The EU Carbon Border Adjustment Mechanism – The 2023 / 2025 Transitional Phase
UK & Europe
Decarbonisation in the Shipping Industry
The EU Emissions Trading System (EU ETS) - the world’s largest carbon market introduced in 2005 by the EU to combat climate change - was recently expanded to include the maritime transport sector.
In the fifth article of our six-part series reviewing the impact of the new EU rules set to apply from 1 January 2024, we look at the regulatory interaction between the EU measures and the parallel IMO measures including their legal status, scope of application and geographical reach.
As part of the global effort to decarbonise our environment, several programmes to promote sustainability in the maritime sector have been put in place.
In parallel to the EU’s initiative to reduce carbon emissions by expanding the scope of the EU ETS to the maritime sector, the IMO has adopted separate measures such as the Carbon Intensity Indicator (CII) and the Energy Efficiency eXisting ship Index (EEXI), both directed at the shipping industry.
In this article, we will carry out a comparative analysis of both the EU and the IMO measures.
As discussed previously, the EU ETS is a carbon market introduced by the EU, which aims to reduce greenhouse gas (GHG) emissions from various sectors, including energy-intensive industries. It is the world's first major carbon market and remains the largest.
The EU ETS is a cap-and-trade scheme whereby a cap is set on the total amount of certain greenhouse gases that are allowed to be emitted by the GHG-discharging installations covered by the system.
Within the cap, GHG-producing installations may sell, buy, receive, and trade emission allowances.
On 1 January 2024, the first compliance year for the shipping industry will start. As a result, there will be an obligation on Shipping Companies to monitor and report CO2 emissions and surrender the required allowances.
The IMO introduced amendments to Annex VI of the International Convention for the Prevention of Pollution from Ships 1973 (MARPOL), which provide a framework to assess and measure a ship’s carbon intensity (the IMO Regulations).
The IMO Regulations aim to improve the energy efficiency of ships and promote the use of cleaner fuels.
Since 1 January 2023, when the IMO Regulations came into force, it has been mandatory for all ships subject to the IMO Regulations to calculate their attained Energy Efficiency eXisting ship Index (EEXI) in order to assess their energy efficiency, collect data for the reporting of their annual operational carbon intensity indicator (CII) and obtain a CII rating.
This information is required to measure how efficiently ships operate and to identify opportunities for emissions reductions.
The IMO's Marine Environment Protection Committee (MEPC) plans to review and assess the effectiveness of the IMO Regulations by 1 January 2026 and may possibly amend them.
Building upon the EU ETS and IMO Regulations, the European Commission, amending Directive 2009/16/EC, launched the FuelEU Maritime initiative on 14 July 2021, a proposal for a regulation on the use of renewable and low-carbon fuels in maritime transport.
This proposed regulation, which has now been formally adopted, promotes the use of sustainable alternative fuels by setting binding GHG intensity targets.
In addition, ship operators will be required to gradually increase the share of sustainable and low-carbon fuels used and reduce the GHG emissions, ensuring a more sustainable maritime industry.
The EU ETS, the IMO Regulations, and FuelEU Maritime are complementary in their objectives.
The EU ETS provides a regulatory framework for emissions reduction, whilst the IMO Regulations promote improvements in energy efficiency.
In parallel, FuelEU Maritime supports the transition to low-carbon and renewable fuels, aligning with the goals of both the EU ETS and IMO Regulations.
The recent extension of the EU ETS to the maritime sector aims to incentivise shipowners to invest in emissions reduction technology and measures.
By participating in the world's largest carbon market, ship operators can trade emission allowances, in turn encouraging efficiency and the use of cleaner fuels.
Similarly, the IMO Regulations have created a standard approach for assessing a ship’s energy efficiency through the reporting of emissions.
FuelEU Maritime, with its binding targets for sustainable fuels, promotes the development and use of innovative technology and alternative fuels.
This initiative promotes collaboration amongst all stakeholders, including fuel suppliers, shipbuilders, and shipowners, to accelerate the affordability and availability of sustainable shipping fuels.
The three systems are able to coexist (they may apply to a ship concurrently) and are not in conflict: the EU ETS and the FuelEU Maritime are both EU initiatives, whereas the IMO Regulations are amendments to an international convention (MARPOL).
FuelEU Maritime was formally approved in July 2023 by the two co-legislators of the EU, namely the European Parliament and the European Council, and will apply from 1 January 2025.
On the other hand, MARPOL Annex VI has 105 parties as of 1 November 2022, representing between them 96.81% of world merchant shipping by tonnage.
In terms of scope, the EU ETS applies to ships above 5,000 gross tons which transport cargo or passengers commercially, irrespective of flag.
As for the IMO Regulations, while EEXI generally applies to each ship of 400 gross tonnage and above, CII applies to ships of 5,000 gross tonnage and above.
FuelEU Maritime applies to all vessels of any flag above 5,000 gross tonnage.
The EU ETS applies to all intra-EU voyages and to voyages between the EU and non-member states.
Regarding the IMO Regulations, the provisions of MARPOL Annex VI are applicable internationally: Port State Control in states which are parties to the MARPOL Convention expect vessels that call at their ports to comply with the requirements of Annex VI.
FuelEU Maritime applies to all vessels of any flag travelling to or from, or at berth in ports in the EU.
Another difference between the three systems is that, whilst the IMO Regulations and FuelEU Maritime were initially formulated to apply to the shipping industry, the EU ETS was not originally designed for the shipping industry: the EU ETS initially applied to sectors including power and heat generation, energy-intensive industrial sectors, and commercial aviation (the extension of the EU ETS to the shipping industry is taking place now with the publication of Regulation (EU) 2023/957 and Directive (EU) 2023/959).
The final article in the series will examine:
You may access the previous issues in the series here: