EU Emissions Trading System (EU ETS)
EU ETS at a glance
Initially, the EU Emissions Trading System (ETS) was part of a European Directive (2003/87/EC) designed to lower greenhouse gas (GHG) emissions.
In line with the EU Green Deal, the Fit for 55 package aims to reduce the EU’s emissions by 55% in 2030 compared to a 1990 baseline.
The Fit for 55 package extends the existing ETS to new sectors, including shipping. As a result, the shipping industry will need to mitigate its emissions. The emission trading system aims to reduce the total volume of GHG emitted over time. It is implemented through a “cap and trade” mechanism, meaning that every registered emitter must buy allowances corresponding to their emissions through an auction system. Prices per ton of emissions will generate revenues to partially finance the decarbonization of the maritime sector.
Vessels that fall under the scope of the regulation have already begun collecting GHG emissions under the EU’s Monitoring, Reporting and Verification Regulation (2015/757) (EU MRV). This regulation paved the way for the implementation of the new market-based measure.
Following a vote by the European Parliament on April 18, 2023, the Council formally approved the Directive and the Regulation amending the EU ETS on 25 April 2023.
The Directive and the Regulation were published in the EU Official Journal on 16 May 2023. Both legislative acts will enter into force on 5 June 2023. Amendments will apply from 1 January 2024.
What are the next steps in the legislative process for EU ETS?
In February 2023, the EU Member States approved the agreement reached on the revision of the EU ETS, as well as the European Parliament's Committee on Environment. Following a vote by the European Parliament on April 18, 2023, the formal approval by the Council took place on April 25, 2023.
The Directive and the Regulation were published in the EU Official Journal on 16 May 2023. Both legislative acts will enter into force on 5 June 2023.
A list of implementing and delegated acts will be adopted this year.
The Directive and the Regulation will apply from January 1, 2024.
Which type and size of ships will be included in the EU ETS?
The EU ETS will impact the following ship sizes and types in the coming years:
- From 2024: cargo and passenger ships of 5,000 gross tonnage (GT) and above, regardless of their flag
- From 2027: large offshore service ships (over 5,000 GT)
- From 2027: offshore ships and general cargo ships above 400 GT may be included based upon a report by European Commission
Which emissions will be considered?
Allowances will be needed for the following emissions from commercial operations (passengers/cargo transportation):
- 100% of the emissions from ships travelling between EU ports
- 100% of the emissions at berth in EU ports
- 50% of the emissions for ships travelling between an EU port and a port outside the EU
- Exemptions for dry-docks and other maintenance/emergency reasons
How does EU ETS account for carbon leakage from a transhipment port?
To avoid carbon leakage, transhipment ports will not be considered as a port call. This means that 50% of emissions for voyages to/from a transhipment port outside the EU and to/from an EU port shall be accounted for in EU ETS.
The European Parliament and the Council defines a transhipment port as a neighboring container transhipment port where the share container transhipment exceeds 65% of the total container traffic during the most recent twelve-month period for which relevant data is available. It should be noted that:
- Containers are measured in twenty-foot equivalent units
- Transhipment ports can be located outside the EU as long as they are less than 300 nautical miles from a port under the jurisdiction of a Member State
The European Commission will publish the list of neighbouring container transhipment ports by 31 December 2023 and update it before 31 December every two years thereafter.
What are the derogations from EU ETS?
Until December 31, 2030:
- Ships with ice-class IA or IA super, or equivalent, may surrender 5% fewer allowances.
- Some emissions are excluded on voyages by passenger and ro-pax:
- between an EU port on an island with fewer than 200,000 permanent residents where there is no road or rail link with the mainland and a port of the same State, and from their activities within a port;
- when performed as part of a transnational public service contract or obligation between two EU ports, and from their activities within a port;
- between an EU port located in an outermost region and a port of the same State, and from their activities within a port.
What are the key dates for the phase-in of the EU ETS?
The phase-in period will start from January 1st, 2024, with:
- 40% of the verified emissions covered in 2024
- 70% of the verified emissions covered in 2025
- 100% of the verified emissions covered in 2026
How will EU ETS be implemented in EU MRV?
The diagram below explains how the EU MRV will change into EU ETS: verified emissions change into allowed and traded emissions.
What does “cap and trade” mean?
The publication of the list of companies under EU ETS in February 2024, means participants will now be able to purchase sets of emission allowances for the coming years. This list will be updated every two years.
Participants can only emit up to the amount covered by their allowances. If they don’t have enough to cover their needs, they can purchase additional allowances.
The cap is reduced on an annual basis. The reduction linear factor for GHG emissions allowances will be -4.3 % from 2024 to 2027 and -4.4 % from 2028.
How can I purchase emissions allowances?
The European Energy Exchange (EEX) is appointed by the European Commission as a common auction platform. The EEX is in charge of allocating allowances for EU emissions.
A single ETS market will cover power plants, industry factories, aviation sector and shipping. In 2024, 78.4 million allowances shall be added for maritime transport.
There will be no free allowances for the shipping sector. Originally, free allowances were used to prevent from carbon leakage with the risk of industries’ delocalization and avoidance in the aviation sector. Their phasing out is scheduled until 2034.
What are the first steps to be compliant?
The EU ETS compliance scheme is set on an annual basis.
First, the EU MRV plan must be updated within 3 months from January 2024. The plan must be monitored by an accredited verifier and submitted for approval by April 1, 2024 to the shipping company’s administrative authority.
The shipping company will be administered by an EU Member State’s administrative authority according to:
- its flag;
- the number of its port calls in a Member State;
- or its first call in an EU Port.
The list of shipping companies with the respective administering authority will be set in February 2024.
The shipping company will appoint an accredited verifier at the fleet level.
From January 1, 2025, the shipping company will have to monitor its fleet’s individual GHG emissions. Then, by March 31, 2025, the company must submit a report to the administering authority.
Finally, by September 30, 2025, the shipping company will have to surrender 40% of CO2 emissions emitted in 2024.
Will CO2 captured onboard be deducted from the EUA that must be surrendered?
GHG emissions that are not directly released into the atmosphere shall be included in the EU ETS and corresponding allowances must be surrendered, unless:
- they are stored in a storage site in accordance with Directive 2009/31/EC of the European Parliament and of the Council;
- they are permanently chemically bound in a product so that they do not enter the atmosphere under normal use and any normal activity occuring after the end of the life of the product.
Delegated acts by the Commission will specify the conditions for considering GHGs as permanently chemically bound in a product so that they do not enter the atmosphere, This may include obtaining a carbon removal certificate, where appropriate, in view of regulatory developments regarding the certification of carbon removals.
What are the penalties for non-compliance?
The penalty, enforced by authorities of EU Member State, for excess emissions will be €100 per metric ton equivalent emitted. Moreover, the operator remains under the obligation to purchase the corresponding quantity of allowances for emitted emissions.
In case of persistent non-compliance for two or more consecutive reporting periods:
- expulsion orders may be issued at the port of entry in case of non-compliance
- flag detention order until the shipping company fulfills its obligations (for ships under an EU Member State Flag within a port in that Member State).
What happens if a ship is chartered to another shipping company?
The EU ETS system shall be based on the shipping company’s identity, not the ship itself.
The owner will be responsible for surrendering allowances but can contractually pass on the costs to another entity operating the ship (making them accountable for the emissions voyages covered by EU ETS).
Where will the revenues from EU ETS go?
The revenues generated from the sales of 20 million CO2 certificates will be included in the Innovation Fund and redirected to the renewal of ship fleets.
The rest of the revenues will be redirected to EU Member States.
Will the EU ETS be revised?
The EU ETS will be revised:
- in case of adoption by the IMO as a global market-based measure;
- otherwise, regarding the need to apply the allocation of allowances and surrender requirements in respect of more than 50% of the emissions from ships performing voyages between an EU port and a non-EU port, in light of the objectives of the Paris Agreement.
The European Commission will present a report to the European Parliament and to the EU Council. If appropriate, the report will be accompanied by a legislative proposal to amend the EU ETS Directive.