International Council on Clean Transportation (ICCT) explores the regulatory landscape of the European Union Emissions Trading System (EU ETS), which is expanding to include the maritime sector.
As ICCT informs, ship owners and shipping companies will be subject to an emissions cap, with allowances auctioned within the ETS and with other markets to encourage reductions across applicable sectors. The scope of this policy covers 100% of emissions from intra-EU voyages, and 50% emissions from extra-EU voyages, with special rules to prevent evasion. Revenue generated from the maritime sector’s inclusion will primarily support decarbonization efforts, innovation, and the transition to alternative fuels.
What is an emissions trading system (ETS)?
An emissions trading system (ETS) is a market-based measure that sets a limit (cap) on allowed emissions (allowances) and creates financial incentives to reduce a sector’s emissions. Each allowance equals 1 tonne of carbon dioxide (CO2) or carbon dioxide equivalent (CO2e) emissions, and these can be allocated directly by the government or purchased by companies through auctions.
The cap can be reduced each year to help achieve the ultimate goal of zero emissions in the sector. Allowances can also be traded between companies as part of efforts to reach their own emission reduction goals. In the European Union, the Emissions Trading System Directive (EU ETS Directive) has gone through four phases of development, and each has implemented stricter emission reduction targets and broadened the scope to encompass additional industries.
The latest phase in 2021 included discussions about adding the maritime sector and, starting in 2024, the EU ETS Directive will expand to include greenhouse gas (GHG) emissions from national and international shipping. This policy update focuses on the scope of the EU ETS measures introduced for the maritime sector, including their innovations and limitations.
Considerations for future phases
The extension of the EU ETS Directive to maritime transport is an important step. Since its inception in 2005, the EU ETS has been updated in phases, and such work is scheduled to continue. In particular for maritime transport, there will be a review by December 31, 2024 about whether to include ships smaller than 5,000 GT in the EU ETS, and a review by December 31, 2026 about whether to include offshore vessels.
According to ICCT, future policy revisions could consider the following to further improve the policy’s impact on the marine sector:
- Regulated GHG emissions: Black carbon (BC), a potent short-lived climate pollutant, is not currently within the scope of regulation. These emissions from international shipping accounted for about 7% of all CO2e emissions in 2018, based on 100-year global warming potentials, and emissions of BC from shipping increased by 12% from 2012 to 2018.10 To include BC in future revisions of the Directive, shipping companies could report BC emissions to the European Union for incorporation in the EU ETS Directive the following year.
- Geographical scope: Currently, only 50% of emissions from extra-EU voyages are included in the EU ETS Directive. According to 2021 MRV data, this leaves 41.8 Mt of CO2 annual emissions outside the scope.11 Additionally, a European Commission study estimated that maintaining the geographic scope at 50% would result in €37 billion in missed revenues between 2020 and 2050.12 Future revisions of the Directive could consider extending the scope to 100% of extra-EU voyages for voyages that are not already subject to a carbon price equal to or greater than the EU ETS price. This would help limit the climate impact of maritime transport and unlock additional revenue.
- Vessel size and type: Fishing vessels, yachts, service vessels, and military vessels are currently excluded from the scope of the Directive, as are smaller vessels between 400 GT and up to but not including 5,000 GT. While the smaller vessels will be the subject of the aforementioned feasibility study in 2026, it remains uncertain whether they will subsequently be included in the EU ETS. Smaller ships account for 15% of maritime emissions and typically offer more decarbonization options than larger vessels; this makes them particularly good candidates for testing new zero-carbon technologies. Policymakers could consider including all ship types in the ETS Directive and expanding it to cover ships of 400 GT and above, after the feasibility and impact assessment.
