The EU has expanded the scope of the European Union Emissions Trading System (EU ETS) to include the maritime sector starting this year. This move has been raising all sorts of reactions and thoughts on the implications for the shipping industry due to the challenges and opportunities it presents.
Understanding the EU ETS
At its core, an Emissions Trading System (ETS) is a market-driven strategy that places a cap on permissible emissions, with each allowance representing one tonne of CO2 or CO2 equivalent. The EU ETS operates on a cap-and-trade scheme, compelling companies to purchase allowances based on their emissions, thus driving an overall reduction in greenhouse gases.
Expansion to maritime sector
The expansion aims to encourage the maritime industry to mitigate its environmental impact and hasten the adoption of low-carbon fuels. The EU ETS for shipping applies to all maritime services with at least one call within the EU, encompassing 100% of emissions for legs between two EU ports and 50% for legs between EU ports and non-EU ports.
It also entails a three-year phase-in period, increasing in scope from 40% of emissions in 2024 to 70% in 2025 and 100% in 2026. It applies to cargo and passenger ships above 5000 GT from 2024 and offshore ships above 5000 GT from 2027.
The EU ETS will initially cover carbon dioxide emissions and be widened to include methane and nitrous oxide from 2026. Offshore ship and general cargo ships between 400 and 5000 GT will also be required to report emissions and may be included in the EU ETS at a later stage.
Key Takeaways for Owners and Operators:
- The party responsible for ship operation under the ISM Code is liable for CO2 emissions and must comply with EU ETS regulations.
- The geographical scope of the EU ETS includes vessels arriving at and departing from EU ports.
- The two key principles of the EU ETS are setting a ceiling on yearly GHG emissions and the trading of EU emission allowances.
- Shipping will be phased into the EU ETS gradually, reaching 100% inclusion by 2026.
- Shipping companies exceeding their allowances face remedial penalties.
- By April 1, 2024, shipping companies must submit monitoring plans for conformity assessment.
Implementation and reporting
Shipping lines entering the EU ETS are required to report their emissions and purchase allowances on the EU ETS market. The phased approach mandates that, by 2026, 100% of reported emissions must be converted into allowances.
Furthermore, the MRV Maritime Regulation was revised in 2023 in the light of the inclusion of maritime transport emissions within the scope of the EU ETS. Main obligations for companies eligible under the MRV Maritime Regulation:
- Monitoring: companies must – in line with their respective monitoring plans – monitor, for each of their ships, greenhouse gas emissions, fuel consumption and other parameters, such as distance travelled, time at sea and cargo carried on a per voyage basis, so as to gather annual data into an emissions report verified by an accredited MRV shipping verifier.
- Emissions report: by 30 April of each year (31 March as of 2025), companies must, through THETIS MRV, submit to the Commission and to the States in which those ships are registered (‘flag States’) a satisfactorily verified emissions report for each ship that has performed maritime transport activities in the European Economic Area in the previous reporting period (calendar year). As from 31 March 2025, emissions reports should also be submitted to the responsible administering authority through THETIS-MRV.
- Document of compliance: by 30 June of each year, companies must ensure that all their ships that have performed activities in the previous reporting period and are visiting ports in the European Economic Area carry on board a document of compliance. This might be subject to inspections by Member States’ authorities.
Challenges and opportunities
The financial implications of the EU ETS for the shipping industry are substantial, with estimates suggesting potential liabilities of €3.1 billion, €5.7 billion, and €8.4 billion in 2024, 2025, and 2026, respectively.
Alas, as ESPO, FEPORT and ETA have warned multiple times, shipping companies could avoid costs derived from the ETS by changing the order of port calls so the main part of the voyage is done between two non EEA ports and reconfiguring the routes, making non EEA terminals transhipment ports and thus, diverting much of the traffic that feeds the major European terminals.
Furthermore, the tensions arising between shipowners and charterers necessitate careful consideration of legal and operational nuances, as seen in the adoption of new clauses by organizations like BIMCO.
