EU Emissions Trading System for Maritime Transport Explained – Part 6 of 6

  • Legal Development 19 December 2023 19 December 2023
  • UK & Europe

  • Decarbonisation in the Shipping Industry

Starting on 1 January 2024, the EU Emissions Trading System (EU ETS), the world’s largest carbon market introduced in 2005, will start to apply to the maritime transport sector. In the final article of our six-part series, we continue to examine the regulatory interaction between the EU and the IMO measures in this area, including the varying timelines, stated goals, and legal requirements.

Regulatory interplay between the EU and the IMO measures – Part II

Timelines

EU ETS

The EU ETS has a phased-out implementation process starting 1 January 2024, whereby in 2024 stakeholders will be required to buy and surrender allowances for 40% of their verified emissions for intra-EU voyages and 20% of their emissions for voyages into or out of the EU. 

In 2025, this increases to 70% of emissions for intra-EU voyages. 

In 2026, the figure will reach 100% of emissions for intra-EU voyages and 50% for voyages into or out of the EU. 

By 30 September each year, Shipping Companies will be required to surrender their allowances from the previous year under the EU ETS. 

IMO CII

The CII aims to continuously improve a ship’s energy efficiency by enforcing increasingly stricter emission targets each year. 

The CII is a yearly review of a ship’s actual carbon emission performance over the past year, with such monitoring starting from 1 January 2023.  

By 31 December 2022, all ships subject to the CII rating were required to have prepared a SEEMP Part III (i.e., a specific part of the Ship Energy Efficiency Management Plan developed to support CII targets). 

From 1 January 2024, a Statement of Compliance containing fuel consumption and CII-related data will be issued. 

The flag administration should perform periodical audits of SEEMP Part III/CII compliance, which may include annual audits of the company and additional shipboard verifications and company audits, which, if undertaken, should be six months after the issuance of the Statement of Compliance at the latest.

FuelEU Maritime

The recently adopted FuelEU Maritime regulation sets reduction requirements at five-year increments until 2050 (against the 2020 reference value). 

The yearly average GHG intensity of the energy used on-board a ship shall not exceed the following limits: 

  • 2% from 1 January 2025, 
  • 6% from 1 January 2030, 
  • 14.5% from 1 January 2035, 
  • 31% from 1 January 2040, 
  • 62% from 1 January 2045,
  • 80% from 1 January 2050.

Decarbonisation goals

In terms of decarbonisation goals, the EU ETS is part of the EU’s “Fit for 55” package, namely the EU’s plan to reduce GHG emissions by at least 55% by 2030 compared to 1990 levels, in line with the European Climate Law.
 
FuelEU is also part of the EU’s “Fit for 55” package and its aim is also to reduce net GHG emissions by at least 55% by 2030 compared to 1990 levels and to achieve climate neutrality in 2050. 

The IMO’s Initial GHG Strategy aims to reduce carbon intensity of all ships by 40% by 2030 and 70% by 2050 compared to a 2008 baseline.

All vessels must have an EEXI Technical File on board. In the event of non-compliance, the vessel may be faced with a Condition of Authority. 

In addition, IMO GHG Strategy sets out an enhanced common ambition to reach net-zero GHG emissions from international shipping close to 2050, a commitment to ensure an uptake of alternative zero and near-zero GHG fuels by 2030, as well as indicative check-points for 2030 and 2040.

Requirements 

EU ETS

The EU ETS will initially apply to CO2 emissions and, from 1 January 2026 onwards, emission allowances will need to be surrendered for methane (CH4) and nitrous oxide (N2O) emissions. 

The EU ETS requires the “Shipping Company” (which includes the shipowner, the manager, the bareboat charterer, or anyone that has assumed the 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) to surrender emission allowances. 

Failure to surrender emission allowances may lead to fines, refusal of port calls and potential detention of the ship.

IMO CII

The CII must be calculated and reported every year using the IMO’s prescribed formula. Ships are then given an energy efficiency rating, ranging from A to E, with the required index being C or above. 

If a ship is rated D for three consecutive years, or E for one year, such ship will need to submit corrective action plans setting out steps that will be taken to improve the rating. 

Administrations, port authorities, and other stakeholders are encouraged to provide incentives to vessels rated as A or B. 

IMO EEXI

Since 1 January 2023, it has been mandatory for all ships to calculate their attained EEXI to measure their energy efficiency. This will then be compared against the required EEXI, which is determined by ship type, engine and capacity and is the maximum acceptable attained EEXI value. 

Compliant ships receive an International Energy Efficiency Certificate (IEEC).  

The EEXI regulations do not provide for particular modifications or methods of compliance.  The most popular compliance measures are Engine Power Limitation (EPL) and Shaft Power Limitation (SHAPOLI).

FuelEU Maritime

In contrast, the FuelEU Maritime regulation sets requirements for vessels to progressively reduce their GHG emissions from 2025 onwards, including compliance with monitoring obligations. 

Its aim is to reduce the GHG intensity of the energy used on board. 

The Shipping Company is responsible for ensuring compliance with the requirements of the FuelEU regulation.

Next steps

In terms of next steps, the IMO Marine Environment Protection Committee (MEPC) intends to review the effectiveness of the EEXI measures by 1 January 2026, and possible amendments may be made accordingly. 

The MEPC is also considering a number of submissions related to onboard carbon capture and, ahead of MEPC 81 scheduled for April 2024, instructed working group ISWG-GHG 16 to review the current proposals and advise the Committee on a way forward.  

It should be noted that there is a possibility the EU ETS may be amended, should the IMO decide to implement specific international market-based measures to incentivise the global transition to zero emissions in shipping.  

A reporting and review clause is included in Directive (EU) 2023/959 to monitor the implementation of the rules applicable to the maritime sector and to take into account relevant developments at the level of the IMO.

The European Commission and the IMO both recently expressed their optimism that the EU decarbonisation regulations and the IMO measures could be synchronised, perhaps by 2030. 

However, it seems that the European Commission is supporting the separate concept of a fuel levy within its discussions with the IMO (instead of a solution based on an ETS) as the IMO is more likely to reach consensus on this than on an ETS-based solution. Only a minority of EU member states are pushing for the adoption of an ETS within the IMO. 

This disparity between the two systems could result in the maritime industry dealing with both an EU ETS and a global fuel levy. It remains to be seen how the convergence of the two systems will be achieved.

As regards the FuelEU Maritime initiative, the European Parliament and the European Council reached a deal on 22 March 2023. 

A plenary vote of the European Parliament on 11 July 2023 approved the proposed regulation which was then adopted by the European Council on 25 July 2023 . 

The regulation was published in the Official Journal on 22 September 2023 and entered into force on 12 October 2023, however, it will only apply as of 1 January 2025.

Each of the three initiatives represents a coordinated effort to address emissions in the maritime sector. By combining efficiency improvements, the promotion of sustainable fuels and regulatory efforts, these will hopefully pave the way for a more sustainable shipping industry.


You may access the previous articles in the series here: 

Part I

Part II

Part III

Part IV

Part V


 

End

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