Linking European emission trading systems and carbon border adjustment mechanisms

The European Union (EU) and the United Kingdom (UK) have recently announced their intention to link their emissions trading systems – a step that the EU and Switzerland completed in 2020. This development is expected directly affect the applicability of the EU and UK carbon border adjustment mechanism (CBAM). After a two-year transitional period, the definitive EU CBAM enters into force in January 2026. The UK CBAM is scheduled to come into force in January 2027 without a transitional phase. In this article we shed some light on the potential economic implications of the linkage for trade flows between the EU, the UK and Switzerland.

As previously mentioned, companies may receive emission allowances for free. In fact, in the EU ETS, the large majority of emission allowances are handed out for free to companies to enable them to maintain their international competitiveness. This, however, limits companies’ financial incentive to reduce their emissions and is therefore in conflict with the EU’s objective of reducing emissions by at least 55% by 2030⁵. To address this issue, the EU aims to reduce the amount of emission allowances allocated for free gradually over the next years to zero by 2034 (Figure 1). Since this may increase EU-based companies’ production costs, they may decide to move their production outside the EU and then import the produced goods into the EU – a phenomenon called carbon leakage.

Source: Authors’ calculation and illustration based on European Parliament (2023)⁶.

This is where the EU CBAM comes into play. Just as the free allowances under the EU ETS are phased out, the EU CBAM is to be phased in (Figure 1). In a nutshell, the EU CBAM is designed to level the playing field between companies that produce carbon-intensive goods in the EU (and pay a carbon price under the EU ETS) and those that produce outside the EU (and pay no carbon price under the EU ETS) and import these goods into the EU. During the transitional phase, companies were required to submit quarterly reports on the emissions embedded in their imports of carbon-intensive goods such as aluminium, cement, electricity, fertilisers, iron and steel, and hydrogen. Starting from January 2026, companies will be required to financially offset these emissions by purchasing CBAM certificates corresponding to the price of the EU ETS allowances. In other words, companies that produce these carbon-intensive goods in the EU will be subject to the EU ETS carbon price, and companies that import these goods into the EU will be subject to a CBAM carbon price that mirrors the EU ETS price, thus levelling the playing field. The UK is scheduled to implement its own separate CBAM in January 2027; in contrast to the EU CBAM, there will be no transitional phase.

Importantly, the EU CBAM and the UK CBAM exempt countries that are linked to their respective ETS. Switzerland, for example, is exempted from the EU CBAM because the two ETSs are linked. Similarly, once EU and UK ETSs are linked, the expectation is that imports from the UK to the EU will be exempted from the EU CBAM and those from the EU to the UK exempted from the UK CBAM. What is less clear at this point, however, is whether imports from Switzerland to the UK will be exempted from the UK CBAM, given that Switzerland’s ETS is currently not linked to the UK’s. (Figure 2)

Figure 2: Introduction of UK CBAM and EU-UK ETS link – schematic overview of trade flows under ETS and CBAM in the EU, the UK and Switzerland (and third countries)

Source: Authors’ illustration

Now let us look at the economic significance of the planned linkage between the EU ETS and the UK ETS in terms of trade flows between the EU, the UK and Switzerland.

For the sake of simplicity and owing the limitations on the availability of data, we have done our analysis at the 6-digit (HS6) and 4-digit (HS4) product level of the Harmonised System (HS). The EU CBAM covers 284 products at the HS6 level, the UK CBAM 383. At this HS6 level, all EU CBAM products are also covered by the UK CBAM with the single exception of electrical energy (HS6 code 271600). The 100 products at the HS6 level that are covered by the UK CBAM but not by the EU CBAM include 97 iron and steel products (90 from HS2 Chapter 72 and 7 from HS2 Chapter 73), 2 aluminium items (HS2 Chapter 76) and one fertiliser product (HS2 Chapter 31) (Figure 3).

Source: Authors’ illustration based on the European Commission (2025b)⁷ and HM Revenue & Customs (2025)⁸.

To simplify the analysis of trade flows, we have aggregated the data from the HS6 level to the HS4 level⁹. Table 1 summarises the relevant trade flows between the EU, the UK and Switzerland.

The total value of imports from the EU to the UK was around USD 324 billion in 2024. The value of imports from the EU to the UK that would fall under the UK CBAM is around USD 14 billion, approximately 4.2% of imports. The total value of imports from the UK to the EU is around USD 177 billion. The value of imports from the UK to the EU that would fall under the EU CBAM is around USD 8 billion, around 4.4% of imports.

As previously mentioned, bilateral trade between the EU and the UK would be exempted from the respective CBAM once the EU ETS and UK ETS are linked. It is important to point out, however, that linking two ETSs is not necessarily an easy and quick process. It took the EU and Switzerland almost 10 years to link their respective ETSs¹⁰.

Table 1: Value of trade between the EU, the UK and Switzerland in 2024

Source: Authors’ calculations based on data from UN Comtrade (2025)¹¹. The CBAM value is calculated at the aggregated HS4 level¹² .

In 2024, the total value of imports from the EU to Switzerland was around USD 177 billion. At the same time, the EU imported products worth around USD 142 billion from Switzerland. Since the EU CBAM does not apply to Switzerland and Switzerland does not have a CBAM that could apply to the EU, these trade flows are not covered by the CBAM.

The situation is less clear at this point for trade between Switzerland and the UK, since the countries’ respective ETSs are currently not linked. In 2024, the total value of imports from the UK to Switzerland was around USD 9 billion. Switzerland does not have a CBAM in place that would apply to this value. The total value of imports from Switzerland to the UK was USD 23 billion. The value of imports from Switzerland to the UK that would fall under the UK CBAM is approximately USD 200 million, around 0.9% of total exports. More than half of this figure falls to aluminium plates and sheets (HS code 7606; 41%) and screws, bolts and nuts (HS code 7318; 11%). The top 10 products account for almost 90% of the total value of Swiss exports that would potentially fall under the UK CBAM. (Figure 4)

Source: Authors’ calculations based on data from UN Comtrade (2025)¹³.

The international trade and sustainability policy landscape is constantly evolving. Tariffs are announced, paused and re-introduced. Sustainability reporting requirements are put in place, postponed and re-adjusted¹⁴. Important details of the EU CBAM, such as a de minimis threshold of 50 tonnes, for example, are currently being renegotiated among the EU co-legislators and expected to be confirmed by September 2025¹⁵. The potential link between the EU and UK ETSs adds another layer of uncertainty and complexity for businesses in the EU, the UK and Switzerland.
We at PwC are ready to support our clients in navigating these developments and strategically addressing their trade- and sustainability-related challenges. Get in touch with us to discuss

• CBAM compliance and governance
• CBAM-related financial modelling and hedging strategies
• supply chain restructuring and incentives support for emission reduction technologies.