Taxing the Tide: Mastering the UK ETS Maritime Expansion

As of July 1, 2026, the UK Emissions Trading Scheme (UK ETS) officially brought maritime shipping into its net—putting a direct price tag on carbon for roughly 4,900 domestic vessels.

If you own, operate, or charter vessels in UK waters, carbon is no longer just an environmental metric—it is a major line item on your balance sheet. In this episode, we break down the operational, legal, and financial playbook for staying compliant without sinking your margins.

Also in this episode Barry outlines the ETS system and compares it to the stalled IMO Net Zero Scheme. Ultimately which one is more effective and of course who bears the brunt of the financial burden of each scheme?

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Transcript

SPEAKER_00 0:00

A very warm welcome everyone to the Maritime Education Podcast. My name is Barry Sadler and uh warm welcome if you're joining us for the first time. I hope you find the podcast interesting and of value. And to those regular subscribers, thank you very much for returning. Your presence here is much appreciated and I'm very, very humbled sometimes by the amount of people who do come up and thank me for the podcast. So your continued support and continued returns are really appreciated. Today I'd like to bring us up to speed on something that came into force on the first of July uh this year, twenty twenty six, which really went beneath my radar but has now been highlighted by multiple classification societies and flags, and that is the United Kingdom's ETS maritime expansion, which uh as I say comes into force from the uh the first of July. Now on that date approximately four thousand nine hundred large vessels that operate within UK waters suddenly became liable for their carbon footprint under the newly expanded UK Emissions Trading Scheme ETS as it's known. Now the UK emissions trading scheme differs greatly from the IMO's net zero plans which some of you may remember from previous podcasts have been put on hold until a meeting of the Maritime Environmental Protection Committee in October this year, but very very different concept to the UK's emissions trading scheme to that IMO net zero scheme in the the way of charging companies and the way in which calculations are made for how much somebody does or doesn't owe for the amount of carbon emissions that they are reporting differs uh vastly. Now at the end of the day, the the ETS scheme, the emissions trading scheme, is based upon what we call MRV monitoring, reporting and verification as the kind of foundational taximeter really of the entire scheme itself. It's in legislation, um it uh came in force for lots of other sectors back in 2021, but from the first of July this year it has come into force essentially for um for UK maritime sectors. Fundamentally, the ETS scheme is the United Kingdom's flagship policy for driving industrial decarbonisation. It was launched by the previous government on the first of January 2021 and it effectively replaced the EU ETS scheme following, of course, the United Kingdom's uh exit from the European Union. Basically, what it is is that is a legally binding cap and trade system which is designed to ensure that the United Kingdom uh meets its 2050 net zero target. If you have followed net zero targets within the UK, you'll realize that that target has gone back and back 2030, back to 2040, back to 2050, and the net zero target moving in this way indicates the challenges for an entire state to meet its net zero obligations, but individually the challenges for each portion of the of the industry organization to meet it as well, not just shipping. It's expanding. Initially, it covered around 25% of carbon emitting industries, but the expansion starts to cover a a lot more than that. Um 2021 saw power generation, heavy industries such as steel production, cement, paper, heavy manufacturing and aviation covered by the scheme since its inception in 2021. The next area to be included within the expansion is maritime shipping, and that phased in for the first of July 2026. There is one more phasing in planned for 2028, uh, which is uh the waste sector will be brought into the uh the ETS scheme. So, what is the ETS scheme? So I'll talk about the international side of uh of net zero in a minute, but let's look at the UK scheme because this is the one that has suddenly included these uh these 4900 CPU in its capture from the uh from the first of July. Um it's a trade and cap mechanism. So what this basically means is that the the United Kingdom uh authority sets an absolute legally binding limit on the total amount of greenhouse gases uh that covered sectors can emit. Uh the cap is not a finite cap. Uh the cap on uh carbon dioxide, nitrous oxides, etc., these caps are decreasing over time. So a little bit like the IMO system, which decreases the carbon index indicator levels over time, um the United Kingdom ETS caps um greenhouse gases uh with a limit, and this limit reduces over time, pushing industry towards its its net zero goal. Now, at the end of the day, the government issues allowances uh known as UKAs, where one allowance equals the right to emit one tonne of carbon dioxide equivalent. So operators can buy, sell, trade allowances on the open market, creating a finite incentive. Companies that decarbonize rapidly can then go ahead to sell their surplus allowances for profit to companies that are struggling to cut emissions. So trading in these allowances under the UK scheme is allowed, and even trading for profit. Again, this is the incentive to try and get companies to reduce their carbon footprints over time. Every year, by the 30th of April each year, every regulated operator must surrender enough allowances to cover their verified emissions from the previous calendar year. So it's based upon a calendar year, but reports must be made by the 30th of April, declaring essentially how much carbon has been emitted by a company and therefore how much allowance that company has, and if the company is short of its allowance, in other words, if it has emitted more than its purchase or acquired allowance, then there are massive fines that kick in against that company. Now, at the end of the day, um there are primary auctions and market stability that ensures that the exchange of these uh CO2 per tonne um uh ARAs as they call them are fairly traded. The government sets what's known as an auction reserve price, that's the absolute minimum price that the government will accept at auction. So for 2026, the ARP is effectively flawed at £28 per ton and is programmed to increase yearly with inflation, so that's per ton of uh of CO2 emitted. Now, at the end of the day, uh if allowance prices spike artificially for six consecutive months, in other words, if they are traded aggressively and uh the trading market for these um uh allowances jumps, then the government has the discretion to intervene by releasing extra allowances into the market to cool prices down. So uh a little bit like uh like stock market trading really. Now the UK ETS is strictly enforced by regional regulators such as the Environment Agency in England, CEPA in Scotland, and the reporting and surrender deadlines of the 30th of April are non-negotiable. Any company that misses its 30th of April surrender deadline is uh is subject to very very large financial penalties on top, of course, of the cost of purchasing the missing carbon allowances. On top of that, regulators will routinely publish the name of offenders, so shipping companies who do not report to the UK government on the 30th of April or shipping companies that do not have enough allowances to meet the amount of emissions that they have made, um, they'll be named and shamed. And uh individual aviation and manufacturing companies uh have been hit with civil penalties ranging from you know £44,000 to over 10 million pounds for compliance failures with the scheme. So at the end of the day, you know, this scheme is a uh is a very robust one, but it's also one that heavily penalizes uh those companies that do not comply with the legislation behind it. So, what are the the scopes of the rules for the for the UK emissions trading system? Well, essentially, vessels that are covered are cargo and passenger vessels of 5,000 gross tons and above that are engaged in domestic UK to UK port voyages. Okay, this includes round trips that start and end at the same port as well as emissions generated while ships are in port, whether moored or anchored. Now that's really important because your ship, although at the moment the expansion of this is to domestic voyages, if your ship is on an international voyage and it comes into the UK and it spends time in a UK port, then that ship will be subject to the uh the UK's ETS scheme, and literally the operating company will have to pay for its allowances whilst that ship is in port. Now, the emissions are tracked, um the uh the scheme covers carbon dioxide, methane and nitrous oxide, and it's calculated on a tank-to-wake basis. This is important because the international net zero framework is calculated on a well-to-wake basis. In other words, the cost of extracting the oil and refining the oil is taken into account, the environmental cost, I should say, is taken into account. Whereas the UK ETS only takes into account tank-to-wake basis. In other words, the um the amount of carbon that is emitted from the ship's uh fuel tanks to the actual uh burning of the fuel itself. Um this does reduce, of course, the amount of carbon footprint that each ton of fuel will ultimately um uh emit, but nonetheless, uh we're in a position where you know these costs have to be met. Who's responsible? Well, by default, the registered owner of the vessel is liable for compliance, liable for surrending allowances, uh, and therefore uh liable ultimately for ensuring that enough allowances are there and able to meet the amount of fuel that has ultimately been burnt by their ship. Now, at the end of the day, it's up to operators and owners to handle their own administrative requirements, and they do this digitally through an online platform uh called Mets Manage Your Emissions Trading Scheme. Now, um this means that you know it cuts down the paperwork, uh, an operator can go onto the uh the online scheme, submit the amount of fuel that they've burnt, uh, submit uh their own uh stock, if you like, of allowances and make sure that the stock of allowances eventually outweighs or meets the amount of carbon that has been emitted through the burning of fuel. The other thing to bear in mind is that within 42 days of a UK operator or an operator visiting the UK commencing an in-scope maritime activity, they must register on this MET system. So there's only 42 days grace once you start operating a ship. 42 days later, you must have surrendered your uh your allowances through the uh the MET system. You've also got to submit something called an emissions monitoring plan to your regional UK regulator in order to show how you are going to monitor and seek allowances for the carbon that you are ultimately going to emit. You've also, as a ship owner, got to hire an independent UCAS accredited verifier to audit your annual emission report before the 31st of March reporting deadline each year. So, as well as developing your own report, you've got to get an independent verifier to audit that report and ensure that your reports on the amount you have emitted compared to your allowances are indeed matching up and essentially you know leveling themselves out. Now, domestic shipping and those ships that are alongside in UK ports, uh they are now included within this over 5,000 gross tons I've said before from the 1st of July this year. Umshore vessels do not get included until the first of January 2027. This is to bring them in line with an EU activation date for offshore vessels, which is uh which is exactly the same. Um from the 30th of April 2028, uh operators are given a grace period for the initial rollout. So so basically, the initial rollout to ships uh must be fully complete and up and running by the 30th of April 2028. A little bit like the IMO, we're not going straight to enforcement, we are having a uh you know a surrender period, if you like, uh, right up until the uh the 30th of April 2028. Beyond that, you're uh you're you you're you're gonna get fined heavily as we discussed earlier on. International Voyages review in 2028 as well. So the government is considering expanding the scheme to cover a share of international voyages, uh, which by the way is what the EU already does, which they are planning on starting in 2028. That is subject to review, and we'll see how uh uh how that develops. Now, at the end of the day, this is obviously going to cost uh a UK operator. Very, very rarely is a UK operator going to be operating ships at such low emissions that they are not going to have to purchase uh any form of um uh of allowances. As I said before, those allowances can be traded with uh with other companies that are um uh that are uh uh running very very green ships, but at the end of the day uh it's probably going to cost your uh your average uh UK operator some extra money, and of course that extra money will be passed on to those that are benefiting from the shipping. So ticket prices on passenger vessels will increase, freight rates on cargo will ultimately increase in order to assist in the purchase of these. A company that has invested heavily in its green credentials and has pulled down its greenhouse gas emissions is going to have to spend less and therefore will have less to pass on to the uh to the customer essentially. So this works out well because ultimately the greener you are under this system, the um the the the cheaper your um your allowances will be, and therefore you can pass on some of those savings, I dare say not them all, but some of those savings onto your customers, which is going to attract business and should promote growth. So on the face of it, the ETS system in the UK is is fairly um fairly robust and uh you know pretty well planned out, but it does uh somewhat challenge and uh perhaps um you know, shall we say, contrast the IMO's own net zero framework. Now the IMO's net zero framework, very very different based upon a carbon index indicator. The um the IMO's net framework, what it does is it charges ship owners when they go over the amount of fuel that they are expected to burn within a year. So, again, there is a monitoring and reporting scheme under the international standard, uh, and this monitoring and reporting scheme develops what's known as a carbon index indicator. Now, at the end of the day, you know, this carbon index indicator is what's going to be the primary driver, or what is the current, shall we say, primary driver for getting shipping companies to be more economical with their ships. It's not necessarily about the charge that's going to be levied if you go above what you are expected to burn in a year, it's more about the ability for you to put in place measures which reduce the amount of fuel that you use and therefore reduce your carbon index indicator. Now, the carbon index indicator using IMO data is an incredibly complex number. It is fundamentally calculated by looking at the total CO2 emissions divided by the capacity of the ship times the distance that the ship has travelled. Now, at the end of the day, the total CO2 emissions are obtained from the total amount of fuel burnt over the year. This is from the compulsory data reporting that the ship owner has to do. This is multiplied by a specific carbon emission factor for that type of fuel. In other words, if you're using really heavy fuel oil, that has a higher factor than, for instance, LNG. Capacity basically is the uh is the dead weight and distance travelled as a total nautical miles sailed over that year. Now, the carbon index indicator is then rated. It's rated from A to E. Now, at the end of the day, um A, B, and C are all what we would uh what we would term acceptable carbon index indicators. Um A would indicate an incredibly efficient and environmentally friendly ship. C's um average at the end of the day, uh you're not burning too much fuel, but then again, you're not right up there at the uh the lower end of emissions. But D and E are a problem. Now, unlike the UK ETS, the IMO does not fine you or force you to buy carbon credits if your ship is found to be inefficient. The carbon index indicator is effectively enforced through operational mandates and market pressure. As I said, bad grades are an E rating for a single year or a D rating for three years. Consecutive years. If a vessel hits either of these triggers, then basically the regulatory and commercial consequences will then kick in. The regulatory requirement is that if you are E or D for those timescales, then you're legally required to develop a corrective action plan which is then incorporated into your shipboard energy efficiency management plan. In other words, you've got to review your shipboard energy efficiency management plan, have this verified by your flag state or classification society, and must detail explicitly the operational or technical modifications you intend to make in order to bring the ship back to at least that C rating. Now, at the end of the day, if you do not submit your corrective action plan or review your shipboard energy efficiency management plan, the flag state will not issue the ship's annual statement of compliance, essentially rendering your certificate invalid. That's just one side of it. The other side of it is of course the commercial and market penalties that will come out from the ship that does not meet a decent carbon index indicator. This could include charter rejection, so major charterers are increasingly refusing to use D or E rated vessels on their charters, and therefore the ship will become unattractive commercially. For slow steaming, you may find that an owner has to slow the ship right down in order to stop the ship slipping into the D or E carbon index indicator band. Now this means slower steaming means it uh it may arrive late. Uh charterers at the end of the day may insist that speeds are maintained at a level where commercial charter is effectively impossible because the ship literally can't do a speed that's good enough in order to attract a charter party. Financing and insurance is the other commercial penalty that would uh that would come in. At the end of the day, major maritime banks and insurers track the carbon intensity of the fleets that they back, and fleets that are heavy with DE rated ships will effectively face higher interest rates on on loans or higher insurance rates on insurance. Skip now to what was deferred from last year, the IMO's net zero plan, which essentially is based upon the amount of fuel that the ship is expected to burn. If the ship burns more fuel than it's expected to burn within the year, then essentially that means that the IMO will fine the individual shipping company that runs that ship. Fine itself doesn't go to the IMO. The the fines will go into an international fund, and that international fund will be used to help develop new technologies for the reduction of greenhouse gases as well as assisting those companies who companies and more importantly perhaps states who struggle within the developed world to come up with alternative fuels for the ships that they run. So we call it a fine, but it's a contribution towards those funds, and those contributions will only be levied by the IMO in the case that the vessel exceeds the amount of fuel that it would reasonably burn in a year, taking into account all the measures contained within the shipboard energy efficiency management plan. This is the big difference between that and the UK's ETS system. The ETS system requires the purchase of allowances in order to emit into the atmosphere, whereas the IMO will only require funds to be put into that international fund should the ship go above the amount of emissions that it would reasonably be expected to emit for that year. So, in other words, there's no way of avoiding uh ETS funding, but as long as you run your ship efficiently, you can avoid having to contribute to the international fund under the IMO's net zero scheme. Now, obviously, we have to take into account the fact that we've got the carbon index indicator which has those other ramifications that I discussed, and that's an international tool used to encourage ship owners to operate their ships more efficiently and to invest in more efficient, less polluting fuels. But at the end of the day, that is only there to, shall we say, set the levels of fuel that must be used. Once those levels of fuel have and only once those levels of fuel have been exceeded, would contributions need to be made to the IMO's fund. Now, obviously it's difficult to put an exact cost on the IMO funding because a lot would depend upon the efficiency of the ship. But we can put a current price on the UK ZTS funding. Now, currently the the price of UK carbon allowance is hovering at around 59 tonnes per ton of CO2 equivalent. That's what the uh the UK carbon allowances are uh are set at uh July 2026, the numbers that I've uh been given here in front of me. Now, just to put it into context, one ton of heavy fuel oil burned by a ship generates about 3.1 tonnes of CO2. That means that at a £59 carbon price, every ton of heavy fuel oil burned on an in-scope UK voyage will cost the ship operator approximately £183 in extra ETS charges. Now the government also sets a formal carbon price for several penalties, which is used specifically to calculate fines if you break the rules, i.e., you know, failing to surrender these allowances on time. And for the 2026 scheme year, the penalty baseline is set at around 49.4 uh pounds uh per tonne. So basically, this means that if you go over and your allowance does not cover, yep, you're paying 49.41p uh per ton of uh uh of uh CO2. Now at the end of the day, 3.1 tons, if you burn a ton over, you know, that's 3.1 times 49.41. So it's not a cheap thing to have to to to go over that ETS limit uh without purchasing the uh the allowances. So at the end of the day, you know, that those allowances must be bought in order to prevent that. And of course, your uh your MRV, your monitoring reporting, must be done on time in order to avoid a fine based again uh upon that. Um auctions take place of uh millions of new allowances every two weeks uh through a government platform, and uh to account for the maritime expansion that's just happened on the first of July. The government also added an extra 983,000 allowances into the auction calendar uh to be purchased, of course, by shipping companies uh as discussed in order to offset their uh their ETS carbon emissions. Don't forget, as I said, uh full enforcement isn't till 2028 on the uh on the UK ETS. So although these um these new allowances are in the market, um they're there to see, shall we say, how things how things run. At the end of the day, uh the government when it uh it puts out these allowances uh puts out an auction reserve price for them of of £28 is the current auction reserve price, but obviously the price is going to go above that, and as I've just quoted to you, currently running at around £59 per tonne. So considerably uh above that government uh government reserve price for the um uh for the allowances. Secondary markets are there as I discussed earlier on, um just like buying stock, ship operators can buy allowances directly from banks, commodity traders, and other companies that have purchased surpluses. Um it's an investment opportunity you can purchase these and uh and then sell them on. So, particularly if you are a uh a green company, then uh you can purchase these allowances, hold on to them, and then along comes an operator that has exceeded their allowance and needs desperately needs to buy some, then uh you know you have the upper hand as you're holding those allowances which you now do not need because your ships are green. It is you know a trading market, and uh you know I think that's going to in some ways be good for people who are reducing their carbon emissions and able to trade their allowances, but I think bad because the markets can uh turn against uh some ship owners who perhaps have been running ships at a certain level of CO2 emissions for many many years, suddenly find themselves affected by the ETS and in need of these allowances. And the more you need these allowances, the more you're going to pay because it's supply and demand. Uh if you desperately need them, then anybody willing to sell you their share or sell you some more is going to do so at a uh a reasonably high market price. So having to pay for uh higher emissions as a shipping company under the newly expanded ETS is gonna be a bit of an expensive game, particularly if you're regularly going uh above the allowances that you've already purchased. But just to reiterate, unlike the international system, you need to purchase these allowances literally just to run your ship. Alright, there's no financial penalty under the international scheme unless you burn more fuel than you are forecast to burn for the year, or indeed you end up in uh with a carbon index indicator in DE and you suffer market consequences as a result. It's a minefield out there. Um you know the the the ways that governments have come up with trying to meet their net zero are uh are as wide as they are long. United Kingdom's uh ETS scheme uh doesn't affect smaller vessels, which is good at the moment. Um I had an exchange with the uh the chief executive of Red Funnel who said that none of their vessels are over 5,000 gross tons, and therefore the ETS scheme doesn't affect them. Obviously that's a uh you know that's an essential link to the Isle of Wight, and any additional cost of the fuel will ultimately be passed on to those that wishes to uh transit the solent to the Isle of Wight and uh you know may unfairly penalise those that live on the Isle of Wight. So they've been spared that. Um there is one ship on the Isle of Wight Crossing that uh is over 5,000 gross tons, uh, runs uh on behalf of White Link uh between uh Portsmouth and uh Fishbourne and uh that uh will find itself um paying more, and I'm sure that Whitelink will pass some of those costs on to its customers uh in the form of slightly inflated uh ticket prices. Ultimately, that means that Joe Public is going to perhaps carry the uh the lion's share of the weight of any additional monies that need to be invested within green schemes such as the UK ETS scheme. If a ship owner ends up paying more for their fuel because they need to buy these allowances, then that price is going to be passed on. Um, a high proportion of it, if not all of it, passed on to those that are using the service. So ultimately you'll find that the customer will uh will be the person that pays the higher price for the goods, the higher price for the for the ticket to take their car or uh or whatever on the ferry in order to uh offset this. But it's the price we pay in order to uh reduce the damage that we've already done to the environment and the earth through the uh over-emission of particularly of CO2 uh over the past uh 100 years. Hopefully I've uh explained clearly and made a clear comparison between uh the UK ETS scheme, which uh came into force on shipping on the first of July this year, just uh just 21 days ago, three weeks ago, and uh that that the international community is uh trying to push forward with the IMO's net zero scheme. As I said in the podcast, we will know in October where the IMO's net zero scheme sits, and hopefully uh talks can restart on the implementation of that net zero framework and the contribution to the funds necessary by those burning more fuel than their ships are expected to burn throughout the year. But that's uh up to the uh the countries themselves that are uh voting and debating it, and uh they expected to be able to push it through in October last year, and uh through uh political pressures uh that was not possible. Whether those political pressures still exist in October this year, we wait and see, because if they do, then the IMO's net zero framework will once again be kicked down the road. Because of that, the uh UK's ETS framework, which is in place and operating, would appear to step in as a worthy uh as a worthy substitute and alternative for the net zero scheme to try and promote the uh the investment and technology required in order to produce ships that literally burn less fuel or burn fuel that's not so harmful to the environment. So, in the absence of the IMO's net zero framework, the UK's ETS scheme is carrying the shoulder of the burden of achieving that, at least for the time being, on UK domestic voyages and of course international voyages for fuel that are uh that's burned whilst the vessel is uh alongside in the port. Right, guys, thank you very much for listening to the uh to the podcast. Once again, it's great to have you all on board. I look forward to welcome you again to the Maritime Education Podcast. In the meantime, have a great day, everyone, and we'll be back soon. Thank you very much for listening.