Expansion of UK Emissions Trading Scheme into the domestic maritime sector: Final Business and Regulatory Impact Assessment 2026

Section 3: Costs, impacts and benefits

Quantified costs to businesses

In line with UK ETS Authority impact assessment analysis^[14], three different options were explored to assess the possible quantified costs to businesses. Each was compared to the “Do Nothing” scenario, representing the counterfactual. These are detailed in table 3A below, with Option A representing the preferred policy option.

The key differences between options are:

• Applied exemptions, in particular to fish-catching and fish-processing ships, ferries serving Scotland’s islands and peninsula communities and government maritime activity.
• Whether to adjust the UK ETS cap with expansion to domestic maritime.
• The approach to emissions accounting, namely tank-to-wake with zero rating or well-to-wake^[15].

Table 3A: Shortlist of Policy Options

• Policy Consideration: Vessel scope
• Do Nothing: No expansion of the UK ETS to domestic maritime
• Option A – Preferred option: Vessels of 5000 gross tonnage (GT) and above
• Option B – Do maximum: Vessels of 5000 gross tonnage (GT) and above
• Option C – No Cap Adjustment: Vessels of 5000 gross tonnage (GT) and above

• Policy Consideration: Activity scope
• Do Nothing: No expansion of the UK ETS to domestic maritime
• Option A – Preferred option: UK domestic maritime
• Option B – Do maximum: UK domestic maritime
• Option C – No Cap Adjustment: UK domestic maritime

• Policy Consideration: Exemptions
• Do Nothing: No expansion of the UK ETS to domestic maritime
• Option A – Preferred option: Exemptions for fish-catching and fish processing ships, ferries serving Scotland’s islands and peninsula communities and government maritime activity
• Option B – Do maximum: No exemption
• Option C – No Cap Adjustment: Exemptions for fish-catching and fish processing ships, ferries serving Scotland’s islands and peninsula communities and government maritime activity

• Policy Consideration: GB-NI equivalence
• Do Nothing: No expansion of the UK ETS to domestic maritime
• Option A – Preferred option: 50% surrender deduction for GB-NI journeys
• Option B – Do maximum: 50% surrender deduction for GB-NI journeys
• Option C – No Cap Adjustment: 50% surrender deduction for GB-NI journeys

• Policy Consideration: Cap adjustment
• Do Nothing: No expansion of the UK ETS to domestic maritime
• Option A – Preferred option: Adjust cap according to NZ consistent pathway for the sector
• Option B – Do maximum: Adjust cap according to NZ consistent pathway for the sector
• Option C – No Cap Adjustment: No cap adjustment

• Policy Consideration: Gas coverage
• Do Nothing: No expansion of the UK ETS to domestic maritime
• Option A – Preferred option: CO2, methane, and nitrous oxide
• Option B – Do maximum: CO2, methane, and nitrous oxide
• Option C – No Cap Adjustment: CO2, methane, and nitrous oxide

• Policy Consideration: Emissions accounting
• Do Nothing: No expansion of the UK ETS to domestic maritime
• Option A – Preferred option: Tank to Wake with zero-rating
• Option B – Do maximum: Well to Wake
• Option C – No Cap Adjustment: Tank to Wake with zero-rating

As outlined in the UK ETS Authority’s Impact Assessment, each policy option was explored to consider a range of ambition levels in terms of emissions coverage:

• Do Nothing (Business as usual): this represents the counterfactual scenario where the UK ETS is not expanded to include UK domestic maritime. This is not considered a viable option as it would not achieve the policy aim of expanding the scope of the UK ETS to include UK domestic maritime.
• Option A (Preferred policy package): this is the preferred approach which introduces exemptions to protect regional connectivity in Scotland, avoids introducing competitive distortions for the UK fishing sector, and applies sensible treatment to government maritime activity.
• Option B: explores a high-ambition scenario which maximises emissions coverage in UK domestic maritime, assuming no exemptions. This is purely hypothetical scenario designed to test an upper bound of emissions reductions, and is not considered deliverable in a policy context given the importance of maintaining regional connectivity across Scotland.
• Option C: mirrors Option A, but explores emissions impact under no adjustment to the UK ETS cap when expanding to UK domestic maritime. This tests the implications of absorbing domestic maritime within current UK ETS cap, including impact on carbon prices and the marginal abatement cost curve across UK ETS sectors. This scenario aligns with the CCC’s advice^[16].

Overview of UK domestic maritime across UK countries

UK domestic maritime greenhouse gas (GHG) emissions were estimated at 5.8 MtCO2e in 2019, from approximately 8,100 vessels^[17]. The definition of UK domestic maritime includes voyages between two UK ports and voyages that begin and end at the same UK port. For these voyages, emissions from vessels at sea, at anchor or while moored are included. Moreover, emissions from all in-port vessels are also included, covering emissions at berth and emissions from vessels moving within port boundaries. This applies to vessels undertaking domestic, international and mixed voyages. A breakdown of emissions by UK country and operational phase is presented in table 3B^[18]. At-sea emissions are attributed to vessels based on UK country of voyage origin, whereas at berth emissions are attributed based on which UK country the port resides. At-berth emissions were highest at English ports, whereas emissions from vessels at sea were largest in Scotland. Emissions from maritime activity in Scotland accounted for around 40% of total UK-wide maritime emissions, with over two-thirds of this occurring at sea.

When restricting UK ETS scope expansion to vessels at 5000 gross tonnage (GT) or above^[19], domestic emissions in 2019 were estimated at 3.3 MtCO2e from around 4,900 vessels. Emissions attributed to Scottish domestic maritime accounted for around 30% of UK domestic emissions, a lower proportion than emissions from vessels of all sizes. Of these emissions, around 60% originated from vessels at sea.

To consider the implications of reduced scope coverage on emissions coverage, emissions data was sourced from the Department for Transport’s (DfT) Maritime Emissions Model (MEM), with emissions held constant at their 2019 proportion of total UK domestic maritime GHG emissions for all scope reductions apart from the Scottish ferries exemption. For this, it is assumed that emissions are held constant at a level 27% above 2019 to reflect the impact of recent fleet renewal and the introduction of larger vessels into service. Estimates of emissions are presented in table 4C below, taken from table 1B of the UK ETS Authority’s impact assessment^[20].

Consideration of Options

Option A

As outlined above and in the UK ETS Authority impact assessment, Option A explores a scenario where the UK ETS is expanded to include UK domestic maritime vessels of 5000GT, with specific exemptions to provide a balance between practical, socioeconomic and environmental considerations:

• Exempting Government maritime activity - including activities by arms-length bodies and non-government organisations, in addition to activities performed for the exclusive purpose of search and rescue, firefighting and providing humanitarian aid.
• Exempting ferries serving Scotland’s islands and peninsula communities - Section 7 of the Islands Scotland Act 2018 requires that all relevant authorities must have regard to island communities when carrying out functions, including implementation of new policies. As illustrated in the Island Communities Impact Assessment (ICIA)^[22], Scottish Government analysis suggests that under no exemption, if UK ETS costs were passed directly to ferry passengers, ticket prices could increase by between 14 and 42% based on an illustrative central carbon price of £80 per tonne of CO2e^[23]. If the UK ETS carbon price rose to above £120 per tonne of CO2e, it was estimated it would no longer be possible for operators to fully recover ETS costs through fare increases alone for the current fleet. This suggests operators could need to reduce service levels in this scenario to offset the additional costs of UK ETS maritime scope expansion. This analysis demonstrates the importance of including this exemption.
• A 50% surrender deduction for routes between Northern Ireland and Great Britain - this aligns with the EU ETS treatment of Republic of Ireland-GB routes, and is subject to review if the EU ETS coverage changes or if the UK ETS expands to cover international voyages.
• Delayed implementation for offshore ships - aligns with the EU ETS phased approach, with offshore ships due to enter the scheme from January 2027.
• Exempting fish-catching and fish processing ships - this is consistent with the treatment of fishing vessels in the EU ETS, to avoid competitive distortions for the UK fishing sector.
• Exemptions will be reviewed in future as part of a wider review of exemptions in the scheme.

In addition to including these exemptions, Option A also takes a tank-to-wake (TtW) emissions accounting approach. This considers emissions generated by the operation of domestic maritime vessels, but does not include well-to-tank (WtT) emissions. WtT emissions are those generated by the production and distribution of the fuels and other energy sources used by domestic maritime vessels. Moreover, Option A includes an adjustment to the phase 1 UK ETS cap to account for the inclusion of domestic maritime emissions from July 2026.

Option B

This option was developed to explore impact of a do-maximum approach, with no exemptions applied and a broader well-to-wake (WtW) approach to emissions accounting. While Option B explores a scenario without exemptions, it was never considered operationally deliverable given the Scottish Government’s legal responsibility to safeguard island communities. It primarily provides an illustrative do-maximum scenario as a benchmark for comparison with Options A and C. Another core difference is the adoption of the WtW emissions accounting approach, which captures upstream emissions associated with fuel production and distribution in addition to direct emissions generated by the operation of maritime vessels.

Option C

This option mirrors Option A in all areas apart from the approach to adjusting the UK ETS cap. In 2023, the Authority reset the UK ETS cap for 2021-2030 to be consistent with the top of the net zero consistent range at 936 million allowances^[24], 30% lower than the previously legislated cap. The decision to set the cap at the top of the range was to give a balance between consistency with net zero and providing greater flexibility to manage market and carbon leakage risks associated with alternative options. Option C explores a scenario where no cap adjustment is made, resulting in more scarce allowances with a broader number of UK ETS participants. This allows for direct comparison with Option A to illustrate impact of making no cap adjustment, such as the impact on the UK ETS carbon price, allowance supply-demand balance and abatement effort across both domestic maritime and the UK ETS traded sector.

Costs associated with UK domestic maritime Scope Expansion

As in the UK ETS Authority Impact Assessment^[25], the main costs associated with expansion of the UK ETS to UK domestic maritime are administrative, ETS compliance, and abatement costs associated with further decarbonisation effort. Administrative costs include familiarisation, data collection and reporting costs for maritime operators, as well as administrative costs for regulators. There is large uncertainty relating to the degree of additional cost associated maritime scope expansion, as some of the sector already faces existing administrative costs associated with both UK and EU Monitoring, Reporting and Verification (MRV). Consequently ranges often emerge when trying to estimate total additional costs.

However, when considering the central scenario as in chapter 3C of the UK ETS Authority impact assessment, total administrative costs associated with each policy option broken down by origin of operator have been estimated^[26].

While UK-based operators are estimated to face around £7m in administrative costs across all policy options, Scottish-based operators are estimated to make up around 24% of these costs at £1.7m^[27]. ETS compliance costs concern the expected cost to UK domestic maritime from having to purchase ETS allowances for the emissions produced in the sector. Expansion of UK ETS to UK domestic maritime will introduce a legal obligation for UK domestic maritime to pay for all emissions produced, with civil penalties issued to operators who fail to meet their legal duties under the UK ETS^[28].

Table 3F outlines the additional costs UK domestic maritime operators could face under UK ETS scope expansion, when assuming ETS carbon prices in line with the Net Zero Strategy Aligned projection^[29]. As before, given the majority of UK domestic maritime operators are not UK-based, the majority of ETS compliance costs are expected to fall on international operators. Approximately 4% of total costs are expected to fall on UK-based operators, with around 24% of this falling on Scotland-based operators.

Lastly, it is expected that expansion of the UK ETS to UK domestic maritime could incentivise further decarbonisation in the sector compared to the counterfactual of no scope expansion. Additional abatement effort because of the policy change was modelled by integrating DfT’s domestic maritime sector marginal abatement cost curves in DESNZ’s Carbon Markets Model^[30].

As presented in table 3G below, the total cost of additional abatement effort is estimated to be around £22m under preferred policy Option A, rising to around £954m under policy Option C which does not include a UK ETS cap adjustment. The difference between these two scenarios suggest that the average marginal abatement cost in the Maritime sector is significantly above the UK ETS price under Option A, but significantly below the UK ETS price under Option C.

Summary of Costs

Table 3H below summarises all these costs for Scottish operators, comparing across each policy option. If only considering business costs, Option A appears to be the most favourable option with costs totalling around £8.9m for all operators across Scotland. This achieves the goal of expanding the UK ETS to include UK domestic maritime while maintaining a balance between practical, socioeconomic and environmental considerations. While not included in this BRIA given the focus on business impacts, there could also be societal benefits such as air quality benefits and lower UK-wide carbon emissions^[31].

Businesses may face a one-off familiarisation cost due to a change in the regulatory environment. While this is a possibility, these costs are likely to be small when compared to the aforementioned monetised impacts.

Scottish firms’ international competitiveness

The impact of UK ETS scope expansion to the international competitiveness of domestic maritime in Scotland is expected to be low, as the relative cost of UK ETS compliance costs is not expected to be significant relative to costs or earnings of international shipping operations. This is typically due to, in part, the emissions produced at berth in UK ports representing a small proportion of total emissions associated with international journeys. For example, data from the DfT Maritime Emissions Model suggests that of the 165,000 port calls made by vessels over 5,000 GT in 2019, the mean CO2e produced at berth in UK ports was around 12 tonnes^[32]. Moreover, research by Frontier Economics found that UK domestic maritime is unlikely to face substantial changes in traffic levels following the expansion of the UK ETS under current UK ETS prices, and would require significantly higher UK ETS allowances prices to impact the sector due to relatively high cost pass-through and low demand elasticity in the sector^[33].

Benefits to business

While it is not expected that the policy change will result in any monetary benefits to businesses in Scotland, there is evidence to suggest that the policy change is likely to result in benefits such as improved air quality and lower carbon emissions. This would benefit both the Scottish population, as well business owners across Scotland.

Small business impacts

The scope expansion of the UK ETS to domestic maritime is currently only proposes to include vessels over 5,000GT, meaning companies operating smaller vessels will not be affected by the policy. As vessel size is broadly correlated with business size, it is unlikely small businesses will be adversely affected. There is a risk that small businesses may be impacted as customers of larger maritime operators if costs are passed on, however as mentioned above this risk is considered low given the magnitude of compliance costs relative to other business costs or earnings.

Investment

Scope expansion of the UK ETS to domestic maritime is expected to promote innovation in decarbonisation technologies, which could drive investment in energy efficiency technologies. This could occur due to the UK ETS carbon price incentivising greater investment as it is expected the relative cost of fossil-fuel based technologies will get more expensive in the sector with UK ETS scope expansion.

An early evaluation of the UK ETS suggested that the UK ETS helps drive investment in decarbonisation technologies, with 34% of respondents noting that they were planning to “invest in research, development and innovation” while 28% of respondents planned to “invest in R&D for deep decarbonisation technology”^[34].

Workforce and Fair Work

The policy is not anticipated to have any specific impacts on the ability of businesses to meet the Fair Work First principles. The proposed changes apply to the UK domestic maritime sector, with exemptions applied to fish-catching and fish processing ships, and ferries serving Scotland’s islands and peninsula communities. It is expected that these exemptions will help mitigate any adverse impacts. Any indirect effects on the workforce will depend on the commercial decisions made by UK domestic maritime operators. The Scottish Government does not collect information on the commercial choices of businesses or the factors influencing them and therefore cannot predict or confirm how UK domestic maritime operators may respond to scope expansion in the UK ETS.

Climate change/Circular Economy

Both the UK Government and the Scottish Government have legislated ambitious net zero targets. Scotland’s greenhouse gas emissions reduction targets are set out in the Climate Change (Scotland) Act 2009^[35]. Scotland’s net zero target is consistent with the overall UK target and is based on advice from the CCC. The UK ETS aids the Scottish Government’s priority of tackling the climate emergency and is generally seen as the most economically efficient way of driving decarbonisation. The UK ETS operates under a cap-and-trade system, where a fixed number of emissions allowances are issued every year. Over time, the cap is reduced to drive emissions down and increase the carbon price, thereby encouraging investment in decarbonisation technologies. Expansion of the UK ETS to the UK domestic maritime sector is expected to incentivise further decarbonisation across the Scottish economy, driving emissions reductions and further helping achieve net zero targets across the UK.

Competition Assessment

The vessels affected by the scope expansion of the UK ETS to UK domestic maritime include passenger ferries, cruises, freight, container services, and dry and liquid bulk freight services. For some of these services, there could be alternative modes of transport which may make UK domestic maritime relatively less competitive. For example, shipping operators will face increased costs in the form of UK ETS compliance obligations making business operations more expensive. The overall impact on competitiveness will depend on how substitutable UK domestic maritime activities are with alternatives. Research by Frontier Economics found that UK domestic maritime is unlikely to face substantial changes in traffic levels following the expansion of the UK ETS under current UK ETS prices, and would require significantly higher UK ETS allowances prices to impact the sector due to relatively high cost pass-through and low demand elasticity in the sector^[36].

Consumer Duty

The overall impact on consumers is expected to be small, given evidence of the shipping sector suggests that the cost of transporting goods typically make up a small proportion of the final cost. The low level of domestic maritime freight relative to other modes of transport, such as air and road, also suggests a reduced risk of significantly impacting consumer prices across the UK.