Official Report: Minutes of Evidence

The Chairperson (Mr Butler): I welcome from the Department of Agriculture, Environment and Rural Affairs' climate change legislation policy division Richard Coey, the deputy director of the emissions trading scheme (ETS), carbon pricing and the Windsor framework, and Joseph Kelly, deputy principal in the emissions trading scheme branch. Gentlemen, please feel free to brief the Committee. A few more members will come in as you proceed.

Mr Joseph Kelly (Department of Agriculture, Environment and Rural Affairs): Thank you for the opportunity to give the Committee an overview of the Greenhouse Gas Emissions Trading Scheme (Amendment) (Extension to Maritime Activities) Order 2026.

Before getting into the detail, I will say that the Committee will recall that it was recently briefed on minor drafting anomalies that the Delegated Powers and Law Reform Committee (DPLRC) of the Scottish Parliament identified. I can confirm that that Committee has now deemed those anomalies to be inconsequential and voted to approve the statutory instrument (SI) as drafted. No correction to the SI will therefore be required. If members are content, I will not go over the background to and operation of the scheme, as the Committee will be familiar with its workings from previous briefings. As with any update on the ETS, however, it is important to take the opportunity to remind members how important and instrumental it has been in incentivising carbon-intensive industries to reduce their greenhouse gas emissions. There has been a 55% reduction in emissions from in-scope sectors since 2005. If members so wish, we are happy to clarify any aspect of the scheme.

I will now focus on the changes to the scheme that the amending Order in Council will make. Members received a summary of the changes, which was provided in correspondence dated 25 November last year. Hopefully, members will also have noted the written briefing paper that was provided to the Committee in advance of today. The Order will amend the Greenhouse Gas Emissions Trading Scheme Order 2020, and the draft Order was laid under the affirmative resolution procedure in each legislature, including the Northern Ireland Assembly, on 13 January 2026, with an effective date for coming into force, subject to its passing in all legislatures, of 1 July 2026.

The policy intent of the provisions in the draft amending Order was first proposed by the UK Emissions Trading Scheme Authority (UKETSA) more than three years ago, in 2022, during the development of the UK ETS consultation. The response to that consultation was published in July 2023, and, at that point, the authority signalled clearly its intention to expand the scope of the ETS to domestic maritime activities from 2026 in order to provide lead-in time for stakeholders to engage on the detail of what it would look like. Subsequently, the authority issued a further consultation, titled 'UK Emissions Trading Scheme Scope Expansion: Maritime', in November 2024. In January 2025, as part of that consultation, we, alongside officials from the UK Department for Energy Security and Net Zero (DESNZ), hosted an in-person policy briefing and consultation event in Northern Ireland that was attended by a wide range of key local stakeholders.

That consultation was responded to in two stages. First, there was an interim response in July 2025. It was followed by the main response in November 2025. The Committee was advised of the publication of the consultation in correspondence dated 27 November 2024. Subsequent correspondence responses were dated 18 July and 25 November 2025 respectively. The purpose of July's interim response was to allow operators and regulators more time to prepare for the on-boarding requirements for participation in the scheme.

The intention is that including domestic maritime activities in the UK ETS could help overcome a key barrier to decarbonising the sector, which is that the prices of maritime fuels do not currently reflect their environmental cost. The sector's inclusion in the scheme should also help support and strengthen the incentive to adopt low-carbon fuels and support the deployment of fuel-efficient technologies and the introduction of fuel-efficient operating practices.

I will now explain the detail of the provisions that are contained in the draft Order. The statutory instrument extends the scope of the UK ETS to the domestic maritime sector. Domestic journeys are defined in the draft Order as being voyages between one UK port to another, as well as voyages that terminate in the UK port from which they departed. Emissions from voyages between UK ports of call are also within the scope of the draft Order, as are emissions produced at anchor and while moored. Emissions that are produced while in port will be included, comprising emissions produced when at berth in UK ports and emissions produced from movements within UK ports. Emissions within the port from ships that are travelling domestically, internationally or both are included.

Vessels of 5,000 gross tons and above will be included within the scope of the Order. It should be noted that gross tonnage is a measure of a ship's internal volume, not its weight. That tonnage threshold is already used for the existing UK monitoring, reporting and verification regime of CO2 emissions from ships, as it is already required under the Merchant Shipping (Monitoring, Reporting and Verification of Carbon Dioxide Emissions) and the Port State Control (Amendment) Regulations 2017. It is also the threshold for other reporting schemes internationally. The majority of ships over that threshold are already equipped for collecting and reporting emissions data, which has facilitated a smoother transition for operators. No minimum emissions threshold will be set, and all thresholds will be subject to review in 2028.

Small domestic ferries that operate locally, including the Rathlin Island ferry and the Strangford lough ferry, do not fall within the scope of the draft Order as they are well below the tonnage threshold. It is also important to clarify that the draft Order provides for certain exemptions from inclusion within its scope. First, it will fully exempt non-commercial government maritime activity. Examples of such activities include those performed by ships that are involved in law enforcement, by coastguard search and rescue activities and by armed forces ships. An exemption has also been provided for vessels in the fishing sector. The EU provides a similar exemption in its emissions trading system, so the exemption will ensure that Northern Ireland fishing vessels will not be disadvantaged in any way over those that operate out of Irish ports.

The draft Order also provides an exemption for ferries that serve Scottish islands and peninsulas. That exemption has been included owing to the Scottish Government's legal duties under the Islands (Scotland) Act 2018 to consider the impacts on and vulnerability of small island populations and communities and their reliance on those routes for lifeline services such as schools and healthcare. The exemption also considers the risk of further depopulation. The position on all those exemptions will be reviewed in 2028, and the review point will consider the wider impacts of inclusion and the differing capabilities of sectors to decarbonise.

There are other caveats in the draft Order, particularly that the inclusion of offshore vessels in the scheme will commence in January 2027. That position aligns with that for offshore vessels in the EU ETS, thus helping avoid the risk of gaming created by any policy divergence or misalignment. The term "offshore ship" refers to vessels that are involved in offshore production, offshore construction and work on offshore renewables such as wind farms.

Of particular interest to the Committee will be the exemption secured for routes between NI and GB. I can confirm that an interim 50% partial exemption from UK ETS obligations will be introduced specifically for routes between NI and GB. That is down to the fact that the EU emissions trading scheme has included maritime emissions within its scope since 2024. It covers 100% of emissions for voyages between EU ports, in addition to 50% of emissions for voyages starting or ending in the EU. For example, a ferry travelling between Dublin and Liverpool would be required to surrender allowances for only 50% of emissions, whereas if a partial exemption to be introduced by the authority were not in place, a ferry travelling between Belfast and Liverpool would be required to surrender allowances for 100% of its emissions. That represents a significant intervention, as applying a 50% reduction in UK surrender obligations on voyages between NI and GB, rather than requiring 100% surrender, will ensure fairness and parity in carbon pricing across the Irish Sea and avoid the risk of competitive distortion locally.

In addition to several online engagement events, DAERA and DESNZ jointly hosted an in-person event in Belfast for Northern Ireland stakeholders during last year's public consultation period. Some 91% of respondents to the consultation agreed that the routes between Northern Ireland and GB should face carbon-pricing options equivalent to those between the Republic of Ireland and GB. From respondents, including local stakeholders, there was significant support — 71% — for the 50% partial deduction option. On 25 November last year, the Committee was advised of the UK ETS Authority consultation on the future inclusion of international maritime emissions in the UK ETS. That consultation concluded recently, and the responses are under consideration. The future inclusion of such emissions would ensure parity of coverage in the Irish Sea and remove the need for a partial exemption.

Current UK monitoring, reporting and verification requirements will apply in a number of areas of divergence, including emissions at berth and methane and nitrous oxide emissions. The draft Order provides compliance deadlines for emissions reporting, and surrender will be in line with those already in force for existing ETS participants. Given that the Order will come into force part way through the year, from 1 July 2026, maritime participants will not be required to surrender emissions allowances for 2026 or 2027 until 30 April 2028. That should help address concerns that operators may have about having limited time to comply with the scheme. The Committee will be aware that the number of allowances available to participants to purchase through the UK ETS is determined by a cap. Significantly, the draft Order implements an increase to the cap. That is to account for the widening of the scope of the ETS to the maritime sector. It will not place an undue burden on existing scheme participants and will maintain a net zero trajectory.

The Committee will be aware from correspondence that an impact assessment was prepared alongside the main consultation response. Although the impact assessment did not publish specific Northern Ireland figures on consumer impact, the UK ETS Authority undertook an internal analysis during the policy development process to understand the potential impacts on NI. That analysis showed that the impact is expected to be minor. Precise quantification of the impact on consumers is challenging, however, owing to evidence gaps, including limited data on container contents. Transport costs represent only a small proportion of the final cost of goods, so the impact of the UK ETS on the overall cost of producing and transporting goods for business is expected to be minimal. The analysis was based on a full cost pass-through scenario. It will, however, be a commercial decision for operators whether to pass on all or part of those costs.

Alongside the impact assessment, the authority commissioned a report from Frontier Economics to look at the impacts on three NI to GB routes: Belfast to Liverpool, which is mainly passenger and roll-on roll-off cargo; Heysham to Warrenpoint, which is mainly roll-on roll-off cargo; and Belfast to Southampton, which is a route for cruise voyages. The report examined the potential risk of carbon leakage and concluded that there was a low risk across the routes that were analysed. That reflects in part the equivalent coverage and inclusion of such emissions in the EU ETS. The report found that a carbon price significantly higher than that currently envisaged for the UK ETS would be required in order for there to be any material impact on maritime demand. An impact assessment of the EU ETS expansion to domestic maritime concluded that, even under full cost pass-through, prices for commodities such as iron ore and cereals would rise by less than 2% over the approximately 25 years to 2050. Goods such as crude oil, organic chemicals and perishable goods would be largely unaffected.

Similarly, a report that the transport and advocacy group Transport and Environment commissioned concluded that the likely impact of the EU ETS on seaborne transport costs would be negligible. Based on the available evidence, the cost implications that businesses will face from producing and transporting goods is therefore expected to be minimal. Additionally, the 50% exemption that is being applied to routes between Northern Ireland and GB will also help mitigate any carbon-price exposure that consumers in Northern Ireland potentially face.

That concludes our briefing. I thank members for their time and interest in the scheme and the amending Order. We are now happy to take questions.

The Chairperson (Mr Butler): Thank you very much, Joseph. I will start with a short question. Can either of you remove any ambiguity concerning the Windsor framework and the Northern Ireland-specific elements of applying the Order here as opposed to how it will be applied in the rest of the UK and the Republic?

Mr Richard Coey (Department of Agriculture, Environment and Rural Affairs): The draft Order does not implement any Windsor framework obligations. It was made solely under the Greenhouse Gas Emissions Trading Scheme Order 2020, which was made under the UK's Climate Change Act 2008.

The Chairperson (Mr Butler): Excellent. One of the issues that has been raised with us is the lack of shoreside electricity infrastructure. Some have suggested that if we were serious about reducing pollution and greenhouse gas emissions, we would be providing the infrastructure as opposed to taxing, because, in reality, we will have no control over where the money then goes. Are you aware of any plans in Northern Ireland, or across the rest of the UK, to provide a link to shoreside electricity?

Mr Coey: Last November or December, the Belfast Harbour Commissioners held a public consultation event on the expansion of the Belfast harbour estate. One of the planned developments is the provision of shoreside electricity. It has been acknowledged that that will probably not take place until 2030 to 2035 — that sort of window — but there is a plan to provide that infrastructure. We appreciate that the lack of such infrastructure is a problem that is not unique to Northern Ireland, but, yes, doing that would help with decarbonisation, and there are plans afoot. We carried out research to make sure that there were plans in place to have alternative fuel sources.

The Chairperson (Mr Butler): I have one more question. We have already been contacted by some stakeholders. They have suggested that freight prices could increase by a further 6%, which they would ultimately have to pass on to their customers, who are our constituents. You have done your calculations, which said that there will be a low impact. Is that what constitutes a low impact? Do you contend that it could be 6%?

Mr Coey: We do not recognise the 6% figure. We have figures on the impact from the UK ETS Authority that suggest that journey price increases are likely to be in the region of £2 a passenger. That amounts to roughly a 5% increase on the current cheapest ticket price, which is £35. I have another couple of figures from the Department for Transport. There will be something like 6p a ton put on agricultural feedstocks and less than a penny a litre put on fuel. Those are the sorts of figures that we got through doing our impact assessment work. I have not had sight of the correspondence from —.

The Chairperson (Mr Butler): Do those figures include the 50% exemption, or are they based on the 100% figure?

Mr Coey: They are likely based on the 100% figure. They do not take into account the 50% exemption.

The Chairperson (Mr Butler): The 50% exemption is applicable in the first year.

Mr Coey: It is applicable until such a time as it is reviewed. It will be reviewed in 2028. As Joe said in his presentation, the authority recently concluded a consultation on the future inclusion of international maritime emissions. If that is implemented, it will do away with the need for the 50% exemption to ensure parity of carbon pricing between NI and GB and between the Republic of Ireland and GB. The 50% exemption will be in place until there is a formal review done, however. The legislation would then need to be amended to remove the 50% exemption.

The Chairperson (Mr Butler): Thank you very much.

Mr McAleer: You mentioned the lack of shoreside electricity infrastructure. I am concerned that that could place our businesses at a competitive disadvantage to businesses across the water. Britain is a huge market — it is the biggest market for us — but we have a greater reliance on ferries.

Stena Line has contacted us, but, just this morning, I got an email from a firm that stated:

and, ultimately, to the consumer.

The Department recognises that the North is more exposed and that there are evidential gaps. I fear that our businesses could be put at a competitive disadvantage.

The point was also made that the 50% partial exemption, although it is good, does not mean as much, because our businesses are competing with businesses across the water that do not rely on ferries. It therefore does not mean that much when they consider their main competition.

Mr Coey: There is no question that Northern Ireland is different from the rest of the UK, in that we rely more heavily on freight transport. I refer you to the figures that I gave the Chair about the potential cost increases, albeit they are estimates. They are expected to be minimal, based on the information that we have. I therefore cannot say that there will not be cost impacts, but they are expected to be minimal.

Mr McAleer: In the briefing note that we received, the Department recognises that the North will be more exposed. It states:

There is therefore a gap in the Department's evidence. You recognise that the North will be more exposed, and businesses are coming to us saying that they will be at a competitive disadvantage to competitors across the water and when it comes to supply chains back and forth.

Mr Coey: We appreciate the evidence gaps, which is why we looked at the impact assessment work that was carried out on the EU ETS when it was expanded to include maritime activity to see whether we could get some relatable, comparable data from it. That data suggested that the cost impacts would be minimal.

I appreciate that the inclusion of maritime activity in the EU ETS is fairly new. At this stage, it is a proposal that we are working on. It is the best available data that we have on which to make our policy decisions. As I said, however, the cost impacts are expected to be minimal.

Ms Finnegan: Declan spoke about the evidence gaps, and you referenced the EU model. Given those evidence gaps, would the responsible approach to take not be to have a 12-month delay in order to allow for a proper impact assessment to be done and for there to be sectoral engagement and then implement the Order using a phased approach over three years, in line with the EU ETS?

Mr Coey: The proposal to include domestic maritime activity in the EU ETS was first mooted in a consultation in 2022, so the sector had a lot of notice about what was potentially coming down the tracks. The response to that consultation, which was published in 2023, signalled the intention to implement its inclusion by 2026.

I recognise that the EU introduced it in 2024 using a phased approach. It is planning full implementation by 2027. There is no phased approach proposed in our system, but the obligations to comply with the financial requirements will not kick in until 2028. Even though vessels have to start monitoring and recording their emissions from 2026, they will not have to surrender any allowances for those emissions until 2028. They will therefore have some time to get used to the system.

Vessels over 5,000 gross tons are required to meet monitoring, reporting and verification requirements under separate legislation at the minute, so, hopefully, those requirements will not be new to them. Only the financial impacts will be different. They will not have to purchase and surrender allowances until 2028. Furthermore, in 2028, as part of a wider review, there will be a review of how the maritime aspect of the UK ETS is operating. The inclusion of maritime emissions — not just the thresholds and exemptions at the minute but how the scheme currently operates — will therefore be reviewed in 2028.

Ms Finnegan: Am I right in saying that the review will be in 2028 but that implementation will already have happened?

Mr Coey: Yes. Subject to its passing, implementation of the legislation will be from 1 July 2026.

Ms Finnegan: OK. The Department has referenced derogations for the Scottish isles. Why are those routes considered eligible for exemption? Have similar geographic or economic considerations been assessed for the North? If not, why has the North not been assessed in the same way?

Mr Coey: It is primarily because the Scottish Government are obliged under the Islands (Scotland) Act 2018 to consider the impacts on those remote communities. Ferries there are considered lifeline services, because communities rely on them for access to things such as healthcare and education. In Northern Ireland, we do not have the same routine reliance on GB for access to healthcare and education. We are talking about communities in Scotland where people may need to get a ferry to go to school or to get to a hospital or doctor's appointment. That is why they are classed as lifeline services. The ferries that cross the Irish Sea do not fall into that category.

Ms Finnegan: I could ask about five more questions, but it is OK. That is all right for now. Thank you very much.

Mr Blair: I have a quick question. Are you saying that payment will not commence for companies until 2028?

Mr Coey: Sorry. I appreciate that what I said may have been confusing. Companies will not have to surrender their allowances until 2028, but they will have to pay for their emissions from 1 July 2026.

Mr Blair: OK.

Mr Coey: Thanks for allowing me to clarify that.

Miss McIlveen: I am curious about this, so perhaps you will explain it to me. My understanding is that the real purpose of the change is to create alignment with the EU, but you are saying that all emissions thresholds will be reviewed in 2028. I understand, however, that the EU is currently reviewing them, because member states are concerned about the impact that they will have on the maritime sector. I am therefore not sure how the timeline works to Northern Ireland's benefit.

Mr Coey: OK. Yes, the EU is carrying out a fairly wide-ranging review of its emissions trading scheme this year, not just of the maritime element but of the scheme's overall operation. Members may be aware that the UK and the EU are in reset negotiations about potentially linking the schemes, so those negotiations may have an impact on any future policy direction. It may therefore need to be considered sooner than 2028, depending on how the linking negotiations go.

I have to acknowledge that there is a bit of uncertainty for the EU, depending on the outcome of the review, and for the UK and the EU, depending on how the current negotiations progress. In the meantime, the UK, separate from the EU and not taking into account what it was doing, made the decision in 2023, following the 2022 consultation, to implement a UK ETS for maritime emissions. That decision was not influenced by the EU's position. Rather, it was in response to the consultation that was carried out in 2022 for the UK ETS only.

Miss McIlveen: Declan articulated my concerns. Some of the correspondence that we have received, particularly from the UK Chamber of Shipping, has said that the policy risks functioning as a tax on activity rather than as a meaningful driver of emissions reductions. Ultimately, the worry is that that tax then impacts on consumers in Northern Ireland.

Mr Coey: Yes. It is probably fair to say that there is a high likelihood that whatever carbon costs the existing sectors in the UK ETS and EU ETS incur are being passed on to consumers as well.

I mentioned what we consider to be the potential for low impact, by which I mean low increases in charges.

I can understand why there may be some concern, because, without those alternatives to decarbonisation —. The intent of the policy is to make it more cost-effective for businesses to decarbonise. I can see how, if those options are limited at the minute, it might be considered a tax. The industry is making moves towards decarbonising in any case. I have already mentioned the Belfast Harbour Commissioners and the plans to implement shore power. There are a couple of vessels operating in the Irish Sea at the minute that are capable of running on alternative fuels such as biomethanol, are shore-power ready and have already gone down the route of investing in and implementing lower-carbon technologies. The emissions trading scheme and the knowledge that such policies are coming will, hopefully, incentivise businesses to make that forward investment. Options may be limited at the minute, but there are plans afoot to provide access to alternative fuels, and the industry appears to be changing and adapting in advance of any policy changes.

Miss McIlveen: Thank you. It will be important to hear from those who have written to us, given the number of things that have raised their head even during this conversation.

The Chairperson (Mr Butler): I am interested in the incentive piece that Michelle has opened up. The gross tonnage is 5,000, but there are smaller vessels available. Is there an incentive, then, for someone to use a smaller vessel to duck below that? Would the fiscal scale not be sufficient —?

Mr Coey: I suppose that you could say that of any scheme or regulatory regime.

The Chairperson (Mr Butler): It happened in the renewable heat incentive (RHI) scheme, with boilers below 99 kW. Do you know what I mean? People did not go for one bigger than 99 kW.

Mr Coey: In the wider ETS, the threshold for inclusion is 20 MW thermal input, so you may have facilities that have 19 just to stay below the threshold. There always is that potential. I am sure that it would be a significant investment for the industry to start making such ships. I cannot tell you now what a 5,000 gross tonnage vessel looks like.

The Chairperson (Mr Butler): It is quite big. There are dry cargo vessels of just —. I used "Mr Research" on my computer to find it. It is interesting. Thank you very much.

Mr Blair: I have a very quick one. I am mindful that some of the major operators have turnovers of tens of billions of pounds, although profitability may be influenced by market trends, Europe-wide or globally. We are and may be dealing with those making representations whose turnover is, as I said, tens of billions of pounds, and we need to be mindful of that. We are also talking about some smaller local operators and companies that depend on those services and on island services, which were mentioned, although there have been some allowances made for that. As far as I know, some of the companies that I mentioned may benefit from a £19 million fund that has been identified by the UK Government to try to look at decarbonisation in shipping, and I think that that includes the prospect of carbon-free shipping from Larne to GB. Is the Department involved in the analysis of that? Has it been consulted on that or directly included in any conversations about that?

Mr Coey: My team has not been involved in that, but we can certainly make enquiries to see whether the wider Northern Ireland Civil Service (NICS) — the Department for the Economy or the Department for Infrastructure — has had any involvement.

Mr Blair: There is a fund of £19 million, as far as I know.

Mr Coey: That is right. It is under the UK Shipping Office for Reducing Emissions.

Mr Blair: I do not imagine that you have any control over it, but if you get information from it that might be useful on days such as this —.

Mr Coey: Yes. OK.

Mr T Buchanan: In your response to Declan and Michelle, you said that the cost impact on businesses would be minimal. What does that mean in financial or percentage terms? That is a broad brush. You can say that the cost impact has been minimal, but, when you drill into it, what does that mean in real terms?

Mr Coey: I will use a couple of examples from analysis that was carried out by the UK Department for Transport. It suggested 6p per ton on top of the cost of transporting agricultural feed stock; less than a penny per litre of fuel; and something like £2 per passenger, on the basis of a ticket costing £35, which is about a 5% increase in passenger fares. Those are the sorts of estimates that we have at the moment.

Mr Kelly: There is some analysis of the EU scheme, which suggests an increase of 10 cents on the price of a TV, 80 cents on the price of a fridge and a maximum of 0·8 of a cent on the price of a pair of shoes. That is analysis of the early stage of the EU scheme.

The Chairperson (Mr Butler): Thank you for that, and thank you, members, for your questions. That will do us with you guys today.