Shipping in the EU’s Emission Trading System (ETS) from 2024

The EU’s legislative bodies have reached an agreement on including shipping in its Emission Trading System (EU ETS). Requirements, scope, phase in, exemptions and derogations, how to comply, penalties and many more.

Subject to final adoption, ships above 5000 GT transporting cargo or passengers for commercial purposes in the EU will have to acquire and surrender emission allowances for their CO2 emissions from 2024. Offshore ships will follow from 2027. This statutory news summarizes the current information on EU ETS. 

Concept

The European Parliament (EP), Council of the European Union, and the European Commission have reached an agreement on including shipping in the EU’s Emission Trading System (EU ETS) from 2024. The EP and Council will expectedly formally adopt the revised directive later. Further details on the requirements and processes can be expected as the final text is adopted, and the European Commission adopts related implementing and delegated acts.

What is EU ETS?
The EU ETS is an emission cap-and-trade system where a limited amount of emission allowances – the cap – is put on the market and can be traded. The cap is reduced each year. Hence, ensuring that the EU’s emission target by 2030 of 55% reduction, relative to 1990, can be met while becoming climate-neutral by 2050.

The EU ETS and EU MRV requirements

Under the EU ETS, each company with ships trading in the EU/EEA has to submit emission allowances. Particularly, corresponding to a certain amount of its GHG emissions emitted over a calendar year starting with 2024. The requirements apply to the shipping company which is the shipowner or any other organization or person, such as the manager or the bareboat charterer, who has assumed the responsibility for the operation of the ship including duties and responsibilities imposed by the ISM Code. The emissions will be reported and verified through the existing EU MRV (Monitoring, Reporting and Verification) system. It will be revised and extended to cover necessary GHG emissions, ship types, and sizes.

Emission scope

Ship types and sizes

From 2024 the EU ETS will include ships above 5000 GT transporting cargo or passengers for commercial purposes. The EU MRV system will extend from 2025 to apply on offshore ships above 400 GT. Additionally, general cargo ships between 400 and 5000 GT, transporting cargo for commercial purposes. Offshore ships above 5000 GT will join the ETS from 2027. By 2026 the European Commission will review whether general cargo and offshore ships between 400 and 5000 GT will also join the ETS.

Greenhouse gases (GHGs)

From 2024 the EU ETS will include CO₂ emissions only, while the EU MRV will extend the same year to include reporting of methane (CH4) and nitrous oxide (N2O) which are two other greenhouse gases (GHG) from ships. From 2026 the EU ETS will also include these two GHGs.

Voyages

All 100% of emissions on voyages and port calls within the EU/EEA, and 50% of emissions on voyages into or out of the EU/EEA are subject to the EU ETS. To avoid evasive behavior, container ships stopping in transhipment ports outside the EU/EEA but less than 300 nm from an EU/EEA port, need to include 50% of the emissions for the voyage to that port as well, rather than only the short leg from the transhipment port. The EU will provide a list of transhipment ports.

Phase-in

The emissions in scope for surrendering allowances will gradually phase in, starting with 40% of emissions according to the scope described above for 2024, increasing to 70% for 2025 and to 100% for 2026 onwards.

Exemptions & Derogations

Certain activities exempt or have reduced obligations to submit allowances. These include certain ice-classed ships, certain ships servicing low-population islands without rail or road links or located in the outermost regions, and ships performing public service obligations.

Compliance Process

Each company will need to be registered with an administrating authority. For companies registered in the EU, the administrating authority will be the member state where it is registered, while for companies outside the EU, it is the member state with the largest number of port calls from voyages performed by the shipping company the last two monitoring years. Alternatively, if it has not traded in the EU in the last two years, the member state of the first port call in the EU. The EU will prepare a list of the administering authorities per company, which will receive updates every two years.

Within three months after entry into force of the revised directive (to be decided at adoption), an updated ship EU MRV monitoring plan must be verified by an accredited verifier and submitted to the administrating authority of the company. The monitoring plan shall describe the method for monitoring and reporting of methane and nitrous oxide. From 1 January 2024, each ship needs to start reporting according to the revised monitoring plan.

By 31 March each year from 2025, a verified company emission report needs to be submitted to the administering authority. The company emission report aggregates the emissions within the scope of the EU ETS reported and verified for each ship under the responsibility of the company during the reporting period (i.e., the calendar year). Note that this in practice means that the ship emissions report needs to be verified and submitted a month earlier than under the current EU MRV system. By 30 September (indicated, subject to confirmation) each year the necessary emission allowances are required to be surrendered to the administering authority.

Penalties

Ships that fail to comply with the EU MRV requirements for two or more consecutive periods may be expelled and denied trading in the EU. Companies that fail to surrender allowances are liable to an excess emissions penalty of €100/tonne CO₂, and are still liable for the surrendering of the required allowances. Companies that fail to comply for two or more consecutive periods may be denied entry in the EU for all ships under its responsibility.

What about biofuels & e-fuels?

The EU ETS allows using a zero CO2 emissions factor for biofuels, renewable fuels of non-biological origin, and recycled carbon fuels fulfilling the sustainability and GHG emissions saving criteria under the EU’s Renewable Energy Directive (RED). The RED revision proposal, which is still under negotiation, sets this GHG emissions saving criteria to 70% for transportation fuel. However, the EU has not finalized the delegated act defining the rules for renewable fuels of nonbiological origin and recycled carbon fuels under the RED.

How to acquire emission allowances?

Ship companies will not receive any free allowances. Emission allowances can be acquired in the primary market through auctions arranged by the European Energy Exchange (EEX) which is currently contracted by the EU to handle this.

There is also a substantial secondary market where allowances are tradeable bilaterally or through various derivatives offered by financial institutions.

Where do the revenues end up?

The revenues from the auctions distribute to various recipients. The introduction of shipping into the EU ETS means that an additional approximately 80 to 100 million emission allowances will join the market. Of these, auction revenues from 20 million emission allowances will go to the Innovation Fund to support shipping-specific projects. The remaining revenues will go to the EU member states and will not be earmarked for specific purposes beyond climate and energy-related activities.

Recommendations

Classification societies recommend that companies with ships within the scope of the EU MRV and EU ETS from 2024, prepare for the updated monitoring and reporting requirements. Companies with ships within the scope of the EU ETS should make the necessary updates to contractual arrangements and start considering how to acquire the necessary emission allowances.

Source: DNV

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