What will ETS inclusion mean for shipping?
The maritime sector is responsible for around 2-3% of greenhouse gas emissions. The sector will likely be included in the EU ETS in 2024. The inclusion of shipping will follow a phased approach in terms of emissions, but also in terms of what ships are included. For the maritime sector, all GHG emissions will be included from 2027 onwards. The EU has put the heat on the maritime sector to bring down emissions at a faster pace.
To achieve climate neutrality, a 90% reduction in transport emissions is needed by 2050
The maritime sector is responsible for around 2-3% of greenhouse gas emissions
The sector will likely be included in the EU ETS in 2024
The inclusion of shipping will follow a phased approach in terms of emissions, but also in terms of what ships are included. For the maritime sector all GHG emissions are included from 2027 onwards
The EU has put the heat on the maritime sector to bring down emissions at a faster pace
Introduction
To achieve climate neutrality, a 90% reduction in transport emissions is needed by 2050. All transport modes, including maritime transport, would have to contribute to the reduction efforts for that scenario to take shape. Maritime shipping carries close to 80% of global trade and accounts for 2-3% of global greenhouse gas (GHG) emissions annually. Achieving significant reductions in emissions of international maritime transport requires using both less energy (increasing energy efficiency) and cleaner types of energy (using renewable and low-carbon fuels). Next year shipping will likely be added to the EU’s Emission Trading System. In this report we focus on this and the consequences for the shipping industry.
Recent trends in emissions
Since 1990, we have seen contrasting trends in emissions between domestic navigation and international navigation. Between 1990 and 2020, domestic navigation declined on average by 1.2% per annum while international navigation increased by 0.7% on average. In 2020 greenhouse gas emissions of international shipping were 20% higher compared to 1990, while domestic navigation declined by 32%, which is in line with whole-economy emission trends for the EU as a whole. As percentage of total EU 27, the share of emissions of domestic navigation remained broadly unchanged (at around 0.5%), while international navigation almost doubled to 3.7% (Eurostat). So domestic navigation reduced emissions in line with EU 27, but international navigation is clearly not moving in the right direction. The EU has put in place a number of policy measures that attempt to accelerate the transition of maritime shipping.
Europe’s Fit for 55 package
On 14 July 2021 the European Commission adopted the ‘fit for 55’package’. It adapted the existing EU climate and energy legislation to the new EU objective of a minimum 55% reduction in greenhouse gas emissions by 2030, compared to 1990 levels. There are several proposals to address maritime transport’s climate impact, including
Extending the EU Emission Trading System (ETS) to maritime transport
Boosting demand for renewable and low-carbon fuels
Boosting alternative fuel infrastructures
Accelerating the supply of renewables in the EU
Revising the existing Energy Taxation Directive
Emission Trading System including shipping
The Emissions trading system is a cap-and-trade system. First a cap is set on the total number of emissions. The cap is determined by a country’s set targets. The emissions cap is gradually lowered, reducing the total number of emissions. The annual reduction factor 2013-2020 was 2.2%. The old ETS system that has been in place since 2005 has been revised in line with more ambitious targets and adding new sectors to the ETS scheme.
On 17 December 2022, co-legislators reached a provisional agreement to strengthen the EU ETS and apply emissions trading to new sectors. This agreement requires formal adoption by the European Parliament and the Council. The proposal for the new scheme is to reduce emissions from the ETS sectors by 62% by 2030, compared to 2005 levels (see graph on the left above) and to include the maritime sector. To reach this target, there is a one-off reduction of the overall emissions cap by 117 million allowances (re-basing) over two years: 90 million will be removed in 2024 and 27 million in 2026. The annual emissions reduction percentage will also be steeper: -4.3% in 2024-2027 and -4.4% 2028-2030(see graph on the right above) (source: ). The total amount of allowances communicated in May 2022 was 1,449,214,182 (source ). Every allowance corresponds to 1 ton of CO2 emissions. Auction volumes from September 2022 to August 2023 will be reduced by 347,811,404 allowances, which will be placed in the Market Stability Reserve (MSR). The Market Stability Reserve aims to provide stability to the EU Emissions Trading System. On 31 December 2021, there were 2,632,682,062 allowances in the Market Stability Reserve, which includes unused allowances from the new entrants reserve for the period 2013-2020, and allowances not allocated to installations due to reduced activity. The next time the total number of allowances in circulation will be published is by 15 May 2023.
What does this mean for the shipping sector?
If the agreement is formally adopted as of 2024, the EU ETS will include the emissions from the maritime sector. So the maritime transport emissions are capped as part of the overall ETS cap. 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.
The ETS will apply for ships over 5,000 gross tonnage. Offshore ships above 5,000 gross tonnage will be included from 2027 on. General cargo and offshore ships between 400 – 5,000 gross tonnage will be evaluated in 2026. From 2024 to 2026, only CO2 emissions are in scope for the maritime sector. From 2026, all greenhouse gasses (such as CO2, Methane and Nitrous Oxide) are in scope and will need to be translated to their CO2 equivalent and surrendered accordingly, e.g. 1 metric tonne Methane = 24 metric tonne CO2 equivalent.
Shipping companies will pay for the emissions they have reported on the previous year. Some countries with a large presence of the shipping sector will receive additional allowances to support the decarbonisation of maritime activities and for the administrative costs. They could receive 3.5% of the ceiling of the auctioned allowances to be distributed among them. of the additional quantity of allowances. 50% of the quantity of allowances shall be distributed among the relevant Member States based on the share of shipping companies under their responsibility and the remainder distributed in equal shares between them.
To ensure a smooth transition, co-legislators agreed on a phase-in approach. This means that in 2025, ship owners will pay for 40% of the emissions reported in 2024; in 2026, they will pay for 70% of their 2025 emissions, and from 2027 onwards, they will pay for 100% of their reported emissions. All emissions from intra-EU voyages and within EU ports will be covered by the ETS, and half of the emissions for journeys to or from a non-EU country.
Conclusion
The maritime sector will most likely fall under the EU ETS scheme from 2024 on. The adding of the maritime sector to the EU ETS comes at a time that domestic navigation moved in line with total EU 27 GHG emissions, but the emission trajectory of international navigation was not moving in the right direction. The sector is now forced via the ETS to reduce emissions in domestic navigation at a faster pace and change upward emissions’ trajectory into a downward trajectory for international navigation. The inclusion of shipping in the ETS will result in the adding of approximately 80-100 million allowances to the ETS scheme. But the rebasing of the scheme (because of stricter targets) will result in 117 million fewer allowances spread over two years (2024 and 2026) and higher annual reduction percentages in 2024 and 2028. The inclusion of shipping will follow a phased approach in terms of emissions, but also in terms of what ships are included in the EU ETS. Moreover, for the maritime sector all greenhouse gas emissions are included from 2027 on. The EU has put the heat is on the maritime sector. On 3-7 July the International Maritime Organization (IMO) will come with revised targets to bring down greenhouse gas emission at a faster pace in the maritime sector. We will cover this strategy revision in our SustainaWeekly.