Understanding EU ETS and its Impact on the Shipping Industry
The European Union Emission Trading System (EU ETS) is a crucial initiative designed to combat greenhouse gas emissions and promote sustainability across various industries.
As the maritime industry continues to navigate the challenges of reducing greenhouse gas emissions, the EU ETS emerges as a significant framework to promote environmental responsibility.
Shipping companies must understand their obligations under the EU ETS, including emission measurement, reporting, and allowance surrender. By embracing the transition towards greener practices, the shipping industry can play a pivotal role in achieving a more sustainable future.
Ultimately, complying with the EU ETS not only contributes to environmental preservation but also enhances a company’s reputation, strengthens partnerships, promotes technological innovation, and positions it as a responsible player in the global shipping industry.
With SERTICA VRS (Vessel Reporting System), ship owners and managers avoid adding new dedicated tools and Excel sheets to comply with the new and future reporting needs. VRS covers all noon reporting needs as well as standard reports for EU MRV, IMO DCS, CII and Performance.
What is EU ETS?
The EU ETS is a cap-and-trade system established by the European Union to regulate greenhouse gas emissions and reduce them by 50% in 2023 compared to 1990. It sets a cap on the total amount of CO2 that can be emitted by industries within its scope.
Companies are allocated emission allowances, which can be bought, sold, or traded via an EU-controlled auction system, depending on their emission levels. If a company emits more greenhouse gases than its allocated allowances, it must purchase additional allowances from the market to cover the excess emissions. Conversely, if a company emits fewer greenhouse gases than its allowances, it can sell its surplus allowances to other companies.
The revenue generated will be allocated to an innovation fund dedicated to the decarbonization of shipping. Additionally, it will be distributed among EU member states to support various climate and energy-focused projects. The system aims to incentivize emission reduction efforts by penalizing companies that exceed their allocated allowances and rewarding those that emit below their limits.
How does the EU ETS apply to Shipping Companies?
Regarding shipping companies, the EU requires the industry to reduce its emissions gradually over time. Furthermore, the available amount of emission allowances for the industry will be gradually reduced every year, by 4.3% until 2027 and 4.4% from 2028.
As of January 2024, the EU ETS extends its applicability to ships of 5,000 gross tonnage (GT) and above. This includes both EU-flagged and non-EU-flagged vessels. Shipping companies need to account for 100% of emissions from voyages within EU ports and 50% of emissions from voyages to and from non-EU ports. Additionally, 100% of emissions within EU ports must be considered.
What Types of Emissions are Covered?
Under the revised directive, shipping companies are required to measure and report CO2 emissions from January 1, 2024. Furthermore, from January 1, 2026, methane (CH4) and nitrous oxide (N2O) emissions must also be included in the reporting process.
How do Shipping Companies Register and Report within the EU ETS?
Shipping companies falling under the EU ETS scope must register with the administering authority, which varies based on the company’s registration or the Member State with the highest port calls.
From 2025 onwards, these companies must submit verified emissions data aggregated at the company level for each reporting period and surrender the required allowances by September 30 of each year.
What are the Exclusions and Derogations?
Certain exemptions and derogations exist within the EU ETS framework. For instance, emissions that have been captured and utilized in products to prevent their release into the atmosphere are not subject to allowance surrender.
Derogations also apply to specific scenarios, such as voyages between EU islands with limited connectivity and emissions from ships performing transnational public service contracts.
What Cost Transfers and Penalties does the EU ETS Require?
While shipping companies remain responsible for compliance, entities assuming ultimate responsibility for fuel purchase or ship operation, such as charters, may reimburse the company for the costs associated with allowance surrender.
Failure to surrender sufficient allowances by the deadline incurs penalties of €100 per metric ton of emitted CO2. However, on top of the penalty, the companies still must purchase the emission allowances that they are required to have. Prolonged non-compliance may result in ships being denied entry to EU ports.