UK carbon price jumps on EU deal
The agreement by the EU and UK to work towards linking their carbon markets could improve the economics for UK carbon and biodiversity credits and natural capital investment.
Monday's agreement to reintegrate the separate mandatory emissions trading systems will create a "functioning link" between the carbon markets, although full linkage is not certain.
Prices rose on ICE Futures Europe, which is the central platform for the UK ETS, after the announcement. The December 2025 contract climbed from £48.36 on May 16 to £55.08 on Tuesday, closing the gap with EU ETS prices on the June 2025 contract of €70.16 (£59) on May 16 and €72.34 (£60.83) on Tuesday.
The move was welcomed by asset managers running UK-based natural capital equity strategies as also being supportive for voluntary carbon markets. Gaining more value from UK carbon could potentially give a lift to carbon and biodiversity projects and credits.
Law firm Latham & Watkins said integration could take between one and two years to negotiate and that a more stable environment will help companies plan for the long term and attract more private investment in carbon management strategies.
A less volatile UK carbon price would be beneficial for forestry projects and carbon credits issued under the Woodland Carbon Code, which is the standard for projects in the UK. It will also benefit biodiversity projects, such as peatland restoration, landbanks and soil carbon projects for restorative agriculture and biodiversity credits.
"Fundamentally the UK and EU ETS aligning is a good thing in that you're starting to see a more appropriate price for carbon, but the ability to make it a key part of the investment case for any project is still challenging because the market has been so volatile," said Peter Bachmann, managing director of sustainable infrastructure at Gresham House.
"As investors start to see a more stable price horizon, you will start to see more projects funded."
The key question is whether the EU or UK will widen the scope of their ETS to include crediting instruments.
"The UK has been more enthusiastic than the EU about widening the scope of the ETS to include some type of crediting instrument, which could include units from carbon or biodiversity projects," said Paula VanLaningham, director of carbon research at LSEG, which owns IFR.
A consultation is underway in the UK about the potential of integrating Woodland Carbon Code credits into the UK ETS. The average price of a pending issuance unit is around £26.85, according to WCC's website.
"If they are admitted, we would expect to see Woodland Carbon Credit prices rise significantly, which would improve the economics of afforestation and effectively make much more land economically viable," said Richard Kelly, a managing director at Foresight Group and co-lead of Foresight Natural Capital.
The new deal to link carbon markets will also grant UK and EU exporters mutual exemptions from their respective Carbon Border Adjustment Mechanisms — a carbon tax on imports that is expected to come into force in 2026 in the EU and 2027 in the UK.