Client corner: Decarbonizing transport through Fit for 55
The EU’s Fit for 55 package could answer calls from COP26 for increased government support to reach climate targets, impacting both the European shipping industry and the sector at large.
What is Fit for 55?
In September 2020, the European Commission set out the steps needed to reach carbon neutrality by 2050. This political commitment is now being proposed as a legal obligation, revising up the EU’s 2030 GHG reduction target of 55% below 1990 levels.
This legislative package, dubbed Fit for 55, touches all EU economic sectors. It is the most extensive and ambitious legislation put forward in the region to date, including measures for carbon pricing, rules, targets and support measures. The package is under review, and legislation may come into effect from 2023.
How does it affect shipping?
Fit for 55 includes one new piece of proposed legislation, and three proposed revisions:
- A revised EU Trading Systems (ETS) directive, which mandates that shipping companies buy allowances for their carbon emissions
- A revised Alternative Fuels Infrastructure regulation to increase the availability of shoreside electricity and LNG input points, also including a deployment plan for alternative fuels to serve as a framework for each member state
- Revisions to the Energy Taxation Directive (ETD), to end tax exemptions for conventional marine fuels while incentivizing use of alternative fuels
- A new policy in FuelEU Maritime, to establish uniform rules limiting the greenhouse gas intensity of energy used onboard by a ship arriving at, staying within or departing from ports under the jurisdiction of a Member State. The well-to-wake approach of these lifecycle footprint requirements will apply to CO2, methane and nitrous oxide.
Does this mean emitters will have to pay more?
Ultimately, yes. Under the new proposal, shipping will be incorporated into the ETS cap-and-trade model. A cap is set for acceptable carbon levels, which is reduced over time to decrease total emissions. Within this cap, shipping companies must buy or trade allowances for each metric ton of CO2 emitted from ships of 5,000 GT or more operating between and at berth in EU ports. If the ship is entering or leaving the EU as part of a voyage, the company will have to cover 50% of CO2 emissions.
Companies will be fined €100 EUR per metric ton of CO2 not accounted for by an allowance, and will be required to surrender allowances equal to their excess emissions the following calendar year. Ships may be denied entry to EU ports for continued failure to surrender the required allowances.
Will this be effective in reducing carbon emissions?
It remains to be seen. But the proposal is ambitious, and the EU Commission has included measures to incentivize greener options to facilitate shipping’s energy transition alongside with an increase of the cost of GHG emissions and penalties for polluters. The FuelEU Maritime proposal, for example, mandates that from 2030, container and passenger ships will be required to use onshore power supply while at port. Meanwhile, provisions are made under the Alternative Fuels Infrastructure revision to increase provision of LNG and onshore electricity. The ETD proposes lighter taxes on renewable hydrogen and electricity, and a higher rate for heavy fuel oil.
When could it come into effect?
Most of these measures will come into effect gradually starting in 2023:
- From 2023 companies will be required to have allowances for 20% of shipping emissions, rising gradually to 100% by 2026
- According to FuelEU, GHG intensity limits for onboard fuels will rise gradually from 2% in 2025 to 75% in 2050.
Keep in mind, though, that at this stage, Fit for 55 is only proposed legislation. Negotiations to produce the final laws are likely to be relatively complicated and may be longer than initially imagined.
Is there similar legislation on the way beyond the EU?
As things stand, the European Commission is the first to propose such holistic measures to limit emissions. However, the IMO may adapt EU packages to a global level. Fit for 55 could thus pave the way for other governments and organizations to introduce similar regulations.
The UK has already launched its own version of ETS – although shipping is not as yet included in its scope – and China has its own requirement for onshore power supply for passenger vessels in port.
At Bureau Veritas Marine & Offshore, we are closely monitoring developments in Europe as they unfold, as well as their wider impacts. We will continue to leverage all our experience to offer our clients the highest level of support in understanding and complying with new regulations.