What is the EU ETS in the shipping industry? Impact for the maritime sector

The European Union Emissions Trading Scheme (EU ETS) is the main policy tool in achieving Europe’s climate targets. It is engineered in such a way that the more participants in the market and the more industries covered, the more effective the system gets to fight global warming. In this context, the European Commission is expanding the scope of the scheme in 2024: there is an EU ETS shipping inclusion. This means that shipping companies will now keep track of the volumes of CO2 that they produce, and then buy and surrender an equivalent amount of European Union Allowances (EUAs) to match them, under the new EU ETS for maritime. We’ve already covered some of this in our article published in Social Europe.

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• Reminder of the basics before the EU ETS in shipping
• The 2024 EU ETS shipping inclusion explained
• What is the Impact of the EU ETS extension to maritime shipping? 
• EU ETS regulation for shipping
• EU ETS and the maritime sector: Industry Perspectives and Ongoing Debate

Reminder of the Basics before the EU ETS in shipping

The EU ETS, a quick definition

As a refresher, the European Union Emissions Trading System (EU ETS) is a cap-and-trade system implemented by the European Union to reduce greenhouse gas emissions. Under this system, a cap is set on the total amount of CO2 that can be emitted by covered entities (industries that produce electricity, steel, cement, etc). The European Commission issues EUAs, each corresponding to 1 tonne of CO2. Industrial companies and manufacturers are obliged to buy an amount of EUAs from the European Commission, in a number equivalent to the volumes of CO2 that they emit every year. The overall quantity of emissions (and EUAs respectively) is decreasing over time as the cap is gradually reduced. As EUA supply decreases, its unit price increases. Therefore, market participants are incentivized to invest in cleaner technologies and reduce their carbon footprint.

The sectors covered by the EU ETS before the 2024 inclusion of maritime transport

As seen in our EU ETS guide, the EU ETS sectors covered before 2024 were: 

• electricity and heat generation;
• energy-intensive industry sectors, including oil refineries, steel works, and production of iron, aluminum, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals‍;‍
• aviation within the European Economic Area and departing flights to Switzerland and the United Kingdom.

The 2024 EU ETS shipping inclusion explained

Why expand the scope of the EU ETS to maritime in 2024?

The maritime shipping sector represents 2.8% of global CO2 emissions. It accounts for 3 to 4% of the EU total CO2 emissions. In 2022, the European footprint of the sector expanded by 5% compared to 2021, reaching a  3 year peak. This growth was driven by a rapid increase in the use of carbon-intensive fuels. Despite a significant technological potential for emission reduction, progress has been unsatisfactory due to a lack of market incentives.

Who is targeted by the EU ETS shipping expansion in 2024?

The new EU ETS directive will apply to cargo and passenger ships of or above 5000 gross tonnage (GT) from 2024 on. Then it will shift to also cover offshore ships of or above 5000 GT starting in 2027. The European Commission describes the extension as “flag-neutral and route-based”. This means that it covers: 

• All emissions from ships departing from and arriving at an EU Member State’s port;
• All emissions from ships released during a stay at a EU Member State’s port; 
• 50% of emissions from ships performing trips from a port of an EU Member State and arriving at a port outside of the EU jurisdiction, and vice-versa (for instance Rotterdam to Shanghai or Shanghai to Rotterdam). 

What is the Impact of the EU ETS extension to maritime shipping?

Maritime Shipping EU ETS to contribute to the EU climate ambitions

In 2018, emissions in the shipping sector amounted to 1 076 million tonnes of CO2, and the International Maritime Organization estimates that those can go up by 130% by 2050 - this can be a serious threat to the carbon net-zero European commitments. To limit the carbon intensity of the maritime shipping industry and in order to align with the Fit for 55 commitment (reduce emissions from the sectors covered  by the EU ETS by 62% by 2030 compared to 2005-levels), shipping companies will have to buy EUAs to account for 

• 40% of their emissions from 2024;
• 70% of their emissions from 2025; 
• 100% of their emissions after that.

A rise in costs for maritime shippers by the EU ETS

As we’ve seen here, we can expect a rise in annual costs for shippers up to €10 billion once the scheme covers all emissions from the sector. Estimates from industry representatives like Maersk, Hapag-Lloyd and CMA CGM foresee an increase of€7 to €105 per TEU after the introduction of the EU ETS expansion (a TEU is a unit of cargo capacity based on the volume of a 20-foot-long (6.1 m) intermodal container).

The end-consumer will not be hurt by the EU ETS shipping inclusion

Taking into account the large volumes of goods transported by every vessel, the financial impact on the price of every unit shipped will be insignificant. To give you a quantitative idea, an average ship has a volume of 8,000 TEU with each container holding around 20 tonnes. It burns around 225 tonnes of marine gas oil per day at a price of €900 per tonne. Each tonne of fuel consumed emits 3.11 tonnes of CO2. So, for a Rotterdam-Athens trip of 13 days, the fuel cost for transporting one tonne of merchandise would be €16.45. If we add €80 per emission allowance (an indicative level from the past 3 years), the transport expense increases by 26.6% to €20.83. And, taking the average weight of a shoe-box, this would only represent an increase of €0.02 per shoebox.

EU ETS regulation for shipping

Navigating the reporting and verification process for the EU ETS maritime shippers

• To simplify the processes, every shipping company is “attributed to” one EU member state - it can only have compliance obligations in one jurisdiction (even if it is an international company); 
• Every maritime operator should open an account in the Union Registry - what we can see as a “bank”, or account allowing shippers to buy and store their carbon allowances;
• Companies need to submit their “monitoring plan” to the authorities by April 1st 2024 - how they consider accounting for the CO2 produced by their activity; 
• From January 1st 2024 on, shippers should start monitoring their carbon emissions;
• Accredited verifiers have to confirm those figures; 
• Then, the shipping company is responsible for purchasing allowances corresponding to emissions from their ships; 
• Companies that do not comply with their obligations will have to pay €100 per tonne of CO2 equivalent and will still have to surrender the required allowances. After 2 years of non compliance, an exclusion order may be issued (every EU member state is required to refuse the entry to the ships).

EU ETS and the maritime sector: Industry Perspectives and Ongoing Debate

What are the criticisms of the EU ETS expansion to maritime shipping?

Multiple industry representatives have advanced several criticisms, notably related to logistics. There are objections on the old-looking, non-intuitive softwares and platforms used to open an account in the registry. Others mention the lack of clarity for larger companies when it comes to matching the emissions of their different vessels to different account numbers ( and then matching them to EUAs surrendered). Finally, the fact that only a very selective group of the company’s representatives can access the Union Registry (for security reasons), is also seen as a burden by some maritime operators.

Light in the tunnel for the EU ETS 2024 shipping inclusion

As a response to the above concerns, a lot of NGOs, consultants and representatives of the EU institutions have come forward to defend the implementation of the EU ETS expansion to the maritime shipping sector. For instance, Gorrissen Federspiel explains what is behind all the complex words seen when following the EU ETS compliance guidelines. The French government, through its Direction des Pêches Maritimes et de lAquaculture has organized several webinars to contribute to the smooth transition to broadening the EU ETS scope. 

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Sources:

Eurostat, 2023. Glossary: European Economic Area

The European Comission, 2023. FAQ – Maritime transport in EU Emissions Trading System (ETS)

The European Commission, 2023. Reducing emissions from aviation

The European Commission, 2023. Reducing emissions from the shipping sector

European Parliament News, 2023. Fir for 55: Parliament adopts key laws to reach 2030 climate target

Gorrissen Federspiel, 2023. EU ETS Implementation - all things clarified? 

ICAP, 2024. EU extends its ETS to the maritime sector

IEA, 2023. International Shipping

IMO, 2020. Fourth Greenhouse Gas Study 2020

Secrétariat chargé de la mer, 2024. Marché carbone européen (ETS) - transport maritime

Social Europe, 2023. Maritime needs stronger wind to cut its emissions

Transport Environment, 2023. Loopholes in EU shipping proposals risk undermining green shipping projects

Zero 44, 2023. EU ETS for maritime – 5 main problems with the EU Union Registry

UNCTAD, 2022. Roadmap to decarbonize the shipping sector