EU Emissions Trading System for Maritime Transport Explained – Part 1 of 6
Market Insight 16 October 2023 16 October 2023
UK & Europe
Decarbonisation in the Shipping Industry
The EU Emissions Trading System (EU ETS), the world’s largest carbon market, was originally introduced in 2005 by the EU to combat climate change by reducing greenhouse gas emissions through an emissions cap-and-trade system.
The system was recently expanded. On 5 June 2023, new legislation entered into force which extended the scope of the EU ETS to maritime transport, a sector previously excluded.
The new rules, set to apply from 1 January 2024, will have a significant impact on the shipping sector in Europe.
Through a series of six articles, we review the main changes introduced by the EU.
In this first issue, we examine:
- The vessels covered by the EU ETS
- The voyage emissions that fall under the scope of the EU ETS
- The phase-in timeline
- The data that is to be reported
In 2005, the EU set up the world’s first and largest international emissions trading system (EU ETS) to combat climate change through the reduction of greenhouse gas (GHG) emissions by way of a cap-and-trade system. However, at its inception, the maritime transport sector was excluded.
In 2021, the EU introduced the Fit for 55 package (FF55), a set of legislative proposals designed to update EU legislation to align with European climate goals. The name of the initiative derived from one of its objectives: the reduction of EU GHG emissions by at least 55% compared with 1990 levels by the target year of 2030, just over six years from now.
FF55 set to reform the EU ETS in 2022 by extending it to maritime transport, and on 18 April 2023, the European Parliament voted in favour of the extension.
Both measures entered into force on 5 June 2023 and will now apply from 1 January 2024.
In order to gain some insight on how these measures are designed to operate, we have produced a six-part series analysing the key elements of the new legislation.
Which vessels are covered under the EU ETS?
Various vessel types will fall under the scope of the EU ETS. They are as follows:
- Commercial ships
The EU ETS will initially only cover commercial vessels of 5,000 gross tonnes or more that call at EU ports, regardless of flag or of the owner’s jurisdiction of incorporation.
The measure includes both cargo and passenger ships (with certain exemptions for some ferries, outlined below).
It does not currently include offshore ships, but it will be expanded to include these from 1 January 2027. No definition is given within the measures as to what constitutes an “offshore ship”, however, offshore vessels would typically include vessels which serve operational purposes in connection with, for example, oil and gas exploration and production, wind farms, etc.
The European Commission has expressed its intention to expand the scope of application over time and is planning to present a report to the European Parliament and to the European Council by 31 December 2026, examining the feasibility and economic, environmental, and social impacts of expanding the EU ETS to smaller ships (including offshore ships) of 400 gross tonnes or more.
- Ice-class ships
In acknowledgement of the fact that the specific design of ice-class ships makes them fuel-inefficient in open water (thus leading to them having greater emissions than equivalent ordinary ships), but aware that “renewing fleets of ice-class ships and developing innovative technology that reduces the emissions of such ships will take time and require financial support”, these vessels are – until 31 December 2030 – granted a dispensation that requires their owners to only surrender a reduced quantity of allowances (5% fewer than their verified emissions).
This dispensation only applies to ships with ice-class IA, IA Super or equivalent.
- Particular ships
Finally, a few specific ship-types are entirely excluded from the EU ETS, including military vessels and government ships used for non-commercial purposes, ships not propelled by mechanical means, wooden ships “of a primitive build”, and fishing vessels (whether for catching or processing) 1.
The EU ETS provides for some geographical exemptions to address particular circumstances. These are intended to prevent obvious disadvantages to geographically remote states and areas and to protect lifeline ferry services.
- Small island exemption
There are provisions allowing Member States, by means of local legislation, to provide a temporary, total exemption from the EU ETS (until 31 December 2030) to non-cruise passenger and ro-pax ships performing voyages between small islands and ports on the mainland, where these islands have no road or rail link to the mainland and a permanent population of less than 200,000 people.
The European Commission intends to publish a list of the islands and ports covered by this exemption.
- Geographical exemption
Similar exemptions apply to:
- Ferries operating between Member States who share no land border with another Member State and their geographically closest neighbour (who can make a joint application to the European Commission for an exemption where the voyages are “performed in the framework of a transnational public service contract or a transnational public service obligation”), such as the maritime connection between Cyprus and Greece which has been absent for over two decades, and
- Any voyages between a port located in the “outermost region” of a Member State and other ports within that Member State, or
- Activities within ports relating to these voyages.
Which voyage emissions fall under the scope of the EU ETS?
Emissions of CO2 gas will be covered under the EU ETS in the following manner:
- 100% of emissions from voyages starting and ending at EU ports
- 100% of emissions from vessels at berth in EU ports
- 50% of emissions from voyages which start or end at EU ports, with a destination or starting point outside the EU
What is the phase-in timeline for the EU ETS?
Regulators have decided to adopt a gradual phase-in timetable for the introduction of the EU ETS in the maritime sector.
The following infographic shows the percentage of emissions a shipping company will be required to compensate through the surrender of allowances over the next three years.
Allowances will need to be surrendered by 30 September of the year following the calendar year when emissions are calculated (the reporting period).
While the climate impact of maritime transport is mainly due to CO2 emissions, both methane (CH4) and nitrous oxide (N2O) emissions, which are expected to grow overtime due to the use of liquefied natural gases or other energy sources, will be included in the EU ETS from 2026.
What data is to be reported?
Once in force, from 1 January 2024, the EU ETS regulations will cover the monitoring and reporting of CO2 emissions only.
However, from 2026, the reporting requirements will include other greenhouse gases, i.e., methane (CH4) and nitrous oxide (N2O) as mentioned above.
Vessel emissions are primarily determined based on the fuel consumption of various machineries, including those needed for propulsion, power generation and cargo operations.
The emissions are not determined by monitoring the actual content of CO2 released in the air but are calculated by measuring the fuel consumption of each particular machinery and then calculating the CO2 produced during the combustion by using a “carbon emission factor” for that fuel.
The various shipboard machineries whose fuel consumption is to be monitored are:
- Main engines
- Auxiliary engines
- Gas turbines
- Boilers – including main and auxiliary boilers
- Inert gas generators (for tankers and gas carriers)
- Gas combustion unit (for LNG carriers)
The emergency generator engines are not to be regarded as an emission source, unless these are being used for operational purposes, in which case their emissions are included along with auxiliary engines.
Measurement of fuel consumption
This can be done by a combination of one or more of the following methods:
- Bunker Delivery Notes to determine the quantity of fuel delivered on board the ship in a calendar year.
- Bunker tank measurements by means of radar or manual soundings.
- Flow meters installed on various machineries.
- Cargo tank measurement – where cargo is being used as a fuel (for gas carriers).
The above falls within daily routine tasks which are performed by the shipboard staff.
The choice of measurement technique adopted will depend on the type of ship and fuel used.
In the forthcoming articles, we will be looking at:
- Who is responsible for compliance under the EU ETS?
- What are the MRV obligations under the EU ETS?
- How are EU Allowances purchased?
- How might the cost of EU Allowances be shared between the parties?
- Do any exclusions apply to the EU ETS?
- Are there penalties for non-compliance?
- How will the EU address any avoidance attempts?
- The regulatory interplay between EU and the IMO measures – Part I
- The regulatory interplay between EU and the IMO measures – Part II