In line with its commitment to expand the UK Emissions Trading Scheme (ETS) to new sectors of the economy, and building on the Transport Decarbonisation Plan published in 2021, the UK Government is consulting on including domestic maritime in the UK ETS by the mid – 2020s.


Emissions from domestic shipping represent around 5% of UK's overall transport emissions, more than the UK rail and bus network combined. However, decarbonisation efforts face a number of barriers: 

a) since the maritime fuel prices do not reflect the cost of their emissions, the uptake of energy efficiency technologies in shipping has been slow; and 

b) investment in vessel efficiency has been held back by the nature of the ownership – chartering arrangements, where the party paying for the fuel is often not the vessel owner. 

To address these challenges, the Government has presented a choice of three options: 

a) applying the UK ETS to shipowners or operators on the basis of vessel activity – the lead option; 

b) inclusion on a fuel supplied basis – a first alternative; and 

c) a hybrid approach of including larger vessels on the basis of their activity and smaller vessels on the basis of fuel supplied – a second alternative.

The lead option

The lead option would capture shipping activity regardless of fuel source. The owner or operator of the vessel would be required to determine the volume of fuel used in each qualifying domestic journey and then multiply this by a carbon intensity factor to calculate their emissions for that voyage. 

Monitoring, reporting and verification (MRV) should not be too onerous for operators of large ships who are already experienced and equipped for this:

a) since 1 January 2018 vessels calling at an EU/EEA port have been subject to the EU MRV regime; and 

b) from 1 January 2022, ships over 5000 gross tons operating on certain routes began monitoring their fuel consumption and emissions under the UK MRV regime. 

It is proposed to apply the UK ETS to vessels over the same threshold so as to allow operators of larger ships to use the MRV data to plan better and introduce efficiencies.  Government believes that this lead option is likely to capture the highest quantity of emissions and that the risk of carbon leakage is low.  On the downside, if action were taken by the International Maritime Organisation (IMO) to regulate the international shipping, this option has the highest potential for double charging.

The first alternative – burdens fuel suppliers

The first alternative would target all shipping fuels sold domestically, placing the obligation to account and pay for emissions at the point where fuel becomes liable for excise duty in the UK or, for fuels not subject to excise duty, at a similar assessment point.

The MRV obligation would fall on marine fuel distribution or bunkering businesses who would report the volume of fuel sold to vessels on domestic voyages at the duty point and multiply this by a carbon intensity factor. 

International shipping could be excluded from the scheme in one of two ways: 

a) using HMRC fuel data to exclude any fuel supplied to international bunkers; or 

b) allowing vessels operating internationally to purchase fuel not covered by the scheme.

This option has several drawbacks:

a) it would capture fewer emissions;

b) the risk of carbon leakage would be higher, since operators could purchase fuel overseas to avoid compliance;

c) vessel owners and operators, not directly impacted by the scheme, would not be incentivised to adopt decarbonisation measures; and

d) the cost of marine fuel at the point of supply would likely increase.

On the plus side, the administrative burden on vessel operators would be lower since they would not be required to perform MRV.

The second alternative – a hybrid approach

Under this option, the approach to smaller vessels would be similar to the first alternative, with compliance obligation placed on the fuel firms, whereas larger vessels, having more resources and MRV experience, would be covered on an activity basis, as per the lead option.

The distinction between these two mutually exclusive regimes could be made by imposing either of the following conditions or a combination of both: 

a) applying a cut-off in vessel size (e.g. "under 24 m" or "under 400 ft"); and/or 

b) defining by sector or sub-sector (e.g. recreational craft and cargo ships).

The MRV obligation in respect of the vessels in the fuel supply option would fall on the fuel firms, with these vessels paying for emissions indirectly via a premium on fuel price.

In the case of vessels included on an activity basis, their owner or operator would perform MRV and surrender the requisite number of allowances.

To avoid double charging of vessels included on an activity basis: 

a) the volume of fuels purchased by operators of those vessels could be deducted from the total volume sold by the fuel firms, resulting in a lower cost of fuel for those businesses; or 

b) operators could claim a rebate or a discount for the additional costs of the fuel they purchase.

Government will consider applying a threshold under which no vessels would be paying a carbon price.

The hybrid approach could offer a more effective way of incorporating domestic maritime in the UK ETS, but the legislative and administrative burden of running a hybrid scheme would be comparatively high. There is also potential for vessels on the border between the schemes to game the system and for competitor vessels to be captured by different regimes.

Conclusion

By including domestic maritime in the compliance scheme the Government aims to incentivise the sector to adopt cleaner fuels, environmentally friendly technologies and greener operating practices. However, recognising that carbon pricing on its own will not be enough to overcome barriers to decarbonisation, it will propose a broader package of interventions in due course.

Particular areas of concern are the risks of gaming the system, carbon leakage, a shift away from maritime transport to alternative modes, the cost of domestic shipping services and the impact on consumers and small businesses operating in the sector. 

The European Commission proposed to include international shipping within the scope of EU ETS from 2023 onwards, with a three-year phase-in until 2026. This has prompted concerns from non-EU shipping companies that will become subject to the EU compliance regime. 

Globally, maritime transport is responsible for around 2.5% of emissions and without mitigation measures this will grow.  The current dependence on traditional fuel oil, the international nature of shipping and the variety of stakeholders involved present significant challenges to decarbonising the sector.  Including domestic shipping in the UK ETS is a welcome first step in this direction.

Key Contacts

Ed Watt

Ed Watt

Partner, Head of Shipping
Edinburgh, UK

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Alexander Sarac

Alexander Sarac

Partner, Infrastructure Projects & Energy
UAE / Germany

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Michelle Headrige

Michelle Headrige

Partner, Environment & Sustainability; Construction & Engineering
Manchester, UK

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Inga Aryanova

Inga Aryanova

Managing Associate, Infrastructure Projects & Energy
London

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