Inclusion of shipping industry in EU Emission Trading System (EU ETS)
27 January 2023
In a nutshell: In December 2022 the European Union (EU) agreed that starting from 1 January 2024 the European Union emission trading system (EU ETS) shall also cover greenhouse gas emissions generated by the shipping industry. The EU ETS is part of the “Fit for 55” package of the EU, aiming to reduce greenhouse gas emissions by at least 55% by 2030 in comparison to 1990 levels. In this newsletter we will provide you with an overview of the way the maritime sector will be included in the EU ETS and potential implications for ship owners and operators.
The EU’s “Fit for 55 in 2030 Package” is a compendium of proposals to align the EU’s climate, energy, land use, transport and taxation policies with the target of reducing net greenhouse gas emissions by at least 55 % by 2030, compared to 1990 levels. As part of such package the European Commission published proposals on 14 July 2021 to further expand the EU ETS to also include emissions from maritime transport. The European Parliament and the Council of the European Union reached a provisional agreement on 18 December 2022, confirming the inclusion of the shipping industry in the EU ETS from 1 January 2024 onwards. The respective draft directive is currently pending formal adoption and has not been published yet.
The EU ETS, which was introduced in 2008 and covers the EU member states as well as states of the European Economic Area (EEA), is constructed as a “cap and trade” system. A cap is set on the total amount of certain greenhouse gas emissions that can be emitted by the units covered by the system. Each unit needs to acquire enough allowances to fully cover its emissions, whereas the allowances may be traded between the units according to demand. At the end of each year sufficient allowances to cover all emissions must be surrendered by each unit. The price per allowance is not fixed but fluctuates according to the market demand and supply of emission allowances. Free allowances, which are currently still issued, are planned to be phased out until 2030.
In order to achieve its set climate objectives, the EU will further gradually reduce the issued emission allowances over the next years. In addition to carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O) emissions shall be included in the EU Monitoring Reporting and Verification Regulation (MRV Regulation) by 2024 and covered by the EU ETS from 2026 onwards.
With regard to shipping the main duty imposed by the EU ETS is that also shipping companies must acquire and submit allowances for their carbon dioxide emissions (and for methane and nitrous oxide emissions as from 2026 onwards).
Pursuant to the proposed directive, allowances are required for all emissions on voyages between EU and EEA ports (including emissions that occur when ships are at berth in EU or EEA ports) and 50% of the emissions for voyages between EU or EEA ports and third countries. This applies to vessels above 5,000 gross tonnage, regardless of the flag they fly. General cargo vessels and offshore vessels between 400 and 5,000 gross tonnage are currently excluded from the schedule, however, they will be included in the MRV Regulation from 2025 on, which means that shipowners are required to monitor, report and verify their respective vessels’ CO2 emissions from 2025 on. A possible inclusion in the EU ETS shall be reconsidered in the year 2026. Yachts, including superyachts, are excluded from the EU ETS under the current proposal, if they are for private use only, irrespective of their size and actual emissions.
For the requirement to surrender emission allowances under the maritime EU ETS the EU agreed on a graduated scheme covering 40 % of all generated carbon dioxide (CO2) emissions from 2024, 70 % from 2025, and 100 % of all generated CO2 emissions as well as methane and nitrous oxide emissions from 2026.
“Shipping company” within the EU ETS is defined as the shipowner or any other organisation or person, such as the ship manager or the bareboat charterer, that has assumed 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), set out in Annex I to Regulation (EC) No 336/2006 of the European Parliament and the Council.
In consideration of the broad definition of a “shipping company” it remains to be seen which party involved shall be responsible for compliance with the EU ETS directive and for procuring the respective EU ETS emission allowances and in which way possible increased costs or risk shall be dealt with adequately. The party responsible would usually be the one that operates the vessel commercially and has control over the speed and route of the vessel and pays for the fuel. The ETS Emission Trading Scheme Allowances Clause for Time Charter Parties 2022, published by the Baltic and International Maritime Council (BIMCO) in 2022, provides a good basis for negotiations in this context. Further revisions of BIMCO forms as the SHIPMAN are expected during 2023 to also take these latest developments into account.
Amongst other possible sanctions, it is likely that the penalty system that is currently applicable under the EU ETS will also be applied for maritime transports. In this case, any shipping company that does not surrender sufficient allowances by 30 April of each year to cover its emissions during the preceding year would be liable for payment of an excess emissions penalty of €100 for each ton of CO2 equivalent emitted in excess of surrendered allowances.
As many details regarding the introduction of the EU ETS for maritime transports have not been published yet by the EU, it remains to be seen how the acquisition and submission of the allowances will be implemented, how many allowances will be distributed and how trading of allowances will be practically organized. Since generally under the EU ETS it is planned to reduce and phase out free allowances it seems rather unlikely that there will be any free allowances for the shipping EU ETS. Another question will be how third countries will react to the introduction of the trading scheme for maritime transports and whether they will possibly create similar emission trading systems.
If you have any further questions, please do not hesitate to contact your regular contact person at EHLERMANN RINDFLEISCH GADOW or Dr. Julia Glocke or Hendrik Brauns.