EU’s small but vital step to shipping decarbonisation: the maritime ETS 

On 9 February 2023, the Environment Committee of the European Parliament endorsed the political agreement reached last December by the European Parliament and the Council on extending the European Trading Emission Scheme (ETS) to the shipping sector, as part of the EU ETS reform. 

What is the EU ETS?

Set up in 2005, the EU ETS is the world’s first international emission trading system. It is a cap and trade mechanism in which the maximal quantity of emissions is fixed. Within the cap, economic actors in sectors covered by the EU ETS, which do not include the shipping sector at the moment, buy or receive emissions allowances and trade with one another as needed. The cap is reduced over time to incentivise economic actors to invest in low-carbon technologies so that total emissions fall. Due to the frustration of a lack of progress on shipping decarbonisation at the global level, the Commission proposed in July 2021 as part of the Fit for 55 package to extend the EU ETS to the shipping sector. 

The key aspects of the maritime ETS

• Include in the ETS all emissions from ships travelling between EU ports, and 50% of the emissions from ships performing voyages between an EU port and a non-EU port. 
• The inclusion will take a phased-in approach:
  • 40 % of verified emissions reported for 2024 will be surrendered in 2025;
  • 70 % of verified emissions reported for 2025 will be surrendered in 2026;
  • 100 % of verified emissions reported for 2026 will be surrendered in 2027.
• Outermost regions including Azores and Madeira (Portugal) and the Canary Islands (Spain) will be exempted from the EU ETS until December 2030.
• Methane and Nitrous Oxide will be covered by the EU Measurement, Reporting and Verification (MRV) schemefrom 2024 and by the EU ETS from 2026.
• EUR 1.6 billion (details to be further clarified) will be earmarked for mandatory dedicated maritime projects under the Innovation Fund.
• Should the International Maritime Organisation (IMO) not adopt a global market-based measure by 2028, the Commission shall consider the possibility to include all emissions from ships performing voyages between an EU port and a non-EU port.
• Where shipping companies fail to comply with the surrender requirements for two or more consecutive reporting periods, as a measure of last resort, an expulsion order may be issued to refuse entry of ships of that shipping company. 

Next steps in the legislative procedure

Following the vote of the Environment Committee, the full House of the European Parliament is expected to vote on the proposal during the plenary session taking place in the week of 13-17 March. On the Council side, the Swedish Presidency expects the approval process to go smoothly. The whole legislative procedure therefore is expected to be completed before the summer break.

Our take

Extending the EU ETS to shipping marks an important first step to decarbonise the sector. However, more clarity is still needed in terms of its implementation, where the devil will be in the details of Implementing and Delegated Acts. There also remains questions about the availability of the Innovation Fund to the shipping sector. 

Extending the EU ETS to shipping marks an important first step to decarbonise the sector. However, more clarity is still needed in terms of its implementation, where the devil will be in the details of Implementing and Delegated Acts. There also remains questions about the availability of the Innovation Fund to the shipping sector.

hAOYANG yAN

In addition to the maritime ETS, the EU also intends to set up a legislative framework to incentivise the uptake of renewable energy at a reasonable price and make available on shore power supply. For this purpose, the EU institutions are negotiating other key maritime-related legislative proposals including the FuelEU Maritime, Alternative Fuels Infrastructure Regulation, the Energy Taxation Directive and the Renewable Energy Directive, which together form a basket of measures to decarbonise the shipping sector. 

The difficulty lies in how to ensure the coherence of the whole regulatory framework so that the EU can, on the one hand, pursue its climate neutrality goal (which is set in stone in the Climate Law Act), while on the other hand, maintain the competitiveness of the European shipping sector, in particular at the time when other regions of the world are massively investing in clean technologies and alternative energy solutions. It remains to be seen whether the recently announced Green Deal Industrial Plan would provide sufficient regulatory and financial support in this regard. 

At the international level, the EU is likely to push the IMO to swiftly adopt more ambitious global market-based measures in its decarbonisation strategy, which is due to be revised later this year. Actors in the maritime ecosystem should pay close attention to the policy developments at both the EU and international level in the next couple of months and start to prepare for the compliance for the EU ETS.

For more information, please contact:

Haoyang Yan at Haoyang.yan@fipra.com

Hilary Hudson at Hilary.hudson@fipra.com