The European Commission’s July 2026 proposals to reform the EU Emissions Trading System (EU ETS), alongside the expansion of the UK Emissions Trading Scheme (UK ETS), could significantly affect shipping companies and their legal advisers. Particular questions arise for the offshore sector over the allocation of carbon costs, compliance responsibilities and contractual liabilities.
The EU proposals are driven by the need to deliver the EU’s legally binding climate target of a 90% reduction in net greenhouse gas (GHG) emissions by 2040, as well as tidying up elements of the existing scheme. The present review of the EU ETS forms part of a broad package of measures to deliver the post-2030 framework and assesses how the EU ETS can achieve the emission reductions required to contribute to this target in the most cost-effective way. Particular attention is given to hard-to-abate sectors such as maritime and aviation.
The European Commission’s EU ETS Directive revision proposal COM(2026) 616 and companion proposal amending the Maritime EU MRV and FuelEU Maritime Regulation COM(2026) 620 must pass through the Council of the European Union and European Parliament. Numerous iterations are expected before the proposals become law, and it will be interesting to see whether the divisions that have emerged between Member States in negotiations for the IMO’s Net Zero Framework are repeated or spread further than Greece and Cyprus.
There are ten key aspects to the Commission’s initial maritime proposals worth highlighting. The Commission proposes to:
- Create a dedicated maritime funding mechanism, SMAP (Sustainable Maritime Alternative Propulsion), worth approximately €15bn for maritime decarbonisation;
- Extend the scope of EU ETS to specified ships (e.g. general cargo and offshore vessels) between 400 and 5,000 GT from 2031;
- Replace the ‘offshore ship’ category with an activity-based test, widening exposure for previously unaffected offshore vessels, particularly in the wind sector;
- Tighten the anti-evasion rules for container transhipment;
- Introduce relief for genuine non-EU-to-non-EU transhipment through EU ports;
- Merge ETS/MRV and FuelEU reporting architecture into a single unified compliance system;
- Extend existing geographical and operational derogations;
- Address overlap with any future IMO Net Zero Framework;
- Support developing states affected by maritime carbon pricing; and
- Tighten the overall ETS cap and revise the Market Stability Reserve.
The focus of this article is specifically on the proposed SMAP, the expanding scope of EU ETS and the proposed amalgamation of three reporting regimes into one.
Proposal for a dedicated maritime funding mechanism: SMAP
Previous proposed amendments to the ETS Directive considered establishing an Ocean Fund dedicated to supporting the transition to energy efficiency and climate resilience in the EU maritime sector. Under the originally proposed Ocean Fund, 75% of revenues from allowances under the EU ETS and the FuelEU Maritime initiative would have been dedicated to maritime decarbonisation. However, the Ocean Fund never saw light of day.
The newly proposed SMAP mechanism would reserve up to 110 million EU allowances, estimated by the Commission at approximately €15bn, for maritime decarbonisation. It would operate from 2028 – or the first year after the amendments enter into force – until 2040. The formal beneficiary would be the EU ETS ‘shipping company’, applying annually. This is normally the registered owner, unless responsibility has validly been transferred to the ISM company.
SMAP would support:
- Qualifying biogas and advanced biofuels;
- Renewable fuels of non-biological origin, such as e-methanol, e-ammonia and e-methane;
- Qualifying low-carbon hydrogen and low-carbon fuels;
- Electric propulsion;
- Wind-assisted propulsion; and
- Technologies enabling vessels to use the supported fuels.
Different support rates would be applied depending on the type of low-carbon fuel, with possible uplifts for fuels made from feedstocks sourced in the EU or for zero-emission propulsion technology fitted in EU shipyards.
Potential challenges: Owners cannot yet bank the full headline subsidy in investment models and decisions. Further detail is awaited around subsidy eligibility, reference fuel prices, evidence requirements, overcompensation rules and the extent of annual availability. The proposed eligibility criteria and allocation of funding between technologies are likely to be heavily debated as the proposals move through the legislative process, potentially delaying or limiting SMAP’s ambitions. Even if SMAP survives the final text in one form or another, disputes around whether SMAP value belongs to the owner, the charterer funding the fuel, the technical manager operating the equipment or another party are inevitable.
Potential opportunities: If properly structured, SMAP could materially improve the economics and bankability of dual-fuel ships, wind-assist retrofits, batteries and early offtake arrangements for e-fuels. However, this would only work if sufficient funds are earmarked for maritime. Given the recent history of the Ocean Fund, we think the current proposals should be treated with healthy scepticism.
Extend EU ETS to specified ships between 400 and 5,000 GT
The proposal would extend the carbon-pricing perimeter in stages:
- General cargo and offshore ships between 400 and 5,000 GT, already within MRV from 2025, would enter the ETS from 2031;
- Oil tankers, chemical tankers, gas carriers and LNG carriers between 400 and 5,000 GT would enter MRV from 2029 and the ETS from 2031;
- RoPax and passenger ships between 400 and 5,000 GT would enter MRV from 2029, but the Commission material does not show them entering ETS automatically in 2031 under this proposal; and
- The ETS cap would be increased to reflect the additional emissions, with the resulting allowance value attributed to SMAP.
The proposed inclusion of offshore vessels between 400 and 5,000 GT in EU ETS from 2031 would apply four years after the UK regime pursuant to the UK Emissions Trading Scheme (UK ETS), which has been in force since 1 July 2026 and includes offshore ships from 1 January 2027. The UK scheme applies strictly to offshore vessels of 5,000 GT and above. This threshold is scheduled for a formal review in 2028 to determine if it should be lowered, which may well bring it in line with the future expanded scope of EU ETS.
Scope definitions under UK ETS include offshore supply ships, offshore support vessels, offshore construction vessels and offshore accommodation vessels. Operators must account for emissions from combustion and slippage of carbon dioxide (CO₂), methane (CH₄) and nitrous oxide (N₂O), calculated on a tank-to-wake basis covering 100% of emissions from voyages that start and end at the same UK port, or travel between two UK ports.
Potential challenges: Coastal, feeder, tanker and specialised-vessel businesses currently outside ETS will acquire carbon costs, registry exposure, verification obligations and new contractual disputes over who pays. Uncertainties also remain around potentially overlapping emissions liabilities for offshore vessels operating between UK and EU waters. Careful planning and route analysis are recommended.
Potential opportunities: Efficient smaller vessels and operators that prepare early could gain a cost and chartering advantage over less efficient competitors.
Replace the ‘offshore ship’ category with an activity-based test
Instead of relying principally on whether a vessel belongs to a prescribed category of ‘offshore ship’, the proposal would cover any vessel performing or supporting an offshore operation at an EU offshore worksite. Offshore operations would include activities connected with exploration, appraisal or exploitation of seabed and subsoil resources, and offshore installations or infrastructure. The definition would exclude the ordinary maritime transportation of oil and gas.
An offshore worksite could be in a Member State’s territorial sea, EEZ, continental shelf or another area covered by a Member State offshore authorisation. In-scope emissions would include:
- Voyages between EU ports and EU offshore worksites;
- Voyages between EU offshore worksites;
- Emissions at or within an EU offshore worksite; and
- Potentially certain voyages between a non-EU port or worksite and an EU worksite where undertaken for the offshore activity.
The revised ‘port of call’ rules for offshore activity are proposed to apply from 1 January 2032.
Potential challenges: Service-operation vessels, construction vessels, cable layers and other support vessels may be caught because of what they do, even if their formal ship type previously appeared outside scope. Further guidance on this will be essential and is already being discussed between ECSA and DG CLIMA.
There is also the potential for overlapping emissions liabilities. Offshore wind farms in the North Sea often sit in EEZs that border both UK and EU waters. A vessel departing from an EU port to service an offshore wind farm (OSWF) near the UK maritime border (or vice versa) may encounter uncertainty over how its emissions are treated under the respective regimes.
Under the EU ETS and the expanding UK ETS for maritime, the treatment of voyages involving offshore installations will depend on the relevant scope and ‘port of call’ rules. Differences in how UK and EU regulators categorise particular journeys could create overlapping compliance obligations, although whether any specific voyage would require the surrender of allowances under both schemes would need to be assessed against the applicable rules.
In the absence of a formal linking agreement, such as the one in place between the Swiss and EU ETS, there is currently no automated regulatory mechanism to recognise carbon allowances paid to one system to offset or negate liability in the other.
Charterparties should therefore contain clear provisions specifying which party, owner or charterer, bears the cost if a voyage triggers overlapping UK and EU carbon liabilities. Where feasible, keeping vessel transits strictly within domestic waters, for example from a UK port to a UK OSWF, may help limit exposure to the neighbouring ETS, depending on the applicable scope rules.
Potential opportunities: The change should reduce artificial distinctions between vessel categories and reward efficient offshore-support fleets, particularly those serving offshore wind, provided DG CLIMA clarifies when a voyage is ‘in scope’ or ‘not in scope’.
Amalgamation of ETS/MRV and FuelEU reporting architecture
A more unified reporting and compliance system is proposed pursuant to draft Regulation COM(2026) 620, which proposes the following simplifications:
- A single monitoring plan per vessel;
- A single ship-level report covering both ETS/MRV emissions and FuelEU energy-use information;
- Reporting of well-to-tank and tank-to-wake emissions through the same system, although as separate components;
- Aligned accreditation and verification arrangements;
- Closer alignment of Member State enforcement; and
- The same responsible entity for the Maritime MRV Regulation, FuelEU Maritime and EU ETS.
Potential challenges: Reducing the significant administrative burden that the maritime industry has faced in preparing to comply with ETS and FuelEU is welcome. However, one unintended side effect may be to disrupt existing arrangements under which different group entities, managers or technical teams administer ETS and FuelEU. A single error could affect several regimes simultaneously.
Furthermore, the amalgamation places a greater compliance burden on the manager/ISM company. By accepting delegated ETS responsibility, the ISM assumes direct regulatory, registry, MRV and surrender exposure. A single responsible entity across ETS, MRV and FuelEU increases the consequences of incomplete delegation documentation or poor group governance.
Managers may have to collect new fuel-origin, lifecycle-emissions, container-destination and offshore-activity data. Management agreements will need to be amended to adequately capture EUA funding, security, indemnities, sanctions, termination and, if there is to be a change of manager, access to records.
Potential opportunities: A more coherent verified dataset should reduce administrative costs and make fleet-level compliance planning easier if managed in a coordinated and collaborative manner. Integrated MRV/ETS/FuelEU compliance will inevitably become a premium management service since managers will be in a better position to develop centralised fuel, EUA and verification systems across fleets. Moreover, managers controlling the verified data and compliance processes will be central to successful SMAP applications.
Interaction with the IMO Net Zero Framework
Whilst the industry welcomes the proposed amalgamation of the distinct maritime environmental regimes into one, it remains unclear how the EU regimes may interact with the IMO Net Zero Framework.
The IMO’s Net Zero Framework remains under active negotiation heading towards a resumed extraordinary session in December 2026, as member states continue to debate pricing mechanisms and targets. IMO member states discussed adjusting the framework’s greenhouse gas fuel intensity (GFI) trajectory during negotiations in London from 1 to 4 September, with a softer target and penalty trajectory being discussed.
Under the original IMO proposal, the framework set a base GFI reduction target of 8% and a more stringent ‘direct compliance’ target of 21% to be achieved by 2030. Ships failing to meet the targets would face complex two-tier compliance costs, whilst those outperforming the stricter threshold could generate surplus compliance units.
It remains unclear whether the IMO Net Zero proposals will proceed in a more diluted form and how any future global carbon-pricing mechanism would interact with the EU ETS and UK ETS, including whether the respective regimes would operate alongside one another or require further regulatory adjustments.
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