EU ETS: Preliminary agreement to include shipping in the EU’s Emission Trading System from 2024

The EU’s legislative bodies have reached an agreement on including shipping in its Emission Trading System (EU ETS). Subject to final adoption, ships above 5000 GT transporting cargo or passengers for commercial purposes in the EU will be required to acquire and surrender emission allowances for their CO2 emissions from 2024. Offshore ships will be included from 2027. This statutory news summarizes the current information on EU ETS.

Relevant for ship owners, managers and charterers.

The European Parliament (EP), Council of the European Union, and the European Commission have reached an agreement on including shipping in the EU’s Emission Trading System (EU ETS) from 2024. There is no consolidated text available yet and this newsletter is based on the available information about the agreement and otherwise the Commission proposal from 14 July 2021. The EP and Council are expected to formally adopt the revised directive later. Further details on the requirements and processes can be expected as the final text is adopted, and the European Commission adopts related implementing and delegated acts.

The EU ETS is an emission cap-and-trade system where a limited amount of emission allowances – the cap – is put on the market and can be traded. The cap is reduced each year, ensuring that the EU’s emission target by 2030 of 55% reduction, relative to 1990, can be met while becoming climate-neutral by 2050.

The EU ETS and EU MRV requirements

Under the EU ETS each company with ships trading in the EU/EEA is required to surrender emission allowances corresponding to a certain amount of its GHG emissions emitted over a calendar year starting with 2024. The requirements apply to the shipping company which is the shipowner or any other organization or person, such as the manager or the bareboat charterer, who has assumed the responsibility for the operation of the ship including duties and responsibilities imposed by the ISM Code. The emissions will be reported and verified through the existing EU MRV (Monitoring, Reporting and Verification) system, which will be revised and extended to cover necessary GHG emissions, ship types and sizes.

Emission scope

Ship types and sizes

From 2024 the EU ETS will include ships above 5000 GT transporting cargo or passengers for commercial purposes. The EU MRV system will be extended from 2025 to apply to offshore ships above 400 GT and general cargo ships between 400 and 5000 GT transporting cargo for commercial purposes. Offshore ships above 5000 GT will from 2027 be included in the ETS. By 2026 the European Commission will review whether general cargo and offshore ships between 400 and 5000 GT will also be included in the ETS.

Type Size (GT) EU MRV EU ETS

Ships transporting cargo or passengers 5000+ In force 2024

General cargo and offshore ships 400-5000 2025 To be evaluated

Offshore ships 5000+ 2025 2027

Greenhouse gases (GHGs)

From 2024 the EU ETS will include CO2 emissions only, while the EU MRV will be extended the same year to include reporting of methane (CH4) and nitrous oxide (N2O) which are two other greenhouse gases (GHG) emitted by ships. From 2026 the EU ETS will also include these two GHGs.

GHG EU MRV EU ETS

CO2 In force 2024

Methane (CH4), Nitrous oxide (N2O) 2024 2026

Voyages

All 100% of emissions on voyages and port calls within the EU/EEA, and 50% of emissions on voyages into or out of the EU/EEA are subject to the EU ETS. To avoid evasive behaviour, container ships stopping in transhipment ports outside the EU/EEA but less than 300 nm from an EU/EEA port, need to include 50% of the emissions for the voyage to that port as well, rather than only the short leg from the transhipment port. The EU will provide a list of transhipment ports.

Voyage scope EU MRV EU ETS

Emissions on voyages and port calls within the EU/EEA 100% 100%

Emissions on voyages into and out of the EU/EEA 100% 50%

Phase-in

The emissions in scope for surrendering allowances will be gradually phased-in, starting with 40% of emissions according to the scope described above for 2024, increasing to 70% for 2025 and to 100% for 2026 onwards.

Phase-in 2024 2025 2026

Share of emissions subject to the EU ETS 40% 70% 100%

Exemptions and derogations

Certain activities are exempted or have reduced obligations to surrender allowances, such as certain ice classed ships, certain ships servicing low population islands without rail or road link or located in the outermost regions, and ships performing public service obligations.

Compliance process

Each company will need to be registered with an administrating authority. For companies registered in the EU, the administrating authority will be the member state where it is registered, while for companies outside the EU it is the member state with the largest number of port calls from voyages performed by the ship company the last two monitoring years, or, if it has not traded in the EU the last two years, the member state of the first port call in the EU. The EU will prepare a list of the administering authorities per company, which will be updated every two years.

Within three months after entry into force of the revised directive (to be decided at adoption), an updated ship EU MRV monitoring plan must be verified by an accredited verifier and submitted to the administrating authority of the company. The monitoring plan shall describe the method for monitoring and reporting of methane and nitrous oxide. From 1 January 2024, each ship needs to start reporting according to the revised monitoring plan.

By 31 March each year from 2025, a verified company emission report needs to be submitted to the administering authority. The company emission report aggregates the emissions within the scope of the EU ETS reported and verified for each ship under the responsibility of the company during the reporting period (i.e., the calendar year). Note that this in practice means that the ship emissions report needs to be verified and submitted a month earlier than under the current EU MRV system. By 30 September (indicated, subject to confirmation) each year the necessary emission allowances are required to be surrendered to the administering authority.

Penalties

Ships that fail to comply with the EU MRV requirements for two or more consecutive periods may be expelled and denied trading in the EU. Companies that fail to surrender allowances are liable to an excess emissions penalty of €100/tonne CO2, and are still liable for the surrendering of the required allowances. Companies that fail to comply for two or more consecutive periods may be denied entry in the EU for all ships under its responsibility.

How will biofuels and e-fuels be handled?

The EU ETS allows using a zero CO2 emissions factor for biofuels, renewable fuels of non-biological origin, and recycled carbon fuels fulfilling the sustainability and GHG emissions saving criteria under the EU’s Renewable Energy Directive (RED). The RED revision proposal, which is still under negotiation, sets this GHG emissions saving criteria to 70% for transportation fuel. However, the EU has not finalised the delegated act defining the rules for renewable fuels of nonbiological origin and recycled carbon fuels under the RED.

How to acquire emission allowances?

Ship companies will not receive any free allowances. Emission allowances can be acquired in the primary market through auctions arranged by the European Energy Exchange (EEX) which is currently contracted by the EU to handle this.

There is also a substantial secondary market where allowances can be traded bilaterally or through various derivatives offered by financial institutions.

Where do the revenues end up?

The revenues from the auctions are distributed to various recipients. The introduction of shipping into the EU ETS means that an additional approximately 80 to 100 million emission allowances will be put on the market. Of these, auction revenues from 20 million emission allowances will go to the Innovation Fund to be used for shipping specific projects. The remaining revenues will go to the EU member states and will not be earmarked for specific purposes beyond climate and energy-related activities.

Recommendations

DNV recommends that companies with ships within the scope of the EU MRV and EU ETS from 2024, prepare for the updated monitoring and reporting requirements. Companies with ships within the scope of the EU ETS are recommended to make the necessary updates to contractual arrangements and to start considering how to acquire the necessary emission allowances.
Source: DNV