Closer energy and climate cooperation with the EU

Our priorities

This note sets out key Scottish Government priorities for closer energy and climate cooperation with the EU, which we wish to see reflected in how the UK Government defines its objectives for talks with the EU in the coming months. We stand ready to work collaboratively with the UK Government and wider partners to re-build a closer relationship with the rest of Europe in this space.

The impact of Brexit on energy and climate cooperation

The Scottish Government believes the best future for Scotland and indeed the UK is to be a member state of the EU. We will also always be a voice for closer co-operation with our fellow Europeans and believe it is essential to rebuild closer collaboration with the EU on energy and climate matters, to offset at least some of the damage of Brexit. As a result of Brexit:

• the UK left the EU’s Emissions Trading Scheme (ETS), a common carbon pricing system incentivising decarbonisation across the EU; relatedly, measures which add tariffs onto imported goods considered to have been produced without the application of a robust carbon price – Carbon Border Adjustment Mechanisms (CBAMs) – are now being developed separately by both the EU and UK, which will generate further barriers to trade
• the UK left the EU’s harmonised Internal Energy Market (IEM), which enables efficient flows of electricity and gas across European borders
• the UK also lost full membership of the North Seas Energy Cooperation (NSEC), a key forum of Northern European nations working collaboratively towards unlocking the region's full potential for renewable energy generation; the UK subsequently signed a Memorandum of Understanding with NSEC and regained a degree of access, but remains unable to participate fully in the forum
• the UK lacks access to key EU hydrogen fora and initiatives, and there is a risk of UK-EU regulatory divergence on hydrogen, a vital clean energy technology and essential future export for Scotland; likewise, there is a risk of divergence on other important emerging technologies, such as carbon capture, utilisation and storage (CCUS)

Overall, Energy UK estimated in 2024 that “Unless the UK moves toward closer cooperation with the EU on energy and climate, it may lead to additional costs of up to £10bn this Parliament through higher energy bills and lower Treasury revenues” – with costs set to increase further beyond 2030. 

Scottish Government priorities

In light of the shared challenges that we face today, closer energy and climate cooperation between Scotland, the UK, and our European partners is more vital now than ever.

The EU aims to diversify its energy supply and phase out reliance on Russian fossil fuel, as well as achieve net zero by 2050. This will require significant focus on areas such as renewables, hydrogen, and CCUS – and will present win-win opportunities for Scotland, the UK, and the EU, from economic, security, and climate perspectives, with potential for substantial mutual interest and cooperation.

Scotland has the potential and ambition to play an important role in Europe’s energy transition and future energy security for decades to come. To help lay the ground for this, the Scottish Government strongly encourages the UK Government to work actively and cooperatively with the EU to pursue commitments made in the Trade and Cooperation Agreement (TCA), and build upon them, to deliver mutual benefits with our European partners. In particular, we encourage the UK Government to:

Enhance existing structures for regular strategic dialogue between UK and EU authorities on energy and climate matters

It is vital to ensure the right fora are in place to drive progress on key shared priorities, enable early sight of regulatory proposals, and exchange policy expertise and experience. These structures must include meaningful opportunities for Devolved Governments to input and engage.

Link the UK and EU Emissions Trading Schemes (ETS) as provided for within the TCA

Linking would enable emissions allowances to be used across the two schemes. This would foster cooperation on net zero targets and drive more efficient decarbonisation – as well maintaining critical industrial competitiveness and avoiding additional trade barriers and indirect costs for Scottish and wider UK exporters as a result of the EU CBAM, to be fully implemented from 2026.

Advocate for dialogue with the EU around carbon capture, utilisation and storage (CCUS), and explore how best to support Scottish facilities in obtaining CO2 storage permits

In conjunction with ETS linking, this would enable a quarter of Europe’s CO2 storage potential, located in Scottish and wider UK waters, to be accessible to European partners. This could help deliver cost-effective solutions to our European partners.

Align with EU hydrogen regulation and rules for certification of renewable and low-carbon hydrogen and hydrogen products.

This alignment will be essential to enable the smooth trade and transportation of hydrogen between Scotland, the UK and Europe. More broadly, it is essential that the UK collaborates closely with the EU on key emerging technologies, including CCUS and hydrogen, to ensure coordination on regulation, research and innovation, and cross-border infrastructure. This includes cooperating on direct hydrogen pipelines identified through the Hydrogen Backbone Link project and the European Hydrogen Backbone initiative with the potential to link Scotland to the rest of Northern Europe.

Cooperate closely with the EU on the development of offshore renewable energy capacity, supply chain industry, and interconnectivity.

This cooperation should build on strengthened collaboration in the North Seas via NSEC, and ensure a full and active role for Scotland.

Accelerate adoption of more efficient UK-EU electricity trading arrangements.

It is essential to develop a model swiftly that makes it more efficient to trade electricity across interconnectors, and to also ensure that the model developed supports Scottish Government priorities of protecting consumers, ensuring affordable electricity supplies, encouraging investment in net zero, and improving resilience.

We would strongly welcome the UK Government incorporating the above objectives into its own priorities. By focusing on cooperation, aligned policies, and stronger trade ties, Scotland’s leading position in clean energy can be secured into the future. This will drive economic growth, reduce costs, strengthen energy security, and contribute substantially to shared climate goals.

The remainder of this note sets out more detail on each of the areas above. This overview of priorities is not exhaustive. Scottish Government climate change policy priorities also include, for example, heat networks, agriculture, and adaptation, and we wish to collaborate with the EU across these areas of shared interest. 

Carbon pricing

Emissions trading schemes (ETS) provide an efficient means to ensure the cost of energy and production reflects the cost of carbon. In the TCA, the UK and EU committed to giving serious consideration to linking the UK and EU ETS. Linking the ETS should mean the same carbon price and mutual recognition of the two schemes in both jurisdictions. We have consistently encouraged the UK Government to open talks with the EU on this, as linking will likely generate multiple benefits:

• linking would establish a larger and more liquid carbon market, reduce carbon price volatility, and support a more efficient decarbonisation pathway to net zero, helping the UK and EU collectively to achieve their shared climate goals
• linking would exempt the UK from the EU CBAM, subject to applicable rules of origin, and avoid additional regulatory burdens on Scottish companies with EU supply chains, and thereby avoid additional costs and reduce trade barriers, supporting more efficient UK-EU trade; while liability of direct EU CBAM charges sits with EU importers, linking would avoid compliance costs for Scottish and UK exporters and remove the risk of businesses having to face an additional cost (of the CBAM scheme) which would undermine their competitiveness
• linking could increase tax revenues flowing to the UK Government; is estimated that revenue foregone would be between £3.5bn and £8bn from 2025 to 2030, if the UK ETS continued to not be linked to the EU scheme and the UK carbon price continued to be lower than the EU’s

Read more: Frontier Economics: Linking UK and EU carbon markets

The Scottish Government is particularly concerned about the potential impact of unaligned UK and EU CBAMs on the renewables sector in Scotland and across GB. We have decarbonised our system more than many countries in Europe, but this is not reflected in the carbon content of marginal generation (i.e. the measure used in the EU CBAM). This means UK renewable exports may cost EU importers more, relative to the embedded carbon. As a result, this has the potential to reduce Scottish competitiveness in the EU market, reduce Scottish renewable energy exports, and decrease investment in renewable projects, slowing down Scotland’s progress towards its clean energy goals, contrary to the intention of this policy.

The UK Government is not planning to include electricity as a sector covered by the UK CBAM, and the Scottish Government would therefore support seeking an agreement that enables UK electricity to be exempt from EU CBAM measures, as an interim step prior to ETS linking.

ETS linking will likely be critical also to the future competitiveness of CCUS options in Scotland and in the wider UK – industry voices in the EU indicate that if the UK ETS is not linked to the EU ETS, then carbon storage in the UK will not be a viable option for EU businesses, as they will not receive credit for this under the EU ETS.

In light of the clear benefits of ETS linking, and strong stakeholder support, it is vital that talks are opened as soon as possible, with close involvement of the Devolved Governments.

Offshore renewable energy capacity and interconnectivity

Scotland’s vast territorial waters and deep-water potential present a huge opportunity for offshore wind, a sector in which we are already recognised as a global leader. Scotland has a reported potential pipeline of over 40GW of offshore wind capacity – the equivalent of generating enough electricity annually to power every single home in Scotland for 17 years. This is in addition to the 3GW which is currently operational.

With scale, offshore engineering heritage, an extensive network of ports, and strong innovation clusters, we believe Scotland’s offshore wind sector will be central to Europe’s energy transition, and its future energy security for decades to come.

Energy UK estimated in July 2024 that greater UK-EU cooperation could reduce the cost of meeting the 300GW offshore wind target in the Ostend Declaration by €13bn, while Baringa estimated in December 2024 that improved UK-EU coordination on offshore wind would lead to €44bn in savings to consumers each year by 2040.

To realise this potential, it is vital that the UK Government cooperates closely with our partners in the EU on the development of offshore renewable energy capacity, supply chain industry, and interconnectivity, ensuring a full and active role for Scotland. To this end, we support full NSEC membership for the UK, to enable the closest possible collaboration with our North Seas neighbours.

We would also support the establishment of enhanced structured, strategic dialogue between the UK and EU on energy and climate matters, with appropriate Devolved Government involvement. This would provide a forum at a senior political level to drive progress on key priorities, enable early sight of proposals, and provide space for mutual exchange of policy expertise and experience.

Hydrogen, CCUS and wider emerging technologies

Scotland is forging ahead in commercial development of hydrogen. It has the resources, people and ambition to become a world leader in production of reliable, competitive and sustainable hydrogen.

Scotland is strongly positioned to become a leading producer and supplier of hydrogen to the rest of the UK and exporter to Europe. In addition to its vast renewables potential, Scotland is well-placed in proximity and infrastructure connectivity to facilitate efficient low-cost transportation of hydrogen to key import locations in Northern Europe, as evidenced by the Hydrogen Backbone Link project. To help achieve this vision, the Scottish Government published its Hydrogen sector export plan in November 2024. 

International cooperation and strategic planning will be key to developing future hydrogen markets and their supporting infrastructure. Notwithstanding the UK’s position outside of the EU, we want to create the best conditions we can for Scotland to realise its full potential as part of the locus of hydrogen production and infrastructure emerging around the North Sea.

It is therefore vital that the UK aligns with EU hydrogen regulation and rules for the certification of renewable and low-carbon hydrogen, to enable smooth trade and transportation of hydrogen and hydrogen products between Scotland, the UK, and Europe. We also hope to see direct pipelines between Scotland and Europe being considered as part of the hydrogen supply corridors taken forward by the European Hydrogen Backbone initiative.

Scotland also has strategically significant offshore infrastructure for CCUS that could substantially assist in Europe’s wider transition to net zero. Scotland is in the enviable position of possessing the infrastructure, skills, and storage capacity to make a significant and lasting contribution to decarbonisation across Europe. To achieve this, not only do the UK and EU ETS need to be linked, but we would welcome a dialogue on CCUS to explore how best to support Scottish providers and sites in obtaining CO2 storage permits. We continue to advocate for Scottish storage with relevant EU partners. 

More broadly, it is essential the UK collaborates closely with the EU on key emerging technologies, including CCUS and hydrogen, to ensure coordination on regulation, research and innovation, and cross-border infrastructure. Again, the Scottish Government believes structured, strategic UK-EU dialogue on energy and climate matters will help to ensure timely discussion of key issues.

Electricity trading

In January 2021 the UK left the EU IEM – a subset of the EU single market allowing free movement of electricity and gas across EU borders – resulting in less efficient UK-EU electricity trading.

LCP Delta estimated that in 2020 “prior to GB's de-coupling from the IEM, the average efficiency across operational interconnectors was notably high at 92%”. Comparatively, in July 2023, efficiency levels “averaged 68% across the IFA1, BritNed and Nemo interconnectors”. 

Energy UK notes "The cumulative impact of less efficient trading arrangements is estimated to have added between 0.25% to 0.7% onto electricity costs. In 2022 alone this was between £120m to £370m and at current prices is estimated to be £500m over this Parliament."

The TCA committed the UK and EU to develop a more efficient model of electricity trading, known as Multi-Region Loose Volume Coupling (MRLVC) by April 2022. However, this has not yet happened – it is highly complex to achieve, and implementation is estimated to be many years away from being a reality, if it is viable.

In October 2024, key UK and EU energy industry actors published an open letter, raising strong concerns that the status quo is discouraging North Seas investors, and also that the MRLVC model is unfit for the future of offshore energy infrastructure development (e.g. for hybrid interconnectors).

Instead, the signatories propose “re-establishing a system of price coupling between the IEM and GB markets”, which they believe will “maximise efficient electricity exchanges and ensure affordable prices for households and industries” and “provide the framework for the optimal development and operation of the North Seas, meeting the climate and energy goals of the EU and UK.”

The Scottish Government encourages the UK Government to work with the EU to accelerate progress on adopting more efficient UK-EU electricity trading arrangements. New arrangements must be consistent with Scottish Government priorities of protecting consumers, ensuring affordable electricity supplies, encouraging investment in net zero, and improving resilience.

In developing these new arrangements, ongoing GB and EU electricity market reforms should be taken into account. Calls from industry to re-establish price coupling between IEM and GB markets should also be carefully considered, with exploration of potential costs and benefits, in relation to the Scottish Government’s priorities, and relative to implementation of an MRLVC model.

Next steps

Energy and the transition to net zero are key issues facing us all. A strong relationship with our European neighbours in this space will bring clear mutual benefits, and will be vital to achieving our shared ambitions.

A major milestone in this context will be ensuring the continued operation of the TCA Energy Title beyond June 2026, which will continue to serve as an important foundation for this relationship.

Scotland has a pivotal role to play here, and the Scottish Government stands ready work closely with the UK Government, other Devolved Governments, EU partners and wider stakeholders to re-build closer energy and climate cooperation with the rest of Europe.