Understanding The EU Emissions Trading System Now

The EU Emissions Trading System is a strategic component of the EU Green Deal, an ambitious plan to achieve the first net-zero continent status by 2050. The shipping industry, therefore, has an important role to play in actualizing this significant EU goal or objective.

Summary:

The Scope of EU Emissions Trading System (EU ETS): Even though the EU ETS was initially set up to cover power plants, industrial facilities, and aviation within the EU, beginning in 2024, it has likewise been applied to the shipping industry. By definition, the EU ETS is a cap-and-trade system for reducing greenhouse gas emissions such as carbon dioxide (CO2) by setting a limit on emissions.

Highlighting EU ETS Reduction Targets: The European Union Emissions Trading System (EU ETS) emission reduction targets are vital aspects of the EU’s overarching climate strategy that aims to significantly reduce the amount of greenhouse gas (GHG) emissions. In practice, the cap will be tightened yearly to align with the EU’s climate goals of achieving a 55% reduction in GHG by 2030 and net zero by 2050.

ETS2 System: The ETS2 system is the newest emissions trading system introduced by the EU to regulate CO₂ emissions from fuel combustion. The ETS2 System should not be mistaken for an integral part of the current EU ETS, but it is one of the comprehensive EU climate policies under the umbrella of the European Green Deal. Starting from 2027, when it is expected to be fully operational, this system will separately cover industries that are not included in the existing EU ETS, such as road transport, buildings, and small enterprises.

A Potential Loophole in the EU ETS: The major loophole in the enforcement of the EU ETS in the shipping industry is that it may encourage shippers, owing to cost-saving possibilities, to utilize neighbouring non-EU countries as intermediate calls, instead of voyaging in the European Economic Area (EEA).

Future Benefits of EU ETS: Some of the benefits that can be derived from full implementation of the EU ETS include but are not limited to: playing a significant role in ensuring that the EU’s 55% emissions reduction target by 2030 compared to 1990 levels is achieved; limiting the total quantity of GHG emissions year-over-year through a cap-and-trade system; streamlining the process of transparently trading allowances, encouraging companies to embrace this significant EU decarbonization effort.

EUAs & Carbon Credits: EU Allowances (EUAs) and Carbon Credits are key parts of the EU emissions trading systems, specifically within the EU Emissions Trading System (EU ETS). While the EUAs are permits that give companies the permission to emit one ton of CO₂ equivalent under the EU ETS, the Carbon credits, on the other hand, represent verified emission reductions from projects that reduce or eliminate CO₂ emissions.

The Scope of the EU Emissions Trading System (EU ETS)

Even though the EU ETS was initially set up to cover power plants, industrial facilities, and aviation within the EU, beginning in 2024, it has likewise been applied to the shipping industry.

By definition, the EU ETS is a cap-and-trade system for reducing greenhouse gas emissions such as carbon dioxide (CO2) by setting a limit on emissions. The amount of the emissions can be measured, reported and verified with a high level of accuracy

The EU ETS is applied to maritime transport, measuring specifically 50% of emissions from voyages starting or ending outside of the EU and 100% of emissions from voyages between two EU ports and when ships are within EU ports. Participation in the EU ETS is considered mandatory for all EU shipping companies. [1]

Highlighting EU ETS Reduction Targets

The European Union Emissions Trading System (EU ETS) reduction targets are vital aspects of the EU’s overarching climate strategy that aims to significantly reduce the amount of greenhouse gas (GHG) emissions.

Here are the key EU ETS reduction targets:

The EU ETS plans to attain a 62% reduction in emissions by 2030 compared to 2005 levels.
This strategic target is part of the Fit for 55 package, designed to reduce overall GHG emissions by at least 55% across EU member states.

It must be acknowledged that by setting a cap on emissions, limiting allowances, and slowly hiking costs for high-emission industries, the EU ETS aims to encourage widespread businesses adoption of cleaner energy technologies in industry, including the shipping industry.

In practice, the cap will be tightened every year to align with the EU’s climate goals of achieving a 55% reduction in GHG by 2030 and net zero by 2050. [2]

ETS2 System

The ETS2 system is the newest emissions trading system introduced by the EU to regulate CO₂ emissions from fuel combustion. The ETS2 System should not be mistaken for an integral part of the current EU ETS, but it is one of the comprehensive EU climate policies under the umbrella of the European Green Deal. Starting from 2027, when it is expected to be fully operational, this system will separately cover industries that are not included in the existing EU ETS, such as road transport, buildings, and small industries [3].

The key features of ETS2:

It is a Cap-and-Trade System whereby fuel suppliers must monitor and report emissions and purchase allowances instead of end consumers.
ETS2 aims to reduce emissions by 42% by 2030 compared to 2005 levels.
All allowances will be auctioned, and the revenues will be used in assisting climate action and social programs, such as establishing the Social Climate Fund (SCF) that will help vulnerable households and micro-enterprises transition to cleaner energy.
To stabilize the market, efforts will be deployed by the EU to prevent undue price fluctuations. Therefore, if allowance prices go above €45 (adjusted for inflation) in the first three years, extra allowances may be released.

A Potential Loophole in the EU ETS

The major loophole in the enforcement of the EU ETS in the shipping industry is that it may encourage shippers, owing to cost-saving possibilities, to utilise neighbouring non-EU countries as intermediate calls, instead of voyaging in the European Economic Area (EEA).

Since a sizeable number of shipping companies, oil trading companies, non-EU countries, and ship management companies will be avoiding the EU ETS compliance cost through this approach, it may result in revenue loss for the EU ETS, leading to unmanaged carbon leakage.

EU ETS Loophole - How to reduce the compliance cost

A potential loophole in the EU ETS

Queseas has published an article focusing on the side effects of the inclusion of shipping in the EU Emissions Trading System (EU ETS).

Ship Nerd

Future Benefits of the EU ETS

Some of the benefits that can be derived from full implementation of the EU ETS include, but are not limited to [4]:

Playing a significant role in ensuring that the EU’s 55% emissions reduction target by 2030 compared to 1990 levels is achieved.
Limiting the total quantity of GHG emissions year-over-year through a cap-and-trade system.
Streamlining the process of transparent emissions trading allowances, encouraging companies to embrace this significant EU decarbonization effort.
Encouraging long-term investment in innovative, green or renewable energy technologies.
Reducing dependence on fossil fuels or imported energy, thereby enhancing European energy security.
Creating jobs and expanding economic opportunities through the establishment of new industries made possible by low-energy costs.
Leading the world in carbon pricing through an initiative like Carbon Border Adjustment Mechanism (CBAM) that promotes fair competition in pricing emissions in imported goods, preventing carbon leakage in the process.

EUAs & Carbon Credits

EU Allowances (EUAs) and Carbon Credits are key parts of the EU emissions trading systems, specifically within the EU Emissions Trading System (EU ETS). While the EUAs are permits that give companies the permission to emit one ton of CO₂ equivalent under the EU ETS, the Carbon credits, on the other hand, represent verified emission reductions from projects that reduce or eliminate CO₂ emissions.

There are striking differences between the two approaches, which are clearly presented in the table below:

Feature	EUAs	Carbon Credits
Regulation	EU Emissions Trading System	Voluntary and Compliance Markets
Purpose	Emission allowances for regulated sectors	Offsetting emissions from various sources
Trading	Bought and sold within EU ETS	Traded globally in voluntary and compliance markets

Table 1.1: The main difference between EUAs and Carbon Credits [5]

Key Takeaways

Shippers need to understand that cleaner energy helps spur new innovations and encourages sustainable practices while enhancing job creation, compliance, and higher profitability. However, the EU Emissions Trading System incorporates loopholes which can be leveraged by smart shipowners.