We provide you with an overview of the way the maritime sector will be included in the EU emission trading system starting 1 January 2024 and potential implications for ship owners and operators.
In anutshell:In December 2022 the European Union (EU) agreed that starting from 1January 2024 the European Union emission trading system (EUETS) shall also cover greenhouse gas emissions generated by the shipping industry. TheEUETSis part of the “Fit for 55” package of theEU, aiming to reduce greenhouse gas emissions by at least 55% by 2030in comparison to 1990 levels. In this newsletter we will provide you with an overview of the way the maritime sector will be included in theEUETSand potential implications for ship owners and operators.
TheEU’s “Fit for 55in 2030 Package” is acompendium of proposals to align theEU’s climate, energy, land use, transport and taxation policies with the target of reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. As part of such package the European Commission published proposals on 14 July 2021 to further expand theEUETSto also include emissions from maritime transport. The European Parliament and the Council of the European Union reached aprovisional agreement on 18 December 2022, confirming the inclusion of the shipping industry in theEUETSfrom 1January 2024 onwards. The respective draft directive is currently pending formal adoption and has not been published yet.
TheEUETS, which was introduced in 2008 and covers theEUmember states as well as states of the European Economic Area (EEA), is constructed as a “cap and trade” system. Acap is set on the total amount of certain greenhouse gas emissions that can be emitted by the units covered by the system. Each unit needs to acquire enough allowances to fully cover its emissions, whereas the allowances may be traded between the units according to demand. At the end of each year sufficient allowances to cover all emissions must be surrendered by each unit. The price per allowance is not fixed but fluctuates according to the market demand and supply of emission allowances. Free allowances, which are currently still issued, are planned to be phased out until2030.
In order to achieve its set climate objectives, theEUwill further gradually reduce the issued emission allowances over the next years. In addition to carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O) emissions shall be included in theEUMonitoring Reporting and Verification Regulation (MRVRegulation) by 2024 and covered by theEUETSfrom 2026 onwards.
With regard to shipping the main duty imposed by theEUETSis that also shipping companies must acquire and submit allowances for their carbon dioxide emissions (and for methane and nitrous oxide emissions as from 2026 onwards).
Pursuant to the proposed directive, allowances are required for all emissions on voyages betweenEUandEEAports (including emissions that occur when ships are at berth inEUorEEAports) and 50% of the emissions for voyages betweenEUorEEAports and third countries. This applies to vessels above 5,000 gross tonnage, regardless of the flag they fly. General cargo vessels and offshore vessels between 400 and 5,000 gross tonnage are currently excluded from the schedule, however, they will be included in theMRVRegulation from 2025 on, which means that shipowners are required to monitor, report and verify their respective vessels’CO2emissions from 2025 on. Apossible inclusion in theEUETSshall be reconsidered in the year 2026. Yachts, including superyachts, are excluded from theEUETSunder the current proposal, if they are for private use only, irrespective of their size and actual emissions.
For the requirement to surrender emission allowances under the maritimeEUETStheEUagreed on agraduated scheme covering 40% of all generated carbon dioxide (CO2) emissions from 2024, 70% from 2025, and 100% of all generatedCO2emissions as well as methane and nitrous oxide emissions from2026.
“Shipping company” within theEUETSis defined as the shipowner or any other organisation or person, such as the ship manager or the bareboat charterer, that has assumed responsibility for the operation of the ship from the shipowner and that, on assuming such responsibility, has agreed to take over all the duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention (ISMCode), set out in Annex Ito Regulation (EC) No 336/2006 of the European Parliament and the Council.
In consideration of the broad definition of a “shipping company” it remains to be seen which party involved shall be responsible for compliance with theEUETSdirective and for procuring the respectiveEUETSemission allowances and in which way possible increased costs or risk shall be dealt with adequately. The party responsible would usually be the one that operates the vessel commercially and has control over the speed and route of the vessel and pays for the fuel. TheETSEmission Trading Scheme Allowances Clause for Time Charter Parties 2022, published by the Baltic and International Maritime Council (BIMCO) in 2022, provides agood basis for negotiations in this context. Further revisions ofBIMCOforms as theSHIPMANare expected during 2023 to also take these latest developments into account.
Amongst other possible sanctions, it is likely that the penalty system that is currently applicable under theEUETSwill also be applied for maritime transports. In this case, any shipping company that does not surrender sufficient allowances by 30 April of each year to cover its emissions during the preceding year would be liable for payment of an excess emissions penalty of €100 for each ton ofCO2equivalent emitted in excess of surrendered allowances.
As many details regarding the introduction of theEUETSfor maritime transports have not been published yet by theEU, it remains to be seen how the acquisition and submission of the allowances will be implemented, how many allowances will be distributed and how trading of allowances will be practically organized. Since generally under theEUETSit is planned to reduce and phase out free allowances it seems rather unlikely that there will be any free allowances for the shippingEUETS. Another question will be how third countries will react to the introduction of the trading scheme for maritime transports and whether they will possibly create similar emission trading systems.
If you have any further questions, please do not hesitate to contact your regular contact person atEHLERMANNRINDFLEISCHGADOWorDr. Julia GlockeorHendrik Brauns.
