstream EU manufacturers using UK imports will incur higher input costs, potentially triggering supply chain restructuring [0].
3. Urgency for UK Policy Action
   : The decision increases pressure on the UK government to either accelerate ETS linkage talks or provide financial support (grants, tax relief) to impacted industries to maintain competitiveness [2].

• Cost and Market Share Pressure
  : UK high-emission sectors (steel, cement) face projected cost increases of 5-15% per product, risking a 3-8% loss of EU market share in 2026 [0].
• Supply Chain Disruption
  : EU importers may diversify away from UK goods to avoid CBAM costs, disrupting long-standing trade relationships [0].

• Accelerated ETS Linkage
  : The UK could prioritize negotiations to secure exemption by the 2026 summit, aligning its carbon pricing with the EU [3].
• Decarbonization Incentives
  : UK firms may increase investments in emission reduction technologies to lower CBAM obligations long-term [0].
• Reciprocal CBAM Dynamics
  : The UK’s planned 2027 cross-border carbon adjustment mechanism could create balanced trade conditions if ETS linkage progresses [4].

• The EU will only exempt countries with ETS systems linked to the EU ETS from CBAM; the UK must comply from January 2026.
• UK high-emission industries face an estimated £800 million annual cost from CBAM compliance.
• Stakeholders (UK exporters, government, EU importers) need to adjust strategies to mitigate costs or accelerate ETS linkage.
• The decision sets a policy precedent for third countries seeking CBAM relief, emphasizing the role of ETS alignment.