EU ETS for Marine Transport Explained – Executive Summary

The EU Emissions Trading System (EU ETS), established in 2005, was expanded to include maritime transport in 2023 with the new rules taking effect from 1 January 2024.

Which vessels are covered under the EU ETS?

1. Commercial Ships of 5,000 gross tonnes or more, transporting cargo or passengers, that call at EU ports, regardless of flag or of the owner’s jurisdiction of incorporation. Offshore ships will be included from 1 January 2027.
2. Ice-Class Ships with ice-class IA, IA Super or equivalent, are granted a dispensation until 31 December 2030 that requires their owners to only surrender a reduced quantity of allowances (5% fewer than their verified emissions).
3. Particular Ships: The EU ETS excludes some types of vessels, such as military vessels and government ships used for non-commercial purposes, ships not propelled by mechanical means, some wooden ships, and fishing vessels.
4. Some geographical exemptions were introduced to prevent obvious disadvantages to geographically remote states/areas and to protect lifeline ferry services.

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.

Methane (CH4) and nitrous oxide (N2O) emissions will be included in the EU ETS from 2026.

Phase-in timeline for EU ETS

A gradual phase-in timetable requires stakeholders to buy and surrender EU Allowances (EUAs) for 40% of their verified emissions for intra-EU voyages in 2024, with the figure rising to 70% in 2025, and 100% in 2026. EUAs must be surrendered by 30 September of the year following the calendar year when emissions are calculated (the reporting period).

Who is responsible for compliance under the EU ETS?

The “Shipping Company”  is responsible for compliance by monitoring, registering, and reporting the verified emissions to the administering authority on an annual basis, and later surrendering the required EUAs to the competent authority. To this end, Shipping Companies will need to open accounts with the Union Registry.

The “Shipping Company” is defined as the shipowner, or any other organisation or person, such as the manager or bareboat charterer that has assumed responsibility for the operation of the ship from the shipowner as per the International Management Code for the Safe Operation of Ships and for Pollution Prevention.

EU Monitoring Reporting and Verification (MRV) Obligations

As part of its MRV obligations, the Shipping Company must register with an administering authority that will ensure, amongst other matters, that the Shipping Company submits the aggregated emissions data at company level and a verified emissions report for each ship for the previous calendar year, starting in 2025. This report is submitted to a verifier tasked with issuing a verification report. Once a verifier has assessed the monitoring plans and emissions reports, the verifier will issue a Document of Compliance.

How are EU Allowances purchased and how much do they cost?

Allowances are purchased via auctions held through the European Energy Exchange (EEX) primary market (spot auctions) or the secondary market (spot continuous and derivatives), either directly or through brokers or traders. There is no fixed price per allowance, rather its price is driven by supply and demand. Auctioning is the default method.

Sharing the cost of EU Allowances

In line with the EU’s “polluter pays” principle, the Shipping Company should be entitled to claim reimbursement for the costs arising from the surrender of allowances from the “entity that is directly responsible for the decisions affecting the greenhouse gas emissions of the ship”. The precise arrangements will depend on the commercial agreement between the parties.

Exemptions to the EU ETS

Certain calls at EU ports and their corresponding emissions are excluded. Exempted EU port stops include those solely for refuelling, obtaining supplies, crew relief (except for offshore ships), dry-dock or repairs to the ship and/or its equipment, distress situations, ship-to-ship transfers outside ports, stops for taking shelter from adverse weather and for search and rescue activities, and stops of containerships in listed neighbouring container transhipment ports.

Penalties for non-compliance

Failure by Shipping Companies to comply with their EU ETS obligations can result in penalties, namely:

• Shipping Companies that fail to surrender their allowances when due, will, in addition to their surrender obligation for the missing emission allowances, incur an excess emissions penalty of EUR 100 per tonne of CO2 equivalent emitted that has not been surrendered.
• Failure to comply with the surrender requirements for two or more consecutive reporting periods may result in the issuance of an expulsion order by the competent authority of the Member State of the port of entry with such effect that (1) all Member States, except the flag state, shall refuse entry to all ships operating under that shipping company’s control and, (2) where a ship is flagged in a Member State and it enters one of its ports, the flag state may detain the ship. An expulsion order will remain until the Shipping Company fulfils its emission allowance surrender obligations.
• The names of Shipping Companies not complying with EU ETS regulations may also be published. The company-wide applicability of the EU ETS could result in significant consequences for sister ships.

Anti-avoidance measures

The EU recognises that the regional nature of the emissions trading scheme will inevitably result in an increased risk of circumvention of the EU ETS rule by way of evasive calls and relocation of transhipment activities to ports outside the EU. Evasive behaviour could also include revising routes, adding intermediary ports of calls to schedules so that there are calls to ports outside the EU.

To prevent and discourage such behaviour, the EU has proposed setting a limit of 300 nautical miles from a port under the jurisdiction of a Member State.  Where the distance between a port under the jurisdiction of a Member State and a port outside the jurisdiction of a Member State is less than 300 nautical miles, then 100% of the emissions from voyages to and from such ports and the EU will be caught by the regime.

Subject to the effectiveness of the anti-avoidance regime, further measures may be implemented by the EU such as increased surrender requirements for voyages where the risk of evasion is higher.

Further information

Please read our six-part article series for further insight into the EU ETS for Marine Transport. Our new Decarbonisation in the Maritime Industry hub also provides a range of content surrounding the topic:

EU Emissions Trading System for Maritime Transport Explained – Part 1

Decarbonisation of the Maritime Industry Hub