I am pleased to provide evidence supporting the draft Greenhouse Gas Emissions Trading Scheme (Amendment) (Extension to Maritime Activities) Order 2026. The ETS authority, formed and jointly run by the four nations of the UK, is extending the scope of the scheme to include emissions from domestic maritime activities. That builds on the existing coverage of aviation, power generation and energy-intensive industries within the UK ETS. It incentivises cost-effective maritime decarbonisation and encourages efforts across our society and communities towards net zero goals.

The expansion is focused on emissions related to domestic voyages between UK ports as well as emissions at berth in UK ports, and it will apply to ships of 5,000 gross tonnage or more. In response to extensive stakeholder feedback, there will be exemptions for specific activities, such as search and rescue activities and humanitarian aid, and specific types of ship, including publicly funded research vessels.

Importantly for Scottish interests and for our support for islands and peninsular communities, ferry services in Scotland are also exempt from the scheme, as they maintain essential connectivity to those areas, and fish catching and processing vessels are also exempted. The instrument that is under consideration provides technical detail on the practical aspects of bringing the domestic maritime sector into the UK ETS, including on the regulation of operators, the monitoring and analysis methodology, and annual reporting on maritime emissions.

As in other sectors that are included in the scheme, owners of in-scope vessels or, on their behalf, those to whom the responsibility is delegated will purchase allowances for each tonne of carbon dioxide emitted and surrender them at the end of each scheme year. For maritime emissions, there will be a surrender reduction for voyages between Great Britain and Northern Ireland, in order to avoid a carbon pricing imbalance.

As the expansion to domestic maritime emissions will occur in July this year, arrangements will also be in place to allow double surrender of allowances for both the shorter 2026 and full 2027 scheme years by April 2028.

The instrument adjusts the ETS cap to account for the maritime sector. The scheme will extend to vessels that provide support or services for offshore structures from January 2027. Including those ships at a later date is an alignment approach that is taken in the EU ETS that avoids market distortions ahead of their equivalent inclusion in the EU scheme.

The ETS authority has consulted extensively on the inclusion of domestic maritime in the UK ETS, in order to ensure that it is incentivising emissions reduction in a way that is fair and that accounts for industry best practice. In doing so, it has engaged with businesses across the UK and has held specific workshops with our island communities.

The instrument represents an important step in the on-going development of the UK ETS, recognises the importance of maritime operations to our economy and net zero journey, and lays the groundwork for future expansion to international voyages, which was the subject of a recent authority-wide consultation.

The business and regulatory impact assessment for the instrument was laid on 30 January, after extensive engagement with Scottish businesses.

That is not my area of expertise, but the negotiations considered the different types of biofuels that might be available. It is ultimately for the shipping companies and the international operators to decide how they want to decarbonise and to consider the fuel options that are available to them. They could decide that some vessels are not able to decarbonise to a certain extent and that they will pay the fees and additional costs that are associated with not decarbonising. As an example of such decarbonisation, when cruise ships berth in UK ports, I hope that they will be able to take on an electric fuel supply to reduce the use of diesel.

I will need to look into that, but, if those vessels want to decarbonise and stop using diesel, the most readily available option for them would be to use biofuels.

I do not have an estimate of the particular emissions reduction that will be associated with the instrument. If there is any information on that, it will likely be a UK-wide estimate. However, we can write to the committee. If we have the information, I will get a letter back to the committee on all these detailed questions about specific issues, but I have information only about the instrument with me today.

It is not really in my gift to say what the UK Government will do. Obviously, the ETS and the CBAM are UK Government measures, although the four nations are kept in the loop by the UK Government on the direction of travel.[ has corrected this contribution. See end of report.]

The ETS is not new. The UK ETS was a replacement for the EU ETS as a result of Brexit—it was brought in by the previous UK Government to replace that mechanism. That was because it was understood that, if we did not have a replacement, that would leave businesses vulnerable. There has been a long period since the end of the previous session of Parliament, when I was sat in the chair that you are in now. At that time, five years ago, we were looking at the implementation of a UK ETS to replace the EU one, because we were exiting the EU. That is a great deal of notice. I guess that the uncertainty at that point, five years ago, would have been about whether the UK ETS was going to work but, of course, it has been working for the past five years.

Yes. The instrument addresses issues that have been brought to the attention of all four Governments. One thing that the instrument does is to mitigate the impact of the two years in which Covid inactivity was highest—the instrument adjusts that so that businesses do not have to take it into account. It also updates the benchmarks that are used for free allocation to reflect emissions efficiency improvements. That involves looking at emissions efficiency for each applicant. The instrument will also enable the reduction of free allocation annually in the period from 2027 to 2030 for some installations that will be covered by the CBAM. It is, in effect, a phased approach for which businesses can plan.

I will give you the exact phrasing. The issue relates to the term “relevant period”; “scheme year”, which is meant to replace the word “period”, has been inserted, so the extraction of the word “period” is required.

Yes, thank you, convener. I think that it would be helpful for me to make a short statement to take us through the instrument.

I am pleased to provide evidence supporting the draft Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2026. The UK emissions trading scheme authority, which is formed by the four nations of the UK, is implementing changes to strengthen the climate ambition of the ETS while protecting our businesses and industries. These technical changes focus on the methodology for distributing free allocation of UK ETS allowances. This is the UK’s primary policy instrument to address carbon leakage—that is, when emissions move to another jurisdiction with lower carbon prices.

As the committee will be aware, ETS participants must purchase an allowance for each tonne of COthat is emitted. However, some allowances are given free to sectors that are deemed at risk of carbon leakage. The ETS authority has consulted extensively on the free allocation policy to ensure that, crucially, it is working to incentivise emissions reduction and protect energy-intensive trade-exposed industries from the risk of carbon leakage.

The authority published a consultation response in November last year outlining changes for the next free allocation period from 2027, and the instrument will implement the commitments that are included in that response. I will go through each of them.

First, operators can choose whether to exclude activity data for 2020, or 2020 and 2021, from historical activity level calculations to account for Covid-19 impacts. The concerns of stakeholders about the impact of Covid-19 have been heard. Consequently, the instrument will ensure that operators’ historical activity level is representative so that operators do not lose out on free allowances due to the impact of Covid on production in many sectors.

Secondly, the instrument will update the benchmarks that are used to calculate free allocations: it will retain current benchmarks for 2027, with the intention of adopting European Union benchmark values from 2028. This will ensure that recent emissions efficiency improvements are reflected in free allocations, while aligning with the EU—which is the Scottish Government’s position, and called for by stakeholders—to support linking negotiations.

Thirdly, to ensure that all carbon leakage mitigation measures work cohesively, including ETS free allowances and the UK carbon border adjustment mechanism, the instrument will gradually reduce free allocation for sectors that are covered by the UK CBAM—the aluminium, cement, fertiliser, hydrogen, and iron and steel sectors—to ensure a smooth transition for those sectors.

Finally, a clarification to current legislation makes clear to operators of installations that cease to be free allocation installations as a result of either permanent cessation, as is currently provided for, or the surrender or revocation of the operator’s permit, that, even if they cease operations before the end of the relevant scheme year, they are required to report final year activity levels. This requirement will ensure that free allocations align with actual emissions and prevent overallocations.

These technical changes will ensure fairness and accuracy in free allocation distribution, while continuing to support those sectors.

I have to let the committee know that I am aware that the Welsh Senedd’s Legislation, Justice and Constitution Committee has identified a minor error with the instrument. The issue does not impact the operability of the instrument. One word—“period”—should have been erased as it is being replaced by another term.

The authority is working to determine the best option for amending the instrument, seeking resolution at the earliest opportunity, and the Scottish Government is working with other members in the authority to ensure that we improve the ETS SI drafting and legislative process in future. However, as I said, the issue does not have any material impact on the operation of the instrument.

I am happy to answer any questions that the committee might have.

I will need to write to you once we have bottomed out the method by which we will take this forward. We are still looking at the potential methods. Whether we use a correction slip or something else, we will write to let the committee know.

I do not see that the instrument would have any effect on the cost of fertiliser. It is difficult for me to predict what will happen in the markets, but, as a result of this instrument, the free allocation to businesses that manufacture in high-emitting areas in the UK will continue to be protected. Obviously, quite a lot of fertiliser is imported. In fact, I think that the vast majority of fertiliser is imported. Whatever happens in other countries will be the thing that drives any price increases. Of course, as a result of the CBAM, there is a fairness associated with any imports that come from countries that do not have an ETS. A fertilising company that was set up in the UK would not be put at a disadvantage because another country from which we were importing fertiliser had the advantage of not having to be involved in an ETS.