UK ETS to be expanded to cover maritime emissions: your questions answered
10 November 2023
10 November 2023
The UK ETS Authority has announced that it will expand the UK Emissions Trading Scheme (UK ETS) to include emissions from the domestic maritime sector.1
In this Q&A, we set out what is currently known about the proposed expansion of the UK ETS, based on the Authority's response to the Developing the UK ETS Consultation2 and outline the key areas of further consultation and development.
"From 2026". This coincides with the start of the second allocation period under the UK ETS, which runs from 1 January 2026 - 31 December 2030. Based on the consultation response, we would expect compliance obligations to commence on 1 January 2026. There is no reference to a phase-in period for maritime emissions3 and we therefore anticipate full cost exposure from 1 January 2026 onwards.
Parties obligated under the UK ETS (see further Q7 below) will be obliged to monitor and report emissions from qualifying journeys, then surrender allowances covering those emissions. It is the requirement to surrender UK ETS allowances which creates a liability for the obligated party. Based on current information, the first UK ETS surrender deadline for maritime emissions will be 30 April 2027 (being the surrender deadline in respect of the 2026 scheme year).
Responsibility for compliance and the allocation or apportionment of UK ETS liabilities will be a key commercial consideration for the maritime sector.
It is intended that the UK ETS is applied to vessels over 5,000GT. This aligns with the threshold under the existing UK Monitoring, Reporting and Verification (MRV) regulations and means operators will already be equipped to monitor emissions data.
However, the Authority has acknowledged that the 5,000GT threshold means that only 39% of total UK domestic maritime greenhouse gas emissions will be covered. As such, this threshold will be 'kept under review'. Given the language in the consultation, we anticipate this is a longer-term review, and do not expect further consultation on vessel size in the immediate future.
It is also intended that Government non-commercial maritime activity will be exempted.
The UK ETS is intended to cover "domestic journeys". This is anticipated to cover:
(a) journeys which start and end at the same port in the UK (e.g. Dover - Dover); and
(b) journeys which go from one UK port to another UK port (e.g. Dover - Liverpool).
Crucially, the UK ETS is not anticipated to include international journeys, and the Authority aims instead to "fully support the work of the International Maritime Organisation" to achieve measures to reduce emissions from international shipping.
The UK's approach to the scope of journeys is in stark contrast to the EU Emissions Trading System (EU ETS), which will cover 50% of emissions from ships performing voyages departing from a port under the jurisdiction of an EU Member State and arriving at a port outside its jurisdiction.
The Authority is also minded to include emissions at berth in UK ports or at anchor.
As a key aspect of the scope of the UK ETS, there will be further consultation on the definition of an eligible 'domestic journey' later in 2023.
Perhaps unsurprisingly, Brexit has brought about a degree of complexity. Under the UK ETS, a journey from Belfast - Liverpool would be subject to 100% emissions coverage, as a journey between two UK ports (see 4(b) above). However, a journey from Dublin - Liverpool would, under the EU ETS, be subject to 50% emissions coverage under the EU ETS (as the UK is a 'third country' in relation to Ireland, an EU Member State). This could create differential treatment and an economic distortion between ports on the island of Ireland. To ensure economic equivalence, it is intended that UK ETS obligations on journeys between Northern Ireland and Great Britain are reduced accordingly. This mechanism is similarly subject to detailed consultation later this year.
While there will be a number of liabilities under the UK ETS (including those associated with reporting and verification), the primary liability arises from the requirement under the UK ETS to surrender allowances.
The amount of greenhouse gas emissions for which an obligated party is liable is anticipated to be calculated by the following formula:
Amount of greenhouse gas emissions for which liable = volume of fuel used on a qualifying journey x carbon intensity of fuel type
The financial liability is calculated by multiplying the amount of greenhouse gas emissions by the prevailing carbon price when the allowances are purchased (ahead of the 30 April surrender deadline). Further consultation on UK MRV aspects is expected later in 2023.
The Authority intends that the person responsible for compliance with UK ETS obligations will be the vessel owner or whichever party has assumed responsibility for the operation of the vessel and the duties imposed by the ISM Code4.
Given the complexities of vessel ownership and operation, the consultation acknowledges that the party who is obligated under the UK ETS may in practice not be the commercial operator (that is, the party responsible for the decisions affecting the emissions of the vessel). In light of this, the Authority intends to consult later in 2023 on the ability of the obligated party to recover compliance costs from the commercial operator. Proponents of this approach argue that a costs recovery mechanism would implement the "polluter pays principle" and incentivise the more efficient operation of vessels.
The ability of the 'shipping company' to recover against the commercial operator of the vessel is a key feature of EU ETS design.5 Given this impacts the ability for obligated parties to "pass through" their ETS liabilities to commercial operators, this is an issue we expect will receive significant attention when further consulted upon later in the year.
We anticipate that the UK ETS will, at least initially, be expanded to cover CO2 only (and not other greenhouse gases). This point is not directly addressed in the consultation response; however the consultation does not at this stage envisage covering other greenhouse gases, and current UK MRV requirements extend to CO2 only. This contrasts with the EU ETS, which will cover methane and nitrous oxide from 2026.
The Authority estimate that in the first year of inclusion (2026), domestic maritime emissions will be equivalent to 2 million UK allowances – 2 million tonnes of CO2 equivalent. To give a rough sense of the size of the market, if carbon is priced at £50/TCO2 (as an example only, and not being a true reflection of variable carbon prices), this creates a c. £100m market in 2026. Emissions are expected to decrease during the remainder of the phase.
While this is not addressed directly in the response, we expect not. This would also align with the Authority's decision to phase-out free allocation to the aviation sector by 2026. However, free allocation remains subject to review and this point should be clarified by the Authority in due course.
The Authority intends to obtain further advice from the Climate change Committee and consult again, later in 2023.
Should you have any questions in relation to this Q&A, please contact Eleanor Reeves and James Nierinck.
1. Made up of the UK Government, Scottish Government, Welsh Government and the Department of Agriculture, Environment and Rural Affairs in Northern Ireland
2. See Chapter 6 of the UK ETS Authority's Developing the UK Emissions Trading Scheme: Main Response dated June 2023
3. Unlike there is for energy-from-waste
4. The International Management Code for the Safe Operation of Ships and for Pollution Prevention
5. See Article 3gc EU ETS Directive CL2003L0087EN0150010.0001_cp 1..2 (europa.eu)