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Maritime industry ready and Fit for 55 – vol. 1: The Emission Trading System

This article is the first of a string of three articles aiming to explain how the Fit for 55 package affects shipping and the maritime industry. In this first article, we will focus on the EU Emissions Trading System (ETS), and what it entails to the maritime sector to be included in this system.
Aerial view of freight ship with cargo containers

The Fit for 55-package
To achieve EU’s Paris climate goals, the EU Commission presented in December 2019 the European Green Deal, including a commitment to reduce greenhouse gas emissions by at least 55% by 2030 (compared to 1990 levels) and become carbon neutral by 2050. The EU Commission now intensifies the work and has on 14 July presented an ambitious package of legislative proposals called “Fit for 55 Package” which involves a range of sectors, also including the maritime sector.

With the Fit for 55 package, the Commission has introduced a set of proposals to revise and update EU legislation and to put in place new initiatives with the aim of ensuring that EU policies are in line with the climate goals. The form and content of the final reforms will depend on agreement between the member state’s governments, the European Parliament and the EU executive branch. One thing is however certain; along with several other sectors the maritime sector is designated to take greater responsibility for contributing to the climate goals.

Current emission requirements for maritime sector
At the global level, for more than half a century, the international maritime organization (IMO) has developed international standards and regulations for the shipping and maritime industry. The first resolution on emission control was adopted in 1997. Since then, IMO has taken multiple measures to reduce greenhouse gas emissions from international shipping, such as:

  • For vessel’s above 400 GT, it is mandatory to have on board a vessel specific Ship Energy Efficiency Management Plan (SEEMP). SEEMP is a practical tool to measure and manage a vessel’s performance with an aim to improve efficiency at the benefit of both the environment and the company’s expenses.
  • It is mandatory for all newbuildings to have an Energy Efficiency Design Index (EEDI). EEDI measures a vessel’s emission of CO2 per tonne-mile and the IMO has set the required maximum value of EEDI based on the vessel’s type and deadweight. Compared to the required EEDI, the value of EEDI shall be increasingly reduced in three phases until 2025. Negotiations are ongoing for the adoption of further phases.
  • The IMO Data collection system requires vessels above 500 GT to collect and annually report to IMO their fuel oil consumption data.
  • Maximum permitted sulphur content of fuel oils used outside Emissions Control Areas (ECAs) is 0.50% m/m. Within ECAs, the limit is 0.10%. This forces the operators to either buy more expensive fuel with acceptable sulphur levels, or instal scrubbers on their vessel to clean the exhaust gasses.

Adopting new regulations on the IMO level is however quite time consuming, as all member states would have to agree. Thus, the regulations are often considered not to be strict enough to fulfil its original purpose. This may have triggered EU to take action also within the maritime sector – a sector that also is part of the EU’s commitment under the Paris Agreement. The EU Commission has also stated that they hope that this initiative can inspire and pave the way for further development at a global level.

ETS in short
Simply speaking, the EU ETS is a system that puts a price on carbon and works on the “cap and trade” principle. A cap is set on the total amount of certain emissions that an entity can have each year. The cap is lowered every year. Within this cap, emission allowances can be traded as needed in the carbon market.

Extending ETS to maritime transport
In accordance with the EU MRV Regulation (2015), shipping companies are already required to monitor, report and verify the CO2 emission for vessels arriving at, within or departing from EU/EEA ports. Maritime transport has however not been a part of the EU carbon market.

With the Fit for 55-package, the EU is now proposing to strengthen the role of carbon pricing in the transport sector. If the new proposal is adopted, participants in the shipping industry would gradually be

required to purchase and surrender emission allowances for each ton of reported Co2 emissions. This would apply for all vessels above 500 GT, regardless of its flag.

The amended ETS distinguishes between voyages within the EU and voyages outside the EU: ETS shall apply to all emissions from intra-EU voyages. For voyages starting or ending outside the EU, ETS shall apply to 50% of the emissions. All emissions that occur while a vessel is at berth in an EU port will be subject to ETS. If the proposal is adopted, it is expected that this would also be included in the EEA agreement and apply for EEA ports correspondingly.

Who in the maritime chain will be the regulated entity?
According to the proposal, the regulated entity under the ETS is the “shipping company”. This is defined as either the shipowner or the commercial operator, meaning any other organisation or person that has undertaken to be responsible for the vessel’s operations in accordance with the ISM Code, typically a technical manager or a bareboat charterer.  Such entity will be held accountable to comply with the regulations, including reporting of emissions and bearing the costs og carbon emitted.

Entry into force
The proposal includes a phase-in period where the shipping companies would only have to purchase and surrender allowances for a percentage of its emissions. This starts with 20% in 2023 and will gradually be increased to 45% in 2024 and 70% in 2025. From 2026 the regulation shall be fully implemented, and the shipping companies will be obligated to surrender emissions allowances for all verified emissions.

Penalties and reporting
Failure to comply with the ETS may lead to penalties. In addition, if a vessel fails to pay its emission allowances for two consecutive years, both the vessel and any other vessels operated by the same shipping company can be denied entry to EU ports.

The proposal includes reporting requirements in order for the Commission to properly monitor the implementation. In addition, the Commission has stated that they will keep updated on any developments within the IMO. If the IMO adopts any new measures to reduce greenhouse gas emissions from maritime transport, and in any event prior to 2028, the Commission shall present a report examining such IMO initiatives.