Consultation on UK ETS Scope Expansions for Maritime Emissions and CO₂ Storage

The consultation closes on January 23, 2025.

See https://www.gov.uk/government/consultations/uk-ets-scope-expansion-maritime-sector

Background

The UK Emissions Trading Scheme (ETS) came into operation on 1 January 2021 and currently includes emissions from the power generation sector, industrials and aviation.

The scheme is a key part of the UK Government’s approach to addressing climate change, setting a limit on emissions from the sectors covered and ensuring an appropriate price is applied to them.

In July 2021, the government also published the transport decarbonisation plan, which set out the commitments and actions needed to decarbonise the UK transport system including maritime.

UK ETS Scope

From 2026, operators of domestic ships over 5,000 gross tonnes (GT) starting and finishing voyages between UK ports will be required to purchase and surrender allowances equivalent to 100% of their CO2. However, the Authority is also interested in exploring if a lower threshold could lead to cost-effective decarbonisation for smaller ships.

The definition of domestic voyage for the purpose of the UK ETS would include voyages travelling from one UK port to another UK port. The Authority also confirmed coverage would include voyages which start and end at the same port in the UK.

Voyages between the UK and Crown Dependencies or British Overseas Territories, as well as voyages between Crown Dependencies and British Overseas Territories, are not included as a domestic voyage.

The proposal is to include ALL emissions at berth at UK ports, and all emissions from movements within UK ports. This will include emissions at berth in UK ports from ships travelling domestically, internationally, and to or from Crown Dependencies and British Overseas Territories, regardless of the location of the next or previous port of call.

The one exemption proposed is to exempt ferry services serving Scottish islands from the UK ETS, reflecting the importance of these services to the governments in the ETS and the particular importance of the Islands.

CO2 emissions will be the main greenhouse gas (GHG) covered but the UK ETS authority sees merit in the inclusion of additional GHGs from maritime within the scheme, specifically methane and nitrous oxide. This will increase the GHG emissions coverage of the scheme and avoid perverse incentives for fuels which may have lower CO2 emissions, but higher emissions from other gases which have higher global warming potential (GWP). Emissions from both the combustion and slippage of these gases would be included.

A de minimis threshold is being explored to exclude vessels with very low emissions.

Point of Obligation

The entity responsible for compliance will typically be the ship's registered owner. However, if another entity operates the ship under the International Safety Management (ISM) Code, contractual agreements may be submitted to the regulator to transfer responsibility. If no agreement exists, the registered owner is expected to ensure they have a strategy in place to procure and surrender UK ETS allowances (see Managing ETS Compliance section below).

Northern Ireland-Mainland UK Disparity

The government is also exploring options to address the risk of carbon leakage with respect to voyages between the UK and Northern Ireland.

If 100% of emissions within the domestic UK ETS scope were applied to this route it would create a potential incentive for route diversion as operators could favour ports in Ireland which would incur an EU ETS compliance obligation at only 50% of voyage emissions.

The Authority are proposing two solutions to manage this:

1. Reducing the obligation to 50% of emissions on this route in the UK ETS scope (Option 2 below)
2. Alternatively, the Authority is also interested in stakeholder views on increasing the scope of the UK ETS to also include 50% of emissions from in-scope ships both arriving in or departing from the UK to the European Economic Area (EEA). This would result in UK-Ireland routes having an obligation of 50% EU ETS and 50% UK ETS (shown as Option 3 below)

Alignment with UK ETS MRV

To streamline monitoring, reporting, and verification (MRV) requirements between the current UK MRV regulation for shipping and the incoming UK ETS, the government proposes:

• Shifting emissions monitoring plan submissions to national regulators (e.g., the Environment Agency for England) instead of verifiers.
• Eliminating the requirement for a Document of Compliance (DoC) from verifiers.
• Requiring monitoring plans and annual emissions reports at the operator level instead of per ship.

The scope of MRV may also expand to include methane and nitrous oxide emissions, with the potential for their inclusion in UK ETS compliance requirements in the future. In line with reliefs operators in receive in other sectors, Biofuels will remain zero-rated for emissions reporting, but the government plans to update lifecycle emissions data i.e. well-to-wake emissions of various sustainable fuels to ensure accurate accounting of sustainable fuel use.

UK ETS Cap Adjustments

From 2026 to 2030, the proposed cap for the maritime sector is set at 2.4 million UK Allowances (UKAs) annually.

It is likely that this allocation will be revised downward to account for exclusions such as Scottish Ferry Services. Adjustments will align with the UK’s Carbon Budget commitments and any revisions.

A review of the maritime sector’s UK ETS coverage is planned for 2028, with the potential to expand scope to include ships between 400 and 5,000 GT.

International Maritime Emissions

The UK government has expressed support for a multilateral global greenhouse gas emissions levy under discussion at the International Maritime Organization (IMO). If adopted, this could replace regional schemes such as the UK and EU ETS for international maritime emissions.

Conclusion and next steps:

The European maritime sector first faced compliance obligations under the EU ETS from January 2024 and has since faced challenges of setting up a maritime operator holding account (MOHA), delegating responsibilities and understanding how best to manage allowance purchases and any pass-through costs.

The EU ETS covers a wider scope for maritime emissions, including both 100% of voyage emissions for EU journeys and 50% of emissions for voyages starting or ending in non-EEA territory. Yet operators in the EU have faced a ‘gentler entry’ into the scheme as compliance is being phased in at 40% of emissions in 2024, 60% of emissions in 2025 up to 100% emissions in 2026.

Whilst the UK ETS is currently expected to only to cover domestic emissions, UK operators will face a 100% obligation from start of 2026 and it is likely to include all GHG emissions, not just CO2.

Managing ETS Compliance

The shipping sector has a unique set of operational and contractual complexities that present a challenge when managing ETS compliance.

1. Define Responsibility

It is important to define who should purchase the required allowances for specific voyages. The responsible entity by default is the ship owner but managers/operators/charterers may be made contractually liable (either as a pass-through cost or requirement to deliver allowances).

2. Understanding the Carbon Market

The maritime sector is entering the UK ETS at a time of significant market volatility. Shipping companies must understand the carbon market and the appropriate solutions to manage allowance purchases

3. Develop a Compliance Strategy

Shipping companies should have a clear strategy to manage ETS requirements, coordinate allowance purchases and reconcile costs against voyages. Accessing the UK carbon market requires a number of steps prior to trading which should be established as soon as possible

For tailored advice on navigating the UK ETS carbon market and developing an appropriate compliance strategy please contact our expert carbon compliance team, here.