No Emission Without Permission: UK ETS Enters into Force

1. What is the UK ETS?

   The UK ETS is a core component of the UK’s decarbonisation framework, aimed at reducing the UK’s overall emissions in line with the Climate Change Act 2008, which aims to achieve national net zero emissions by 2050, including key milestones of a 30% reduction by 2030 and an 80% reduction by 2040.

   The UK ETS was established by the UK, Scottish, and Welsh Governments, and the Northern Ireland Department of Agriculture, Environment and Rural Affairs (DAERA) (collectively the “Authority”) in the wake of the UK’s exit from the European Union and resultant withdrawal from the EU Emissions Trading System (“EU ETS”) on 1 January 2021. Further background on the EU ETS is available in the Club’s previous article.

   The legal framework for the UK ETS is primarily established by the Greenhouse Gas Emissions Trading Scheme Order 2020 (SI 2020/1265), as amended (the “UK ETS Order”), which sets out the core obligations relating to monitoring, reporting and surrendering of UKAs.

   From a practical perspective, the introduction of UK ETS to shipping will impose a direct cost on emissions from domestic UK operations and raises immediate issues as to the contractual allocation of those costs between Owners and Charterers, particularly in the context of existing charterparty provisions.

2. Who is affected?

   From 1 July 2026, the UK ETS will be extended to include the maritime sector, covering emissions from: 

   1. Voyages of passenger and cargo vessels¹ of 5,000 GT or more;
   2. Between UK ports² (including between two UK discharging ports where loading occurred elsewhere); and
   3. Includes emissions generated during activities in UK ports. UK port activities include time spent at berth, whether moored or anchored and activities at offshore installations. 

   It should be noted that the current scope is limited to domestic UK emissions. However, the Authority have sought industry consultation and is currently reviewing further expansion of the regime in future phases to include a proportion of emissions from voyages beginning or ending outside the UK (subject to negotiations with the EU) which the Authority proposes to apply from 2028 onwards.

   A whole system review of the operations of the UK ETS will take place in 2028 to consider whether any further amendments to the scheme are necessary.

3. Who is responsible for compliance?

   Responsibility for UK ETS compliance lies with the vessel operator, which by default is the registered owner of the vessel. 

   In the alternative and similar to the approach under the EU ETS, regulatory responsibility may be delegated by the vessel operator to an ISM company, provided there is a legally binding agreement with the registered owner of the vessel assigning UK ETS compliance obligations to the ISM Company. Where this is the case, details of the agreement must be entered in the Manage your UK Emissions Trading Scheme platform (“METS”). 

   It is important to note that this constitutes an allocation of regulatory responsibility and does not determine how UK ETS costs are allocated between contractual counterparties (e.g. under charterparties), which will need to be negotiated separately.

4. How does it work?

   Like the EU ETS and other global emissions schemes, the UK ETS operates on a “cap and trade” principle. The cap represents the total amount of specified greenhouse gases (“GHGs”) that can be emitted by a sector. This overall cap is divided into allowances (“UKAs”), each equivalent to 1 tonne of CO₂ equivalent GHG (“tCO₂e”). Every year, applicable operators must surrender UKAs to cover their emissions for that year.

   Registration

   Operators will be required to register with the UK Emissions Trading Registry, and submit an Emissions Monitoring Plan (“EMP”) covering all applicable vessels under their responsibility to the relevant regulator for approval, who will oversee the operator’s entire compliance cycle.

   Submissions are made via METS. Approval can be applied for at any time, but not later than 42 days after carrying out a maritime activity.

   Monitoring

   As Members who operate vessels under the EU ETS will already know, data applicable to the EU ETS is collected as part of the EU’s Monitoring, Reporting and Verification protocols (“MRV”) at the vessel level.

   Although the UK maintained the MRV concept post-Brexit, data for the UK’s MRV falls under the remit of the UK Department for Transport, whereas overall management of the UK ETS is undertaken by the Department for Energy Security and Net Zero. 

   Following a review in June 2025, and to avoid the duplication of reporting obligations between the two departments, UK MRV Regulations were revoked on 1 April 2026.

   Consequently, the UK ETS will be monitored at the company level rather than the vessel level as under the EU ETS. This shift to company level reporting may require operators to adapt existing systems developed for EU ETS compliance.

   Verification

   Operators must use an independent verifier (approved by the United Kingdom Accreditation Service) to verify their Annual Emissions Report (“AER”).

   Surrendering of UKAs

   Operators must submit their AER by 31 March each year via METS and must surrender the requisite number of UKAs by 30 April. The deadline to surrender UKAs for the first scheme year (1 July 2026 to 31 December 2026), and second scheme year (1 January 2027 to 31 December 2027) will be 30 April 2028.

5. Key Compliance milestones

   1 July 2026	The UK ETS enters into force and AER data collection begins.
   1 January 2027	The UK ETS becomes applicable to offshore vessels.
   31 March 2027	Reporting deadline for first year AER submitted via METS.
   By 31 December 2028	Whole system review of UK ETS and proposed introduction of emissions from international voyages.
   31 March 2028	Reporting deadline for second year AER submitted via METS.
   30 April 2028	Operators must surrender the relevant UKAs for the first and second years to the relevant regulator via METS.

   Example

   If a qualifying vessel (i.e. cargo vessel, 5,000 GT) wishes to sail between two UK ports, the vessel operator (or designated ISM company) would need to:

   1. Register with UK Emissions Trading Registry (this would be the vessel operator’s holding account).
   2. Submit an EMP no later than 42 days after carrying out a maritime activity. These would be submitted and managed via the METS platform.
   3. Surrender applicable UKAs by 30 April 2028 to the relevant regulator via METS platform (noting that this first year is a “double-surrender” of the UKAs applicable to the 2026 and 2027 scheme years).
       

6. Penalties for non-compliance

   Failure to surrender sufficient allowances gives rise to an “excess emissions penalty” under Article 52 of the UK ETS Order, currently £100 per tCO₂e (indexed for inflation), in addition to the continued obligation to surrender the correct UKAs.

   Where non-compliance persists, regulators may issue formal notices. Failure to comply with such notices may trigger additional civil penalties of increasing severity, including fixed and continuing daily penalties (e.g. under Articles 64A to 68 of the UK ETS Order). These may arise, for example, in cases of failure to comply with enforcement or information notices, the provision of false or misleading information, or obstruction of inspections.

7. Exemptions and Discounts

   Key exemptions apply primarily to non-commercial vessels such as those carrying out emergency/medical services, search and rescue activities (coastguard), research activities, military/police activities and customs/border force activities. 

   Other exemptions include the General Lighthouse Authority, ferry services to Scotland’s islands and to certain peninsula communities, and vessels for fish catching and processing (fishing vessels are excluded to maintain consistency with the approach taken under the EU ETS, which is not applicable to fishing vessels). 

   There will be a 50% deduction from UKAs applicable to voyages between Northern Ireland and Great Britain. This is ostensibly to avoid a disparity in carbon pricing obligation on routes between the island of Ireland and Great Britain due to the  differing scope of the UK ETS and the EU ETS. This is due to the EU ETS covering 50% of emissions from international voyages starting or ending in an EU Member State, and the UK ETS including 100% of emissions from domestic voyages. If and when the UK ETS is expanded to include emissions from international voyages, the Authority has confirmed that this discount would no longer apply. 

8. Trading UKAs

   To cover their emissions for that year operators may acquire UKAs: 

   1. By auctions run periodically by the Authority; and/or
   2. From other participants through dedicated secondary markets.

   The price of UKAs is determined by the market and may fluctuate over time, giving rise to potential cost uncertainty for operators.

9. Practical Steps for Members

   In light of the above, Members should consider the following practical steps:

   1. Identify affected vessels and trades
      Determine which vessels and voyages fall within scope, and consider the financial impact of purchasing UKAs.
   2. Review current emissions procedures
      Review current EU ETS procedures and ensure that Members’ systems are capable of capturing and reporting emissions data under the UK ETS, taking into account key differences between the regimes.
   3. Confirm that registration has been properly carried out
      Ensure readiness to comply with UK ETS registration requirements and that key milestone dates are diarised.
   4. Review contractual terms
      Consider how UK ETS costs, risk and obligations will be allocated between Owners and Charterers under charterparties. Owners should also decide whether they wish to delegate regulatory responsibility to an ISM company and ensure a legally binding agreement is in place.

   Comparison with the EU ETS

   Members should also be aware that while the UK ETS to some extent mirrors the structure of the EU ETS, there are important differences between the regimes which may give rise to practical challenges for vessel operators trading between UK and EU ports.

   In particular, the UK ETS currently applies only to domestic voyages, whereas the EU ETS captures a proportion of emissions from international voyages. This means that voyages may be treated differently under each regime. In addition, the two schemes operate separate allowance systems, compliance timelines and reporting frameworks, that require independent compliance.

   These differences may increase administrative complexity and give rise to contractual and cost allocation issues.

10. Conclusion

    The introduction of the UK ETS to shipping will add new cost and compliance dimensions to UK domestic operations, including implications for contractual arrangements and emissions reporting. Members are therefore encouraged to engage early with the regime to ensure effective compliance and cost management.

    As ever, the Club remains available to assist Members with any questions arising from the article and/or the UK ETS more widely.

¹ The inclusion of emissions from offshore vessels is delayed until 1 January 2027 to match the EU ETS timeline.
² Crown dependencies and overseas territories are excluded.