The European Commission has proposed to extend the scope of the EU Emissions Trading System – commonly referred to as the EU ETS – to also cover greenhouse gas emissions from maritime transport. What are the practical implications for shipping companies?
Proposal for a 'revised EU ETS' as part of the EU's 'Fit for 55' package
The EU is moving ahead with its plans to include the shipping sector in the EU ETS. On 14 July 2021, the European Commission presented a proposal for a 'revised EU ETS' as part of its 'Fit for 55' package. The package comprises a set of legislative proposals to align and update EU laws and policies with the EU's increased climate ambition to become climate neutral by 2050 and its intermediate target to cut greenhouse gas emissions by at least 55% by 2030, hence the name 'Fit for 55'.
What is the EU ETS?
The EU ETS was the world's first international emissions trading system and builds on the 'cap and trade' principle. A cap is set on the total amount of certain greenhouse gases that can be emitted each year by entities covered by the system. Within the cap, entities buy or receive emissions allowances. Each allowance gives the holder the right to emit one tonne of CO2 (or its greenhouse gas equivalent). The allowances are allocated and traded between the entities in what constitutes a carbon market. The cap is further reduced over time, which results in a reduction of total emissions.
In its current form, the EU ETS covers around 41% of the EU's greenhouse gas emissions, targeting emissions from power stations and industrial plants located within the European Economic Area (EEA), in addition to flights operated between EEA airports. Although the EU ETS has been criticised for several failings, including over-allocation of allowances, lower carbon price than envisaged and for not succeeding in triggering the required shift away from the use of fossil fuels, it has successfully contributed to bring down emissions from power generation and energy-intensive industries by 42.8% since its 2005 launch.
Proposal to include the shipping industry to the EU ETS
In order to bring the EU ETS legislation in line with the EU's increased climate ambitions, one of the proposals is to extend the EU ETS to cover maritime transport emissions from 2023. The extension will apply to ships above 5,000 gross tonnes regardless of the flag they fly, and apply in respect of 100% of emissions from ships calling at an EU port for voyages within the EU (intra-EU voyages), 50% of the emissions from voyages starting or ending outside of an EU member state (extra-EU voyages) and 100% of the emissions that occur when ships are at berth in EU ports. If adopted, the amendments are expected to be included into the EEA agreement and as such, also apply in respect of voyages between, to, from or within EEA ports.
In order to ensure a smooth transition, the inclusion of the shipping sector in the EU ETS will take place gradually from 2023 to 2025. During this phase-in-period, shipping companies will only have to surrender allowances for a portion of their verified emissions, which will gradually be increased up to 100% from 2026. Under the European Commission's proposal, shipping companies will have to surrender emissions allowances according to the following requirements from 2023:
- 20% of verified emissions reported for 2023
- 45% of verified emissions reported for 2024
- 70% of verified emissions reported for 2025
- 100% of verified emissions reported for 2026 and the following years.
It is expected that around 90 million tons of CO2 would be added to the EU ETS by including maritime transport emissions to the existing EU ETS, which will cover around two thirds of European maritime transport emissions. The European Commission explains that the extension of the EU ETS to include the maritime sector will result in a price signal that incentivises improvements in energy efficiency and low-carbon solutions, in addition to reduce the price difference between alternative fuels and traditional maritime fuels.
Practical implications for shipping companies – who will be the party responsible and how to comply with the requirements?
In practice, shipping companies will have to buy and surrender emission allowances for each tonne of reported CO2 emissions.
The responsibility for compliance is proposed to rest with the 'shipping company', defined as the shipowner or any other organisation or person, such as the manager or the bareboat charterer, that has assumed the responsibility for the operation of the ship from the shipowner and that, on assuming such responsibility, has agreed to take over all the duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention ('ISM Code'). The responsible party and scope of application is the same as under the existing EU Monitoring, Reporting and Verification Regulation for shipping ('EU MRV Regulation').
For the administration of the system, each shipping company will be subject to an administering authority of an EU member state that will ensure compliance using the same rules and requirements as for other sectors, e.g. with regard to auctions, the transfer, surrender and cancellation of allowances, penalties and registries.
The administrative authority will be determined based on where the shipping company is registered. If the shipping company is not registered in an EU member state, it will be attributed to the EU member state where it had the greatest number of port calls in the two previous monitoring years, or, if no port calls have been carried out, the EU member state from where the shipping company has started its first voyage. From 2024, the European Commission is to publish and regularly update a list of shipping companies falling within the scope of application of the EU ETS and their respective administering authority.
The proposal builds on the existing EU MRV Regulation, under which shipping companies since 2018 have been required to monitor emissions and submit annual CO2 emissions reports for ships exceeding 5,000 gross tonnes calling at EU ports. The EU MRV Regulation will be amended so that data reported under the EU MRV regulation can be used also with respect to the EU ETS, which will limit the administrative burden. Shipping companies will have to open an account with the relevant competent authority in order to be able to hold emission allowances.
Entities failing to surrender the necessary emissions allowances by 30 April of the following year, are fined an extra €100 per tonne of CO2 emitted for which they fail to submit an allowance. In addition, ships can be denied entry to EU ports where the responsible entity has failed to surrender the necessary allowances for two or more consecutive years.
Key takeaways for the maritime industry
Pending adoption and the final terms, shipping companies should prepare for the EU ETS to be extended to the maritime transport emissions from 2023. In particular, entities that are operating vessels in a commercial manner, such as shipowners, managers, bareboat charterers and other stakeholders, should carefully assess and consider the potential responsibilities and opportunities that may be created under the extended EU ETS.
As an example, due consideration should be given to whether the responsible 'shipping company', typically the ship's technical manager, could allocate to the shipowner the practical responsibilities and the compliance costs incurred under the EU ETS regulation as part of the management agreement entered into with the shipowner. The shipowner could then in turn, as part of his agreement with e.g. a time charterer, which typically will be responsible for the choice of fuel, route and speed of the vessel, hold the time charterer accountable for the compliance costs under the extended EU ETS. By means of contractual arrangement, the compliance costs could as such be allocated to the entity that has also the largest impact on the ship's operational emissions.
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