Introduction

The EU ETS, established in 2005, is the world’s first emissions trading system and remains the largest greenhouse gas (GHG) emissions trading system across multiple countries and multiple sectors.

ETS for shipping

Shipping was not originally included in the ETS but, following years of discussion, a final agreement to bring shipping into the EU ETS was reached by the European Council and the European Parliament on 18 December 2022. The final text of the revised agreement is expected in the first quarter of 2023, and shipping is expected to be included in the EU ETS from 2024.

Timeframe

The EU ETS, which will be phased in for shipping over three years, will require vessels to report 50% of their tank to wake CO2 emissions on voyages into or out of the EEA, and 100% of their CO2 emissions on voyages between and within EEA ports.  These “reported emissions” will then need to be verified and paid for.

For passenger and cargo ships above 5,000GT, the EU ETS will apply from 2024, with payment obligations phased in over three years:

• 40% of verified reported emissions for 2024 will have to be paid in 2025
• 70% of verified reported emissions for 2025 will have to be paid in 2026
• 100% of verified reported emissions for 2026 will have to be paid in 2027

The timetable will vary for other ship types/sizes:

• Offshore service vessels above 5,000GT will be included in the MRV regulation¹ from 2025, and in the EU ETS from 2027
• Other ships of 400GT and above will be included in the MRV in 2025. Their inclusion in the EU ETS will be reviewed in 2026

Scope of emissions

Initially, only CO2 emissions need to be reported but agreement has been reached to include methane and nitrous oxide (N2O) emissions in the MRV regulation from 2024, and in the EU ETS from 2026.

Emissions allowances

The scheme is based on the idea that the polluter will have to “pay for” the emissions, and that this will be done through the surrender of annual emission allowances.  These allowances must be surrendered by 30 April in the year following the emissions: for example, for the first year (2024) the emission allowances will need to be surrendered by 30 April 2025.

Sanctions for failure to comply

Failure to surrender emission allowances may lead to fines, refusal of port calls and potential detention of the ship.

BIMCO clause

BIMCO issued an ETSA Clause earlier this year, to assist Owners and Charterers to co-operate on the timely sharing of data and information to ensure compliance with these obligations. 

The ETS Innovation Fund²

Revenues raised via the ETS are to be reinvested into an Innovation Fund. The EU has said that it supports the earmarking of revenues raised from shipping for sustainable shipping, the protection of maritime habitats and for funding programmes to decarbonise the maritime sector.

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¹ The Monitoring, Reporting and Verification (MRV) system for the EU.

²Innovation Fund