Eight things you need to know about the UK Emissions Trading Scheme

In March 2022, the UK ETS Authority (the UK ETS Authority) started a consultation process on how the UK Emissions Trading Scheme (the UK ETS) could be further developed. The UK ETS was implemented after the UK left the EU to replace the UK’s participation in the EU Emissions Trading Scheme (the EU ETS). The UK ETS, much like the EU scheme, operates as a cap and trade system  for certain industries: a maximum number of allowances are available in the scheme and these reduce over time making the cost of allowances increase and thereby encouraging the use of measures to reduce emissions in those industries. Each allowance permits the emission of one tonne of CO2 and these allowances are then allocated to participants either via free allowances or auctions, where participants purchase allowances. A participant must ensure that it has sufficient allowances to cover its particular emissions: if it does not then it needs to address reducing its emissions to fall within its allocated allowances or it will need to purchase further allowances which are traded on a secondary market. Following the responses received to the consultation process, the UK ETS Authority published “The Main Response to Development of the UK ETS” on 3 July 2023 (the Response). The Response indicates that the UK ETS Authority intends to increase the scope of the UK ETS to include shipping from 2026. It sets out some preliminary suggestions of how this might be approached, but with acknowledgement that a number of elements need further consultation or additional detail. Whilst additional clarity is  needed in due course the Response does provide helpful guidelines as to how the UK ETS Authority currently envisages approaching this. The main take aways for the shipping industry are:

• The scheme will be administered on a ‘vessel activity’ approach, which means that, in the same way the EU ETS operates (and for further details on this see: Shipping and EU ETS: The changing landscape | United Kingdom | Global law firm | Norton Rose Fulbright), vessels will be required to monitor and report on emissions from eligible journeys and then surrender allowances in relation to these.
• Like the EU ETS, the responsibility for surrendering allowances would be with the owner of the vessel or the document of compliance holder (if different). The Response recognises the importance of incorporating a ‘polluter pays principle’ and the UK ETS Authority plan to consult further on this. 
• The intention is that the UK ETS would apply to vessels over 5,000 GT, however many of the responses to the consultation had suggested that the scheme should apply to vessels over 400 GT and so the UK ETS Authority will keep this under review.
• Two million allowances are expected to be allocated for the maritime sector in 2026. The amount of allowances available would then reduce annually in line with decarbonisation targets.
• Emissions from ‘domestic journeys’ would be caught by the UK ETS. ‘Domestic journeys’ are described as journeys between UK ports or to and from the same UK port. The UK ETS Authority is considering whether emissions from vessels at berth or anchor should be included within the scope of the UK ETS and will consult further on this.
• There are not currently plans to capture emissions from international journeys in the UK ETS.
• Consideration will be given to the interaction between the UK ETS and the EU ETS and the implications of this.
• The Response does not specify the consequences of non-compliance or ‘gaming’ the system: the UK ETS Authority are going to consult on this and provide further detail on options in due course.

The expansion of the UK ETS to include shipping was not unexpected, particularly after the inclusion of the maritime sector in the EU ETS. It is clear from the Response that the UK ETS Authority see this as an effective way to encourage decarbonisation in the sector. Shipowners and charterers who operate within the UK will need to consider the effect that the UK ETS will have on their operations as part of their wider decarbonisation strategy.