From 1 July 2026, shipping emissions will fall within scope of the United Kingdom (UK) Emissions Trading Scheme (ETS).
This marks a significant extension of carbon pricing to the shipping sector which, from 1 January 2024, has also been within scope of the European Union (EU) ETS.
With the UK legislation being passed on 1 April 2026, there is relatively little time for the shipping industry to get to grips with the UK scheme before being obliged to comply. At first glance, the EU and UK regimes appear closely aligned, reflecting a shared regulatory heritage and broadly common policy objectives. However, a closer examination reveals important differences, in both procedural aspects and substantive provisions. These distinctions have material implications for shipping companies operating across both jurisdictions and it is important that the UK ETS is understood as separate to and different from the EU ETS.
What they have in common
The maritime components of the UK ETS and EU ETS are built upon fundamentally similar compliance architecture. In both systems, shipping companies are required to monitor their greenhouse gas emissions, report them annually, subject those reports to independent verification, and surrender a corresponding number of emissions allowances. Failure to surrender sufficient allowances triggers an “excess emissions penalty,” calculated on a per-tonne of carbon dioxide equivalent basis, alongside a continuing obligation to surrender missing allowances.
In the EU, the ETS framework is set out in Directive 2003/87/EC. To date, the UK has retained the core model of the EU Directive in the Greenhouse Gas Emissions Trading Scheme Order 2020, ensuring a high degree of formal symmetry between the two regimes. For instance, both regimes provide that a failure to surrender allowances will result in the publication of names, and therefore potential reputational damage, and the application of an excess emissions penalty of €100 / £100 (index linked for inflation) for each allowance not surrendered. Furthermore, regulators in both jurisdictions are empowered to estimate emissions where operators fail to monitor or report emissions adequately, thus preventing non-compliance through data omission.
Furthermore, both schemes apply to vessels of 5,000 GT and above and capture emissions from voyages connected to their respective territories. Although different terminology is deployed shipping companies (under the EU ETS) and maritime operators (under the UK ETS) bear the compliance obligation which in both cases falls on the registered shipowner but can be transferred to the ISM Company.
Moreover, each system seeks to integrate maritime transport into a broader economy-wide carbon market, pricing shipping emissions consistently with emissions from other sectors, and provides that operators must purchase allowances, as no free allocation is provided to the sector.
Where they diverge
Despite their shared foundation, the maritime components of the UK ETS and EU ETS diverge in several respects, including in relation to: scope, phase-in, compliance timelines, penalty regimes and procedure. Additional differences in markets and mechanisms also differentiate the schemes.
- Scope
The EU ETS adopts a more expansive approach, covering all emissions from voyages between EEA ports, emissions from ships in EU ports, and 50 percent of emissions from voyages between EEA and non-EEA ports. By contrast, the UK regime operates on a narrower geographic basis, covering all emissions from voyages between UK ports (with a derogation to 50% of emissions on voyages between mainland UK ports and ports in Northern Ireland) and emissions from ships in UK ports, but not extending to emissions from voyages between UK and non-UK ports. While maritime operators with vessels making international voyages to/from the UK are therefore not required to surrender allowances in connection with their international voyage emissions, such operators should be aware that in-port emissions will, subject to the reason the vessel is calling at the port, nonetheless fall within the UK ETS meaning engagement with the scheme and surrender of allowances in respect of in-port emissions will be necessary.
- Phase-In
The EU elected to gradually phase-in maritime surrender obligations, requiring shipping companies initially to surrender allowances for only 40% of their emissions, with full coverage reached incrementally over three years. This approach mitigated immediate financial impacts and allowed operators time to adapt operationally and commercially before bearing the full scheme costs in respect of their emissions. The UK, by contrast, has opted to move directly to full coverage without an equivalent phase-in period, providing instead for a single surrender deadline for the first two compliance periods. This means that allowances for emissions reported in 2026 (half-year) and 2027 (full year) will not need to be surrendered until April 2028, mitigating to some extent the initial impacts on operators.
- Timelines
Under the EU ETS, emissions for the preceding year must be verified by the end of March, but allowances are not required to be surrendered until the end of September. This six-month interval offers operators valuable flexibility, particularly in terms of cash flow management and strategic engagement with the carbon market. In the UK, surrender follows the pre-existing ETS timetable, with allowances due by the end of April. This shorter compliance window compresses decision-making and may increase short-term financial and administrative pressure on operators. It is therefore especially important that, where vessels fall within the UK ETS, maritime operators make provision for obtaining allowances on an ongoing basis as liability accrues throughout the year.
- Penalties
Whilst the penalty regimes are broadly similar, the UK ETS defines penalties for procedural breaches that in the EU ETS are devolved to the level of Member State implementation, and so are variable and difficult to anticipate. In the UK, however, the UK ETS prescribes the discretionary fixed and daily escalating penalties applicable to various procedural breaches. For instance, where an application for an emissions monitoring plan is not made on time or a maritime operator fails to report emissions the discretionary fixed penalty is £20,000 accompanied by a daily penalty of £500 for each day of continuing non-compliance up to a cap of £45,000.
- Procedure
While it is beyond the scope of this article to consider procedure in detail, two key differences are worth noting. The first is likely to be met with relief by those who have already navigated applications for Maritime Operator Holding Accounts (MOHAs) pursuant to the EU ETS. Under the UK ETS this process appears to be simplified with the opening of MOHAs being handled automatically by the regulator once an Emissions Monitoring Plan (EMP) has been issued. The second is that a transfer of compliance obligations from the registered shipowner to the ISM Company need not be evidenced to the regulator, unless requested, but must be enshrined in a written agreement prior to the 1 July 2026. This may come as less of a relief as it means entities will need to put agreements in place without delay, if not already in existence.
- Markets
While maritime operators in both systems must purchase allowances, the markets in which they do so differ markedly in scale and maturity. The EU ETS is a large, liquid, and highly integrated market, characterised by widespread trading activity and relatively stable pricing. While the European Energy Exchange (EEX) runs auctions for the primary market, the secondary market has developed several trading platforms and over the counter offerings. The UK ETS, though operating on similar principles, is smaller and more self-contained. In the absence of a formal linking mechanism, this can result in price divergence and greater volatility. Ice Futures Europe facilitates primary market auctions for the UK, but the secondary market is less active. For companies operating in both jurisdictions, this creates additional complexity, as exposure must be managed across two distinct carbon markets with potentially different price dynamics.
- Emission Reduction Claims
The UK ETS includes an “emission reduction claims” (ERC) mechanism that, although already deployed for aviation under the UK ETS, will be new to maritime due to the absence of a similar mechanism in the EU ETS. The ERC allows operators to reduce UK ETS liability through the purchase of eligible fuels by “claiming” an emissions reduction in connection with it, provided the fuel meets criteria concerning sustainability, traceability and purchase and delivery timelines. Once the claim has been verified, the fuel is counted as zero rated and the number of allowances to be surrendered by the operator is reduced. While the EU ETS counts emissions of fuel consumed by vessels on voyages within scope of the scheme, the UK ERC mechanism enables emissions accounting to extend more widely encouraging the uptake of sustainable fuels globally. Guidance on how this will operate in practise is awaited. Although in view of the eligibility criteria it is anticipated that operators wishing to benefit from ERCs may need to introduce new layers of accounting in current fuel purchase, usage, emissions insetting and other accounting architecture, as well as in UK ETS compliance strategies and documentation. The mechanism also raises questions in relation to the interaction between operator ERC’s and charterparty terms, which may need to be adapted to expressly include or exclude the benefits derived from such claims.
Are you ready for both?
For maritime operators the practical challenge of the UK ETS lies not merely in understanding the new regime in isolation, but in navigating the gap between the UK and EU ETS and its impacts on compliance strategy, cost management, and contractual relations across the maritime sector.
While the introduction of the UK ETS alongside the EU ETS undoubtedly introduces new complexities for maritime operators, it may also be seen as presenting a valuable opportunity to develop competitive advantages. By proactively engaging with the requirements of both schemes, investing in robust systems, and seeking expert guidance, operators will be well-placed to manage risks and offer predictable costs and compliant and greener services to their end-users, putting them on the front foot in the commercial realm as well as the compliance world.
For guidance on the EU or UK ETS, and support with any other maritime decarbonisation needs, the Stephenson Harwood Maritime Decarbonisation Team are here to help.
