UK ETS Maritime Expansion Consultation: Top 10 takeaways for the Maritime Industry

Introduction

On 28 November 2024, the UK Emissions Trading Scheme (UK ETS) Authority published a detailed consultation on the expansion of the UK ETS to include the domestic maritime sector from 2026.¹

The consultation builds on the UK ETS Authority's 2023 announcement that the UK ETS would be expanded to cover emissions from the domestic maritime sector, and covers more detailed design aspects and scheme implementation.

We set out below our top 10 takeaways for the maritime industry from the consultation.

1. Point of obligation – who is responsible for UK ETS compliance?

The 'point of obligation' is the technical term for which entity holds UK ETS obligations. In other words, which entity has to (a) monitor and report emissions, and (b) the purchase and surrender UK ETS allowances – thereby incurring the carbon price.

For standard UK ETS industrial installations, the operator of the facility is liable. However, in the shipping context this approach does not align with vessel ownership and chartering arrangements so that purposeful and explicit regulation is required.

The UK ETS Authority therefore proposes that UK ETS obligations will apply to the registered owner of the ship, unless the owner contractually delegates responsibility for UK ETS compliance to the entity that operates the ship and has assumed responsibility for the duties of the International Safety Management (ISM) Code. This other party could be, for example, a technical manager or bareboat charterer.

If the owner seeks to delegate its UK ETS obligations, it would have to notify the regulator, supported by evidence that UK ETS responsibility has been passed-down. Vessel owners and financiers will have a particular interest in ensuring such delegations are effective, to avoid unforeseen exposures including breach of financing covenants.

Time charterers' existing charterparty obligations are often drafted in ambit language that could have a widened reach. When negotiating future time charterers, some rebalancing may be needed to achieve a fair apportionment of UK ETS liabilities and risk.

2. Which emissions will be caught?

The consultation has provided further information on the emissions that will be caught.

It is proposed that the UK ETS maritime expansion covers:

• "domestic voyages" being voyages (a) between UK ports (b) or starting and ending at the same UK port; and
• emissions at berth. This will include all emissions at berth in UK (regardless of the next or previous port of call) and all emissions from movements within UK ports.

This approach aligns with the definition of domestic emissions used in the UK's National Atmospheric Emissions Inventory (NAEI), and the coverage of emissions at berth within the EU ETS.

The UK ETS Authority has not changed its position in relation to international journeys; emissions from journeys which start or end outside of the UK will not be caught (save in respect of voyages between Great Britain and the Republic of Ireland where the position remains to be decided, see para 7 below). In this respect the UK ETS differs from the EU ETS, which covers 50% of emissions from international voyages to and from the EU.

3. Proposed inclusion of methane and nitrous oxide

The UK ETS Authority intends to include emissions from the combustion or slippage of methane and nitrous oxide from maritime activity within the UK ETS, in addition to carbon dioxide.

This would increase the greenhouse gas emissions coverage of the scheme and avoid perverse incentives for fuels which may have lower carbon dioxide emissions, but higher emissions from other gases which have higher global warming potential (GWP).

The inclusion of methane and nitrous oxide will broaden the obligation to buy and surrender allowances, and therefore increase the responsible party's ETS costs (particularly where the GWP for methane is 28/tonne and nitrous oxide is 265/tonne).

This is an interesting development as the UK ETS has, save for a very limited number of sectors, only traditionally covered CO2 emissions. Shipping fuels' whole life cycle GHG, and indeed other harmful emissions, are increasingly a focus of the IMO's MARPOL Annexe VI controls.

4. Regulatory requirements and scheme participation

The maritime UK ETS expansion will follow the same regulatory provisions as the existing sectors covered by the scheme, such as:

• the scheme year (1 Jan – 31 December);
• reporting and surrender deadlines (31 March and 30 April, respectively);
• the use and approval of greenhouse gas emissions monitoring plans;
• the use of civil penalties for non-compliance; and
• the use of the devolved environmental regulators (EA / NRW / SEPA) as regulators.

In broad terms, this makes sense, as the maritime sector is being included within an established complex ETS architecture.

5. Participation threshold and de minimis

The UK ETS Authority has maintained its position that the UK ETS should apply to ships over 5,000GT undertaking an eligible voyage from 2026.

This is the threshold used for the existing UK MRV regime and other reporting schemes internationally, and so is well established, with vessels of this size equipped for emissions monitoring.

However, this threshold will be reviewed by the end of 2028, to explore if a lower threshold could lead to cost-effective decarbonisation for smaller ships.

6. Adjusting the cap for maritime

The UK ETS is a cap and trade scheme. When maritime is included in 2026, the intention is to add allowances to the net zero-consistent UK ETS cap. The cap adjustment will be informed by the most up-to-date decarbonisation pathway for the domestic maritime sector consistent with the delivery of climate targets, specifically the Carbon Budget Delivery Plan for the maritime sector.

The consultation provides indicative cap adjustment figures based on this trajectory and the proposed scope of the scheme, which amount to around 2.4 million UK allowances per year from 2026 to 2030.

There will be no ring-fencing of allowances for maritime, meaning that operators will participate in allowance auctions alongside other ETS installation operators.

The final cap adjustment figures will be confirmed in the Authority Response, subject to the views of consultees, the advice from the Climate Change Committee, the final policy design and any updated maritime decarbonisation pathway.

7. Brexit complexities

The consultation acknowledges the potential discrepancy in emissions coverage on routes between the island of Ireland and Great Britain, as in-scope ships will be subject to 100% UK ETS emissions coverage on routes between Great Britain and Northern Ireland (being UK port  UK port under the UK ETS), compared to 50% emissions coverage for Republic of Ireland and Great Britain routes, being an international voyage under EU ETS rules.

The consultation proposes two options to mitigate this discrepancy and ensure equivalence of carbon pricing obligation on these routes, either:

a) subjecting in-scope ships on voyages between Northern Ireland and Great Britain to 50% of their carbon pricing obligation under the UK ETS; or

b) expanding the scope of the UK ETS to include 50% of emissions from in-scope ships both arriving in or departing from the UK to the EEA.

There is no indication yet in terms of which option will be preferred, however option (b) would bring about an increase in coverage beyond domestic maritime emissions and may significantly increase UK ETS maritime liabilities.

8. Decarbonisation impacts

The consultation expects that the expansion of the UK ETS will help to overcome a key barrier to decarbonising the sector: that the prices of maritime fuels currently do not reflect their environmental costs.

It is anticipated that the price of carbon applied via the UK ETS will help to strengthen incentives to adopt low-carbon fuels, and support the deployment of fuel-efficient technologies and the introduction of fuel-efficient operating practices.

It is also expected that the UK ETS will help to incentivise operational efficiencies during voyages, such as slow-steaming, and allow operators to plan on a longer time horizon, and therefore help to incentivise the use of currently emerging technologies such as battery-powered ships or hydrogen and hydrogen-derived engines.

The expansion of coverage in respect of emissions at berth should also drive decarbonisation in ports, in particular via the use of shore power.

9. Exemptions

The consultation proposes to exempt government non-commercial maritime activity (GNCMA) from the UK ETS. These ships are also exempted from the UK MRV regime.

A non-exhaustive list of GNCMA that is proposed to be exempt from the UK ETS under this category are: military activities, customs, police, coastguard and emergency/medical ships.

The consultation also proposes to exempt ferry services serving Scottish islands from the UK ETS, reflecting the importance placed on these services by the Scottish and UK Governments.

10. Future expansion of the UK ETS to cover additional emissions

Before the inclusion of maritime emissions the UK ETS, the consultation already seeks views on two aspects of its potential future expansion.

First, the consultation proposes to review the threshold of 5,000GT by the end of 2028 and consultation seeks feedback on whether a lower threshold (e.g. 400GT) could support maritime sector decarbonisation, and if so, when any lower threshold should be implemented.

Second, the consultation seeks views on the more contentious issue of whether the UK ETS should be expanded to include emissions from international voyages, in the event that multilateral action through the IMO is delayed or insufficient in reducing GHG emissions from international shipping. Specifically, the consultation seeks feedback on potential alignment on the EU's approach of 50% international emissions coverage.

Should you wish to discuss any of these issues please get in touch with the team below.

 

This article was produced with the help of Rebecca Akroyd, trainee in the Planning and Environment team.