Following historic negotiations, the EU’s Emissions Trading Scheme (ETS) is being expanded to include new sectors, including the shipping industry.
Until now, EU ETS maritime exclusions meant that shipowners and operators were not required to pay a ‘shipping carbon tax’ under the scheme. Now, the shipping industry will need to reduce operating emissions and/or pay ‘carbon tax’ to account for their greenhouse gas production, in accordance with the EU ETS shipping expansion.
What Is the EU Carbon Market?
The ETS, commonly referred to as the carbon market, is one of the EU’s most critical climate policies. Designed to encourage high-emitting industries to reduce greenhouse gas (GHG) emissions and inspire the development of low-carbon technologies, it effectively operates as a ‘cap and trade’ system and requires additional payments, known as a ‘carbon tax’, if the cap is exceeded.
The latest updates to the ETS are being made under the EU’s Fit for 55 policy, which aims to reduce EU emissions by at least 55% by 2030. Under the changes, the overall emissions reductions under the EU ETS will be increased to 62%, free carbon allowances will be reduced and overall emissions ceiling will be rebased (Europa, 2022).
How Does the EU Carbon Market Work?
Facilities that are regulated by the carbon market are known as ‘installations’ and a cap is placed on the volume of GHGs they are able to emit each year without incurring a ‘carbon tax’. Over time, this cap is gradually reduced so that total GHG emissions fall, thus enabling the EU to reach its climate targets.
Each year, eligible installations are given free carbon credits or ‘allowances’, subject to conditionality agreements, which effectively sets a maximum number of emissions that can be produced without additional fees being paid. If an installation exceeds this amount, they must purchase additional carbon credits, thus paying a ‘carbon tax’.
Conversely, if an installation does not use all of its free allowances, it is permitted to sell them to other installations. This has facilitated the trading of carbon credits in the past but the intention to reduce the number of free allowances being issued indicates that fewer trades may take place in upcoming years.
Why Is the EU ETS Expanding to Include the Maritime Industry?
Despite being one of the most energy-efficient forms of transport, the shipping industry accounts for approximately 3-4% of the EU’s emissions, (Europa, 2023). As the EU races to meet its ambitious climate targets, existing policies, such as the ETS, are being updated to ensure the EU is on track to meet its climate objectives.
By expanding the ETS to the maritime industry and introducing a ‘shipping carbon tax’, the EU can successfully reduce its overall emissions and increase the likelihood of satisfying the requirements of its ‘Fit for 55’ policy and its ‘climate neutrality by 2050’ pledge (EEA, 2023).
When Does the EU ETS Shipping Carbon Tax Come into Force?
Plans to introduce the EU ETS shipping carbon tax were only confirmed in late December 2022 and official revisions have yet to be released. However, EU ETS maritime expansion is currently expected to be in place by 2024, which means the shipping industry doesn’t have long to address its greenhouse gas emissions and reduce excess carbon taxes.
What Vessels Will Be Required to Pay the Shipping Carbon Tax?
Ultimately, ships will be required to report 100% of their CO2 emissions on voyages between and within EEA ports and 50% of their tank to wake CO2 emissions on voyages into or out of the EEA but the EU ETS maritime carbon tax will be introduced gradually.
While the revisions to the agreement are expected to be published in the first quarter of 2023, early indications suggest the EU ETS shipping extensions will require vessels to gradually surrender emissions allowances.
For example, cargo and passenger ships above 5,000GT will be subject to the EU ETS maritime regulations from 2024 and will be required to surrender allowances at the following rates:
40% of verified reported emissions for 2024
70% of verified reported emissions for 2025
100% of verified reported emissions for 2026
Offshore service vessels won’t be subject to the EU ETS shipping regulations until 2027, but they will be required to meet requirements under The Monitoring, Reporting and Verification (MRV) system for the EU from 2025 onwards.
Similarly, other ships of 400GT – 5,000GT will be subject to the MRV but their inclusion under the EU ETS shipping regulations will be decided in 2026.
What Emissions Are Included in the EU ETS Shipping Scheme?
It’s expected that vessels will only be required to report on CO2 emissions, but methane and nitrous oxide (N2O) emissions will be included in the MRV from 2024 and the EU ETS by 2026.
This means shipowners and operators will need to widen the scope of their decarbonization efforts and focus on more than solely CO2 reductions. With the introduction of new, sustainable, on-board technology, however, a vessel’s overall emissions and emissions liability can be substantially reduced.
Offsetting the Shipping Carbon Tax Through Innovation
The funds raised by the EU ETS will be placed into an Innovation Fund, which is intended to support emissions reductions. To date, the EU has indicated it supports the earmarking of funds raised via shipping being reinvested into sustainable shipping, the decarbonization of the maritime industry and the protection of marine habitats.
If so, it may be possible to offset some of the costs incurred via the shipping carbon tax by applying for Innovation Fund grants. For example, the cost of installing low-carbon technology, utilizing on-board renewable energy or adapting ships to facilitate the use of green fuels could, in theory, be subsidized via the Innovation Fund.
Of course, self-funding decarbonization technologies will be advantageous for shipowners, operators and charterers, regardless of support from the Innovation Fund. With the potential to significantly decrease emissions, a vessel’s carbon tax liability can be reduced accordingly, thus minimizing or eliminating excess expenditure.
Decarbonizing Your Fleet with HeatPower
The expansion of the EU ETS to cover the maritime sector will come as no surprise to the industry but many shipowners, operators and charterers will want to take steps to decarbonize vessels ahead of the implementation of the shipping carbon tax.
At Climeon, we’re dedicated to supporting sustainable shipping via our sector-specific HeatPower 300 Marine technology. Capable of reducing CO2 emissions, increasing energy efficiency and cutting fuel consumption, HeatPower enables shipowners and operators to generate environmental and financial savings.