Europe: The Price of Rejoining by Stealth

1A technical adjustment, or something larger

When the Government unveiled plans to link Britain’s Emissions Trading Scheme with its European equivalent, the move was presented as little more than a technical adjustment. Another effort to “reduce friction” with our European neighbours.

With today being the tenth anniversary of the Brexit referendum that delivered the largest vote for a single proposition in British political history, it is becoming clear that much of the political establishment remains uncomfortable with what that vote actually meant.

Ten years after voting to leave the European Union, and six years after actually doing so, Britain finds itself governed by a political class increasingly uncomfortable with the freedoms Brexit created. Rather than viewing regulatory independence as an opportunity to sharpen Britain’s competitiveness, ministers see divergence itself as a problem.

The result has led to a growing push towards alignment. Whether it be carbon markets, food standards or student mobility, each proposal has been promoted to the electorate as a pragmatic one-off. When taken together, however, they amount to a gradual reabsorption into the regulatory orbit of a continent that finds itself struggling with stagnating growth, high energy costs and declining levels of competitiveness.

At precisely the moment Britain should be asking how to outcompete Europe, Labour seems determined to become more like it. The Emissions Trading Scheme (ETS) negotiations provide one of the clearest examples.

2The flexibility being surrendered

Following Brexit, Britain left the EU’s carbon market and established its own system. Whatever one’s view of emissions trading, this at least created the possibility of tailoring policy to Britain’s own economic circumstances. Britain could determine how quickly to tighten or loosen allocations and how to balance environmental ambitions against economic realities. When the UK ETS was established under the last government, British carbon prices were significantly cheaper than their European equivalents.

Such flexibility is now being surrendered. According to industry estimates, speculation surrounding UK-EU ETS linkage has already contributed to a rise of a little under £20 per tonne in UK carbon allowance prices between January 2025 and January 2026. The resulting cost to the wider economy is estimated at more than £5bn. Those costs feed through into energy prices, industrial costs and ultimately household bills and expenditure.

The justification stated for these costs is the desire to avoid trade frictions associated with the EU’s Carbon Border Adjustment Mechanism (CBAM). Yet the economics are far less convincing.

Estimates cited by supporters of alignment suggest that the costs being avoided amount to approximately £800m. Britain therefore appears willing to impose costs measured in billions to avoid costs measured in the hundreds of millions.

Britain is willing to impose costs measured in billions to avoid costs measured in the hundreds of millions.

Not only is the cost an issue. Under proposed arrangements, Britain would be required to maintain dynamic alignment with European benchmarks and allocations. Future British policy would increasingly be shaped by decisions taken elsewhere. Britain would remain formally outside of the EU whilst gradually surrendering all practical control over a key area of industrial policy.

3The industries in the firing line

This matters as Britain’s current ETS covers major sectors including steel, refining, aviation and electricity generation — industries that are highly sensitive to regulatory costs.

These industries compete internationally with every additional cost and regulatory decision affecting both investment decisions and British competitiveness. Aligning to the EU ETS risks pushing production elsewhere.

385 ETS-covered sites closed under the EU ETS between 2008 and 2021. A further 41 sites closed under the UK ETS between 2021 and 2023. Carbon pricing alone cannot explain this. Manufacturing has faced numerous pressures over the past two decades, both in Britain and on the Continent. Yet it would be naïve to pretend that rising energy costs, tighter allocations and the ever-growing regulatory burdens have played no role.

The trend in free allocations is equally revealing. Between 2021 and 2025, total free allocations reportedly fell by about 30 per cent, equivalent to 11 million tonnes annually. With no major benchmark revisions during that period, the most obvious explanation is a reduction in overall industrial activity itself.

4The instinct behind the reset

The significance of the ETS negotiations extends far beyond carbon pricing. It reveals an increasingly influential assumption at the heart of Labour’s approach to Europe: that ever-closer alignment is inherently desirable. The same instinct sits behind discussions on sanitary and phytosanitary (SPS) alignment, youth mobility arrangements and the recurring calls for Britain to rejoin Erasmus.

As highlighted in the Prosperity Institute’s paper, “A Road to Nowhere: Why the UK-EU Reset is Not the Answer”, reports that ministers are exploring ways of restoring more favourable treatment for EU students, alongside the Government’s decision to join the Erasmus+ programme from the 2027/28 academic year, reveal a political class whose instincts remain overwhelmingly European in outlook. Under the agreement announced in December last year, Britain is expected to contribute about £570m towards Erasmus+, effectively reversing one of the more tangible post-Brexit reforms in higher education.

The decision is particularly curious given the success of the Turing Scheme, which replaced Erasmus following Brexit. Unlike Erasmus, Turing is global in outlook, supporting placements not just across Europe but the rest of the world. It enabled students to study and work in a far wider range of countries whilst doing so at a lower cost to the taxpayer. At a time when the centre of global economic growth is increasingly shifting towards North America and South and Southeast Asia, replacing a globally focused programme with a Europe-centric one appears difficult to justify.

Of course, no single proposal amounts to rejoining the European Union, nor do ministers claim to be doing so. However, by nudging toward alignment, the Government is gradually recreating many of the same regulatory and policy constraints that voters chose to leave behind. The distinction matters because Brexit was never solely about formal membership of European institutions. In part, it was an argument that Britain should have the freedom to pursue a different economic model where doing so was in the national interest.

5Aligning with a model running out of road

What makes the Government’s approach particularly curious is the economic backdrop against which the alignment is taking place. Europe is not enjoying an economic renaissance. Quite the opposite. Productivity growth across much of the continent has consistently trailed the United States for more than two decades. The European Union’s share of global GDP has steadily declined, with the lion’s share of investment, innovation and entrepreneurial activity gravitating increasingly towards North America and parts of Asia.

In September 2024, the former European Central Bank President, Mario Draghi, published a report on EU competitiveness which delivered a rather sobering assessment of the continent’s economic trajectory. The report warned that Europe faced a widening productivity gap with both the United States and China, whilst investment levels remained insufficient to sustain long-term growth.

Since 2000, real disposable incomes in the United States have grown at almost twice the rate seen within the European Union. Europe has struggled to produce globally dominant tech firms and has fallen behind in many key emerging industries. Across the continent, policymakers are grappling with the very same issues facing Britain: weak productivity growth, high energy costs and sluggish investment.

The publication of the Draghi report was, in many respects, an admission that the European economic model is coming under considerable strain. A logical question to ask the Prime Minister would be why you would want to bind the nation more closely to the very frameworks that Europeans are questioning themselves.

6The case Brexit actually made

That question is important. The strongest economic argument for Brexit was never that trade with Europe would cease to matter, nor was it that Britain could somehow insulate itself from global economic pressures. It was that independence would enable greater flexibility.

Britain lacks both the scale to compete with the United States and the labour-cost advantages of China. We are now a middle power on the world stage, but one that wields significant influence through certain advanced technological capabilities. This is precisely why it is important to be nimble, able to move faster and adapt more quickly to ever-changing economic circumstances. Britain can create a regulatory environment designed around its own priorities rather than the often-competing interests of twenty-seven disparate member states.

Whether successive governments have fully exploited that opportunity is another matter entirely. In truth, they have not. Yet the failure to make use of a competitive advantage is not an argument for abandoning it altogether.

There are of course, areas where Britain and the European Union will continue to adopt similar policies. Shared geography, similar levels of economic development and a close trading relationship make that almost inevitable. However, similarity arrived at through independent decision-making is different from similarity imposed through institutional alignment. One retains sovereignty and accountability for policy choices; the other gradually surrenders these to a third party.

7The choice, a decade on

A decade on from the referendum, Britain faces a clear choice. It can either use the freedoms it has at its disposal to pursue a distinct economic model focused on competitiveness, flexibility and global engagement, or it can gradually drift back towards a system in which policy is increasingly shaped by decisions made elsewhere.

The test facing Britain is whether both current and future politicians intend to exercise the independence the nation voted for, or whether they are content to continue to abdicate it incrementally under the political banner of “pragmatism”.