The expansion of the European Union Emissions Trading System to include maritime transport: Scope, Application and Perspective.
This report provides a summary of the announcement made on Thursday December 1st 2022 and concerns the European Union’s unified amendments to Directive 2003/87/EC with the aim of strengthening the European Union (EU) Emissions Trading System (ETS) and extend it in line with the EU’s increased climate ambition for 2030. Amongst a raft of policy measures introduced as part of the “Fit For 55” climate and energy programme, the EU has expanded the application of the ETS to include maritime transport. This summary is intended to inform discussions on shipping’s inclusion into the ETS and introduce Hecla Emissions Management, a joint venture between Affinity Financial Products (LLP) and Wilhelmsen Ship Management. The ETS covers all 27 EU Member States as well as Iceland, Liechtenstein and Norway, who are members of both the European Economic Area (EEA) and the European Free Trade Association (EFTA). For the purposes of this report, and for ease of simplicity, we refer to all countries under the scope of the ETS as “Member States” and refer to the jurisdiction of the ETS as being the “EU”.
The party responsible for the operation of the ship under the ISM Code is responsible for surrendering the allowances required for compliance.
The “shipping company”, defined as either the shipowner or the entity that has assumed responsibility for the ship under the ISM code, is responsible for surrendering the requisite allowances. However, it is not necessarily liable for the cost of those allowances.
When another entity is responsible for purchasing the fuel or taking operational decisions that affect the CO2 emissions of the ship, a binding clause should be included in such arrangements for the purpose of passing on the costs to that entity.
The geographic scope of the ETS expansion incorporates vessels on voyages both arriving at an EU port and departing from an EU port.
All of the emissions generated by vessels performing voyages between EU ports, and emissions generated while at berth at an EU port, come under the scope of the ETS.
Furthermore, allowances must be purchased and surrendered for half of the emissions generated by ships performing voyages arriving at an EU port from outside the EU (“inbound voyage”), and half of the emissions generated by ships on voyages that depart from an EU port and arrive at a non-EU port (“outbound voyage”).
Shipping will be phased into the ETS from 2024, with more comprehensive inclusion by 2026.
Shipping companies will be liable for 40% of their applicable emissions in 2024, increasing to 70% in 2025, and 100% in 2026 and every year thereafter.
Shipping companies are not expected to receive any free allowances.
Non-CO2 emissions caused by the maritime sector will be included: first under the MRV, then the ETS.
From 2024, nitrous oxide (N2O), soot and methane (CH4 ) will be observed under the Monitoring, Reporting and Verification system.
From 2026, those emissions will be priced into the ETS.
Punishments for non-compliance include penalty charges and blacklisting.
Failure to surrender sufficient EUAs will result in an excess emissions penalty of ~€106/tCO2 . As well as this charge, unpaid emissions are rolled-over to the following year, when their corresponding allowances must still be acquired and surrendered.
If a shipping company fails to comply for two consecutive years, they may be issued with an expulsion order, to be observed by all Member States until the shipping company has fulfilled its surrender obligations.
Regulatory Background
The European Union has unveiled its “Fit for 55” package of energy and climate laws aimed at cutting carbon emissions by 55% from 1990 levels by 2030 and achieving carbon neutrality by 2050. For the EU to achieve the latter target, a 90% reduction in transport emissions is needed by 2050.
As part of this “Fit for 55” policy package, the European Commission has announced its update to Directive 2003/87/EC, which builds upon the EU MRV system and incorporates the maritime industry into the ETS. The EU has said that is has acted “in light of the slow and insufficient progress made by IMO”.
The ETS is a mandatory cap-and-trade system which sets an overall cap on GHG emissions within a certain time period. Allowances, called, EUAs are auctioned amongst participants and the number of available allowances relative to total emissions creates a carbon price; the quantity of available allowances will decrease linearly towards the emissions reduction target.
The MRV system will continue to apply to ships above 5,000 gross tonnage in respect of CO2 emissions released during their voyages from: (i) from an EU port to a non-EU port, (ii) to an EU port from a non-EU port, (iii) between EU ports and (iv) while the ship is at berth at an EU port.
The emission factors for marine fuels will remain constant between the MRV and the ETS:
Diesel/Gas Oil: 3.206 tCO2 per ton of fuel
Light Fuel Oil: 3.151 tCO2 per ton of fuel
Heavy Fuel Oil: 3.141 tCO2 per ton of fuel
LNG: 2.750 tCO2 per ton of fuel
Major Policy Points
Who is responsible for vessel emissions under the ETS?
The Directive states that administering authorities are responsible for ensuring that each shipping company surrenders a quantum of allowances equal to its total applicable emissions generated during the preceding calendar year.
A shipping company is defined as the shipowner or any other organization or person (such as a manager or bareboat charterer) that has assumed the responsibility for the operation of the ship from the shipowner and has agreed to take over all the duties and responsibilities of the International Management Code for the Safe Operation of Ships and for Pollution Prevention (ISM Code).
However, the EU has recognised that the shipping company is not always responsible for purchasing the fuel or taking operational decisions that affect the CO2 emissions of the ship (such as speed, route or choice of cargo carried). In that case, a binding clause should be included in such arrangements for the purpose of passing on the costs so that the entity that is ultimately responsible for the decisions affecting the CO2 emissions of the ship is held accountable for covering the compliance costs paid by the shipping company under this Directive.
The administering authority will be either: (i) the EU Member State in which the shipping company is registered in, or (ii) in the case of a shipping company that is not registered in an EU Member State, the Member State with the greatest estimated number of port calls from voyages performed by that shipping company within the previous two years.
The EC will publish a list of shipping companies that have performed an ETS-applicable voyage, specifying the administering authority for each shipping company. This list shall be updated biennially.
What vessels and voyages fall under the scope of the system?
Requirements for surrendering allowances will apply to all ships above 5,000gt for half of the emissions generated by voyages departing from a Member State port and arriving at a port outside the EU, and half of emissions from ships performing voyages departing from a port outside of a Member State and arriving at a Member State port.
Furthermore, all emissions produced during intra-EU voyages and while a vessel is berthed at an EU port come under the scope of the expanded ETS.
Looking forward, this allows shipping to be brought into China’s ETS (and other regionalised systems) without the same emissions being counted twice. Each regionalised ETS can include 100% of port and intra-port emissions, and 50% of inbound and outbound emissions, creating a defacto global ETS.
