Recap 2022: Shipping emissions in EU ETS almost a reality

Six months of action brought this year's biggest regulatory change for the maritime sector. It is just a stone's throw away from being included in the EU Emissions Trading System (EU ETS).

PHOTO: Entrance of the Louise Weiss building, seat of the European Parliament in Strasbourg, France. Getty Images

EU ETS - the world’s biggest “regulated” carbon market

An ETS for shipping is part of the EU's broader Fit for 55 package, under which responsible shipping companies will be liable for their fleets' greenhouse gas (GHG) emissions from 2024. The system will mean they can convert their reduced carbon footprint into tradeable carbon credits.

The EU ETS works on a cap and trade basis. Under the system, there is a cap on the total GHG emissions allowed for vessels.

According to European Parliament, the cap is “divided into emissions allowances, each giving permission to emit 1 mt of carbon dioxide (CO2) or CO2-equivalent (CO2e).”

The funds generated from ships that emit above their allowance - and have to bear the cost - will partly go into a joint fund and partly be distributed to individual EU member states. The European Community Shipowners' Associations says that an ETS Innovation Fund will allocate at least 20 million ETS allowances to maritime decarbonisation projects. This comes to around €1.5 billion ($1.60 billion) under the current ETS carbon price.

A company can buy or receive emission allowances within the cap and trade them with another company.

The European Commission states that companies must surrender enough allowances each year to cover their full GHG emissions, and those that fail to surrender or exceed the cap will be heavily fined. Companies that reduce emissions below their allocated cap can keep or sell their extra allowances to other companies that need them.

A look back at 2022 - onboarding the shipping industry

In June this year, the European Parliament voted in favour of including shipping emissions in the EU ETS. Six months and a lot of discussions later, a final trialogue between the three EU bodies – the European Council, Parliament and Commission – concluded with a provisional agreement this December.

Under the provisional agreement, offshore vessels of a gross tonnage over 5,000 will be included in the ETS. The responsible shipping company will pay for GHG emissions while travelling to, from and between EU ports, with a three-year phase-in period starting in 2024.

The provisional agreement will extend the ETS to cover all ship emissions from intra-European voyages from 2024. Half of the emissions from voyages to and from EU countries will be included between 2024-2026, before being expanding to 100% from 2027.

According to the provisional agreement, the responsible shipping company will have to surrender their allowances in 2025 to cover 40% of their emissions registered in 2024, in 2026 for 70% of their emissions registered in 2025 and finally in 2027 for 100% of their emissions registered in 2026.

The EU trio has also agreed to include non-carbon shipping emissions like methane and nitrous oxide in the ETS from 2026. Especially the methane emissions inclusion will impact vessels running on liquefied natural gas (LNG).

Who should pay?

The EU legislative text does not provide a blanket answer to whether it is the shipowner or operator that will bear full responsibility for emissions and their potential costs.

It defines the entity responsible for complying with the ETS as “the shipowner or any other organisation or person, such as the manager or the bareboat charterer, that has assumed the 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.”

This was a key question in the legislative debate through the EU bodies. The European Parliament approved amendments to the text on 22 June, from which the European Council made additions and adopted a “general approach” on responsibility for emissions. This general approach sets out a few conditions to determine who is the responsible entity.

A shipowner should be entitled to reimbursements from operators or other entities making decisions that impact ship emissions. These include several factors that might not always be under the direct control of shipowners, such as a ship’s fuel efficiency measures, choice of fuel, the cargo load carried, and its route and speed.

Following a “polluter pays principle”, the size of these reimbursements will depend on how many CO2 emission allowances that have been spent as a result decisions made by a ship's operator. The EU suggests that details around the reimbursements should be agreed between shipowners and operators in contracts.

Claims or other conflicts can arise between the parties, and they should then have a statutory right under national law to make their case for who bears responsibility for the emissions. Any dispute between shipowners and operators does not give them the right to avoid compliance with the ETS.

PHOTO: Aerial view of ships at the Port of Rotterdam, Netherlands. Getty Images

All hands on deck for EU ETS shipping emissions

Industry voices and shipping organisations have voiced their opinions and suggested ways to make the provisional agreement more ironclad by fixing loopholes.

European shipping and energy associations, including Danish Shipping, the World Shipping Council, Renewable Hydrogen Coalition and Methanol Institute have called on the EU to include a lifecycle assessment of fuel emissions in EU ETS - a well-to-wake approach. The European Sea Ports Organisation has urged regulators to address potential carbon leakage before shipping becomes part of the system.

Danish Shipping has voiced similar concerns about a competitive imbalance between the road haulage and short-sea shipping sectors. It argues that the ETS will push maritime transport costs higher and potentially lead customers to opt for road transport as a cheaper alternative.

European environmental non-profit Transport & Environment and a coalition of 36 other maritime companies are calling on EU policymakers to bring down the minimum gross tonnage for vessels covered by ETS from 5,000 to 400. Offshore and service vessels should also be covered, they said in a joint letter to the EU in September.

The road ahead

The shipping sector is expected to be incorporated in the EU ETS from 2024 onwards. The EU’s provisional agreement will be subject to approval by the European Council and Parliament. The pieces of legislation will be adopted by the Council and Parliament before proceeding with the formal steps of adoption.

Upon approval by the President of the European Council and the President of the Parliament, a final directive will be published in the Official Journal of the EU and will become effective 20 days later.

By Konica Bhatt

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