After the EU Parliament’s Rapporteur, MEP Peter Liese, published his draft report on a proposal to revise the Emissions Trading System (ETS) Directive, the World Shipping Council (WSC) raises concerns.
World Shipping Council (WSC) raises concerns
As WSC stated, “the European Parliament’s lead MEP on the EU ETS proposes amendments to the ETS for maritime that put the impact and efficiency of the EU Green Deal at risk.”
More specifically, WSC has two primary concerns:
- The proposed changed definition of “responsible entity” would corrupt the ETS: The proposed amendments are intended to shield shipowners from ETS costs and then provide them with front-of-line access to ETS revenues such as the Ocean Fund. This would corrupt the whole idea of the ETS, changing it from a “polluter-pays” policy to a system where the “polluter-gets-paid”, and vastly reduce its effectiveness. A market incentive for technological change that cannot be applied to shipowners who control the pace of shipboard technology innovation will fail to achieve EU Green Deal goals, slowing down the pace of transition.
- The bilateral agreements proposed would undermine progress towards global GHG policy: Other amendments direct the European Commission to abandon its principle of multilateralism and engage in bilateral deals with nations to extend carbon pricing only for routes serving Europe. This would be a costly distraction, undermining progress towards global GHG policy at the IMO and slowing progress toward decarbonising shipping. It would also undermine the GHG and economic goals of the EU Green Deal, amplifying the risks identified in EU impact assessments – GHG leakage, loss of EU port competitiveness, and distortion of trade.
Ship greenhouse gas emissions result from the combination of design technology, fuel consumed, and operational practices. It’s obvious, frankly, that one cannot decarbonise shipping without addressing the ship itself. A regional EU ETS carbon price must apply to all parties who have a role in GHG reductions– shipowners and operators
highlighted John Butler, President & CEO of WSC.
Bilateral agreements put global progress at risk
Furthermore, WSC added that amendments directing the Commission to pursue bilateral agreements to extend GHG pricing further beyond the European Economic Area (EEA) “can only slow progress toward global market-based-measures.”
In fact, it noted that any resulting agreements would also be ineffective as the bilateral extension of regional EU ETS could at best extend it to address about 20% of global emissions.
Gaining nothing globally, these amendments would also amplify regional EU risks of GHG leakage, voyage evasion and diversion of seaborne trade, and competitive losses across EU ports and supply chains
EU Maritime ETS
According to WFW London Partner Nick Walker and Senior Associate Valentina Keys, there are a number of significant changes to the definitions, scope, phase-in periods and thresholds which are being proposed in the draft report:
- Full reporting on emissions to commence in 2025: Shipping companies will have to surrender 100% of their verified emissions allowances a year earlier than originally proposed. The justification for this amendment is that a shorter phase-in period will indirectly increase the number of allowances available for other industries. Also, in place of reporting 20% of verified emissions in 2023, 45% in 2024 and 70% in 2025, as originally proposed, the draft report calls for more ambitious action by recommending that shipping companies report on 33.3% of verified emissions for 2023; 66.6% for 2024 and 100 % for 2025 and each year thereafter. Moving the date of full application forward by one year, from 2026 to 2025, will apparently make around 57m allowances available to other industries caught by the ETS which would otherwise have been cancelled under the Commission proposal;
- 100% of non-EU emissions from ships calling at EU ports to be caught if IMO fails to introduce a similar global measure by 2028: As only 50% of non-EU voyages are covered in the original draft Maritime ETS proposal, the draft report recommends that the Commission and Member States should foster international cooperation to finally cover 100% of non-EU voyages. The draft report calls for 100% of the emissions from ships over 5,000 gross tons performing voyages between EU and third country ports to be covered by ETS. The draft report notes that capturing all of the non-EU emissions will only become a necessity if the IMO fails to adopt a global based measure by the 2028 global stocktake deadline for the wider EU ETS and no later than 30 September 2028;
- ‘Time charterers’ now expressly included in the definition of ‘Shipping Company’. The definition of ‘shipping company’ is amended to include a ‘time charterer’;
- ETS responsibility and payment of final price to fall on the commercial operator who may not always be the Shipping Company: The draft report recommends that a binding clause should be included in contractual arrangements between parties which ensures that ETS responsibility and payment of ETS costs would fall on the entity that is ultimately responsible for the decisions affecting the CO2 emissions of the ship (including choice of fuel, route, speed and choice of cargo) and that would be held accountable for covering the compliance costs paid by the shipping company. It is not yet clear whether such binding clause will be an express legal requirement or an implied term. This amendment seeks to acknowledge that the shipping company is not always responsible for purchasing the fuel or taking operational decisions that affect the CO2 emissions of the ship. Those responsibilities can be assumed by an entity other than the Shipping Company under a contractual arrangement. This way the polluter pays principle would be fully respected and it is hoped that the uptake of efficiency measures and cleaner fuels would be further encouraged. Another reason for this amendment is to address the challenge competent authorities often face when trying to trace down a commercial operator for companies based outside the EU because there is no international registry of commercial operators in shipping. This way the proposed approach ensures that the final responsibility of the commercial operator, by establishing a contractual requirement between the shipowner and commercial operator to pass on the costs;
- ‘Operation of the ship’ is now also expressly defined for the purposes of the contractual allocation clause (see above) and means “determining the cargo carried by, or the route and speed of, the ship”;
The scope of greenhouse gases that would have to be accounted for by shipping companies could widen from 2026 onwards to ensure alignment with the Paris Agreement targets. The draft report also calls for the Commission to assess and report to the EU Parliament by 31 December 2026 on the impact on the global climate of GHG emissions, other than CO2 and CH4, from ships arriving at, within or departing from ports under the jurisdiction of a Member State; and
- Establishment of an ‘Ocean Fund’ is recommended to fund R&D into maritime decarbonisation, cleaner fuels, short-sea shipping and cleaner ports. The draft report recommends that this should be established from revenues generated from the auctioning of allowances in respect of maritime transport activities under the EU ETS and from penalties raised through the proposed FuelEU Maritime regulation to improve the energy efficiency of ships and support investment aimed at facilitating the decarbonisation of maritime transport, including as regards short sea shipping and ports. It is also proposed that the Ocean Fund should allocate special support to ice-class ships which are treated as particularly hard to abate.
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