Decarbonisation and shipping: EU Emissions Trading Scheme - Update

UPDATE: On 22 June 2022 the EU Commission published a third proposal for the inclusion of emissions from shipping in the EU Emissions Trading Scheme. That proposal supersedes the proposed regime discussed below and is discussed here.

This article updates our previous insight article of 15 December 2020 relating to the EU Emissions Trading Scheme with commentary on the proposals brought forward by the EU on 14 July 2021.

On 14 July 2021, the European Commission published a package of proposals aimed at reducing the EU’s net greenhouse gas emissions by 55% by 2030, compared with 1990 levels. Included in the ‘Fit for 55’ package was a revised proposal for including carbon dioxide emissions from maritime transport within the EU Emissions Trading Scheme, which replaces the previous proposal adopted by the European Parliament in September 2020.

The Fit for 55 proposal, in relation to maritime transport’s inclusion in the existing EU Emissions Trading Scheme, includes a new directive which amends:

1. Directive 2003/87/EC (the ETS Directive), which is the piece of EU legislation which governs the EU ETS; and
2. Regulation 2015/75 (the MRV Regulation), which is the piece of EU legislation which governs the system of monitoring, reporting and verification of carbon dioxide emissions from ships, that was phased into operation from 2017 onwards.

What does the new proposed directive do?

It will apply to:

1. Ships above 5000 gross tonnage, performing voyages with the purpose of transporting passengers or cargo for commercial purposes, but excluding warships, naval auxiliaries, fish-catching or fish-processing ships, wooden ships of a primitive build, ships not propelled by mechanical means, or government ships used for non-commercial purposes; and
2. Carbon dioxide emissions released into the atmosphere by those ships.

And it will require the surrender of allowances to cover:

1. 50% of the emissions from ships performing voyages that enter or depart the EU;
2. 100% of the emissions from ships performing voyages between ports in the EU and from ships at berth in a port within the EU.

What is the implementation schedule?

It is presently proposed that it will be mandatory to surrender allowances in respect of carbon dioxide emissions produced in the year 2023, and beyond, on a phased basis as follows: 

1. 20% of verified emissions reported for 2023; 
2. 45% of verified emissions reported for 2024; 
3. 70% of verified emissions reported for 2025; 
4. 100% of verified emissions reported for 2026 and each year thereafter. 

Who will be responsible for compliance?

The proposed directive requires compliance from a ‘shipping company’, which is defined as:

“the shipowner or any other organisation or person, such as the manager or the bareboat charterer, 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, set out in Annex I to Regulation (EC) No 336/2006 of the European Parliament and of the Council [the ISM Code].”

What are the penalties for non-compliance?

1. Publication of names of shipping companies who fail to comply with their obligations to surrender allowances.
2. Payment of excess emissions penalty of EUR 100 per tonne of carbon dioxide emitted beyond the allowances surrendered. It is intended for the penalty to be index linked.
3. Where a shipping company has failed to comply with the obligation to surrender allowances for two or more consecutive years, there is the possibility of refusal of entry to ports in the EU and detention of ships in the EU.

Conclusion

The current proposal for adding maritime transport to the EU ETS is more detailed than the previous draft and does not yet form part of EU Law. It is intended to take effect from 2023 (which is one year later than the previous implementation date) and proposes to gradually introduce the requirement to surrender allowances over a four-year period.

The penalties for non-compliance, particularly those which relate to refusal of entry and detention are powerful incentives to encourage compliance, alongside the threat of financial penalties.

Entities which come within the revised definition of a ‘shipping company’ (owners, managers, bareboat charterers or other entity with responsibility for the ISM code) should review their contractual commitments with a view to bringing them in line with the obligations that are likely to be imposed by the EU from 2023.

Watch our short introduction to the eighth article in our series on decarbonisation and shipping below: