Ship near the port

EU Emissions Trading System Directive (EU ETS)

Summary

The information provided on this page is based on the European Commission Proposal dated July 2021. Key elements are subject to change before the definitive measures are adopted.

Incentivizing greenhouse gas reductions in the shipping industry

The EU’s Fit for 55 package is the framework for transforming its Green Deal into reality. These measures are the most ambitious legislation the EU has ever set forth to establish a more sustainable low carbon economy. Under Fit for 55, new measures and revisions have been introduced that will impact the maritime industry.

What is EU ETS?

The EU Emissions Trading System (ETS) Directive will incentivize the shipping industry to reduce greenhouse gas (GHG) emissions in line with the EU’s targets. EU ETS uses CO2 pricing and revenue redistribution to achieve these aims. It is a “cap and trade” mechanism, in which CO2 allowances are allocated and traded within a certain restricted level.

What will be impacted by EU ETS?

  • GHG emissions made on voyages between, from and to ports in the EU by ships of any flag above 5,000 GT
  • Vessels covered by monitoring, reporting and verification (MRV) regulation, transporting passengers or cargo for commercial purposes
  • GHG emissions including CO2

Key date:

2026: EU ETS entry into force after a three-year phase in period

How could EU ETS work?

ETS is an existing cap and trade system that would be extended to include the shipping industry under Fit for 55. The current system covers around 40% of the EU’s total GHG emissions and aims to reduce emissions by 40% by 2030.

The revised ETS proposes that emissions from current ETS sectors be reduced by 61% by 2030, compared to 2005 levels. This would represent a 4.2% annual emissions reduction target, as opposed to 2.2% under the current system.

What does cap and trade mean?

Each year, a set number of allowances is made available. They can be freely allocated by an authority, or purchased by participants.

Participants can only emit up to the amount covered by their allowances. If they don’t have enough to cover their needs, they can:

  • Reduce their carbon emissions to allowable levels
  • Purchase additional allowances

The shipping industry will be subject to the same rules concerning the auctioning, transfer, surrender and cancellation of allowances as other sectors. Furthermore, the MRV Regulation will be adjusted and incorporated into the ETS system.

We expect a three-year transitional period, during which shipping companies will only have to surrender allowances for part of their emissions, gradually rising to 100%.

The phasing-in schedule for surrendering allowances for verified emissions will be:

  • 20% for 2023
  • 45% for 2024
  • 70% for 2025
  • 100% for 2026 and each following year

Allowances will eventually be needed for:

  • 50% of emissions from ships departing from an EU port to a port outside of its jurisdiction
  • 50% of emissions from ships departing outside the EU and arriving at a port within its jurisdiction
  • 100% of emissions from ships travelling between EU ports
  • 100% of emissions from ships at berth in an EU port

Who will enforce EU ETS? Who will pay for it?

EU Member states will be assigned as administrative authorities for EU ETS. The EU Commission will establish a list of shipping companies and their respective authorities.

Once ETS comes into force, companies will need to submit a standardized emissions monitoring plan to their authority for each of their ships in its scope within three months. Authorities will then have two years to approve these plans. From 2024, shipping companies will have to submit their aggregated emissions data to their respective authority at the end of March each year.

Operators found to be in breach of the requirements will be subject to an excess emissions penalty of €100 per metric ton of emitted CO2. They will also have to surrender the required number of allowances for that excess the following calendar year. Ships that continually fail to comply with MRV or ETS regulations may be denied entry to EU ports.

Is the plan for EU ETS finalized?

EU ETS is currently under discussion within the EU, while many in the shipping industry also express their views.

The EU Parliament has adopted the EU ETS Position. It includes the following adopted points:

  • The possibility of cooperation with non-EU countries to extend the scope of ETS
  • Creating a fund dedicated to shipping for projects to improve the energy efficiency of ships
  • Provisions for ice classed ships
  • Beginning January 1, 2027, the inclusion of 100% of all voyages within, to and from the EU/EEA
  • Delete the phase-in
  • An ocean fund
  • The prevention of carbon leakage
  • An update of the MRV regulation to include ships above 400 GT
  • The pursuit of market-based-measure (MBM) approach at IMO level

At the EU Council level, the European Environment Council is assessing the proposals, in terms of their contribution to emissions reductions and their impact on competitivity in each sector. Delegations have requested an assessment of the cumulative impact of ETS and FuelEU Maritime. . The points of the General Approach include:

  • A phase-in
  • An update of the MRV regulation to include ships above 400 GT and CH4 and N2O emissions

The next step of the discussion will consist of formal EU Trilogue meetings.

In the shipping industry, reception of ETS has been mixed. Concerns are being raised that if ETS does not take a well-to-wake approach, it will not adequately favor low-carbon fuels. There have also been calls for the EU to increase the pressure on the IMO to develop a global MBM that aligns with the EU ETS. However, there is widespread support for a dedicated fund allocating revenues from shipping allowances to developing low-carbon technologies.

How can I keep up to date with Fit for 55 news?

By gradually restricting the number of allowances, EU ETS will incentivize the transition to cleaner fuels. However, it remains to be seen if fuel supply and availability can be developed at sufficient scale and cost to enable operators to adopt cleaner fuels to schedule. Like all of Fit for 55, the final form of the EU ETS update has yet to be decided, though it will become clearer in the months ahead.   

Bureau Veritas is dedicated to guiding the shipping industry through new regulations in the EU and globally. We will closely monitor the evolution of the Fit for 55 package and stand by our clients’ side to help them prepare.

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