The EU ETS is a key component of the European Union’s efforts to combat climate change by cost-effectively reducing greenhouse gas emissions, while also promoting innovation in low-carbon technologies and practices.
The Environment Committee of the European Parliament endorsed the political agreement made in December by the European Parliament and the Council to expand the European Trading Emission Scheme (ETS) to the shipping sector as a part of the EU ETS reform on 9 February 2023.
What is the EU ETS?
Established in 2005, the EU ETS stands as the pioneer of international emission trading systems.
Operating on a cap-and-trade principle, it sets a maximum limit on emissions. Participants within sectors covered by the EU ETS, except for the shipping sector currently, procure emissions allowances within this cap and engage in trading as necessary. Over time, the cap diminishes to encourage investment in low-carbon technologies, thereby reducing overall emissions. In response to the sluggish progress in global shipping decarbonization efforts, the Commission proposed in July 2021, as part of the Fit for 55 package, an expansion of the EU ETS to encompass the shipping sector.
Each year, a limited number of EU Allowances (EUAs) is made available for trading in the market, and this is reduced yearly for the EU to meet its target of a 55% reduction in GHG emissions by 2030 relative to 1990, and net zero by 2050.
Each EUA gives companies a right to emit GHG emissions equivalent to the global warming potential of one ton of CO2 equivalent.
EU ETS cost implications for shipping
The purchasing and surrendering of emission allowances under the EU ETS can be quite costly for shipping companies, and this is likely to have implications for pricing and other terms of contractual agreements between parties across the value chain, including charterers and cargo owners.
This will necessitate a common and trusted basis for emissions performance data for voyage verification – for all parties to manage substantial tax cash flows across the value chain.
The key aspects of the maritime ETS
The first surrendering deadline falls in September 2025 in all Member States, in respect of emissions reported as taking place from 1 January 2024 to 31 December 2024.
A reporting and review clause is included to monitor the implementation of the rules applicable to the maritime sector and to consider relevant developments in the International Maritime Organisation (IMO).
These rules were adopted on 16 May 2023 and entered into force on 5 June 2023.
- Incorporate into the ETS all emissions originating from ships travelling between EU ports, and 50% of emissions arising from voyages between an EU port and a non-EU port.
- The integration will follow a gradual implementation:
◦ 40% of verified emissions reported for 2024 will be obligated for surrender in 2025;
◦ 70% of verified emissions reported for 2025 will be obligated for surrender in 2026;
◦ 100% of verified emissions reported for 2026 will be obligated for surrender in 2027.
- Regions situated on the outermost periphery, such as the Azores and Madeira (Portugal), and the Canary Islands (Spain), will remain exempt from the EU ETS until December 2030.
- Methane and Nitrous Oxide will fall under the purview of the EU Measurement, Reporting, and Verification (MRV) scheme from 2024 and transition to the EU ETS from 2026.
- An allocation of EUR 1.6 billion (further details pending clarification) will be designated for mandatory dedicated maritime projects under the Innovation Fund.
- If the International Maritime Organization (IMO) fails to adopt a global market-based measure by 2028, the Commission will contemplate including all emissions from ships engaged in voyages between an EU port and a non-EU port.
- In cases where shipping companies repeatedly disregard surrender obligations for two or more consecutive reporting periods, as a last resort, an expulsion order may be issued to deny entry to ships operated by that shipping company.
Next steps in the legislative procedure
Following the vote of the Environment Committee, the full House of the European Parliament is expected to vote on the proposal during the plenary session in the week of 13-17 March. On the Council side, the Swedish Presidency expects the approval process to go smoothly. The whole legislative procedure therefore is expected to be completed before the summer break.
Our take
Extending the EU ETS to shipping marks an important first step to decarbonize the sector. However, more clarity is still needed in terms of its implementation, where the devil will be in the details of Implementing and Delegated Acts. Questions remain about the availability of the Innovation Fund to the shipping sector.
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