The inclusion of maritime shipping activities in the EU Emission Trading System Directive

The European Parliament and the Council of the European Union reached a provisional agreement on the 17th of December 2022, whereby they adopted the European Commission’s proposal to include maritime transport activities in the existing ‘Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC’ (EU ETS Directive). This agreement is part of the ‘Fit for 55’ package and in line with the EU’s target of reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. It is important to remember that the draft proposal is pending formal adoption and may be subject to change before enactment. However, if adopted it will be applicable as from the 1st of January 2024 onwards.

The EU ETS is an emission trading scheme that permits the emission of greenhouse gases in exchange for EU emission allowances (EUAs). Following the adoption of this proposal, a cap would be placed on the total amount of greenhouse gas emissions that can be emitted by a shipowner. These EUAs can be purchased in the primary market through auctions arranged by the European Energy Exchange, or on the secondary market through brokers or online trading platforms. At the end of the applicable period, a shipowner shall surrender sufficient EUAs to cover its tank-to-wake emissions during the previous year, these being the emissions that result from burning or using a fuel once it is already in the tank.

The EU ETS Directive will initially cover carbon dioxide emissions generated from vessels of over 5000 Gross Tonnage, regardless of the flag that they fly. Although vessels between 400-5000 Gross Tonnage are currently excluded, the draft proposal envisages the inclusion of these vessels pending evaluation. The inclusion of these vessels will ultimately depend on the feasibility and cost-effectiveness of their inclusion. Emissions from methane and nitrous oxide may also be added at a later date, pending an analysis of the feasibility and cost-effectiveness of the inclusion of additional greenhouse gas emissions from maritime transport.

The definition of ‘Shipping company’ within the EU ETS Directive proposal is based on the definition of ‘company’ in Article 3(d) of ‘Regulation (EU) 2015/757 of the European Parliament and of the Council of 29 April 2015 on the monitoring, reporting and verification of carbon dioxide emissions from maritime transport’ (MRV Regulation). Shipowners are likely to be responsible for compliance with the EU ETS Directive, however given the broad definition, other persons such as managers may be held ultimately responsible. It is worth noting that the MRV Regulation has been transposed into Maltese law through Subsidiary Legislation 234.54, since January 2018. Therefore, ships falling under the scope of this regulation have to ensure that they remain in compliance with the applicable requirements.

Shipping companies will have to surrender EUAs based on their verified emissions as quantified by the ‘Measurement, Reporting, and Verification Framework’. The provisional agreement envisages a tiered scheme, whereby shipowners will only surrender EUAs for a portion of their emissions. This means that they will surrender EUAs covering 40% of all verified emissions from 2024, 70 % of all verified emissions from 2025, and 100 % of all verified emissions from 2026. In calculating these verified emissions, shipowners will have to surrender all emissions emanating from ships performing voyages between EU ports and emissions from ships at berth in an EU port. However, shipowners will only have to surrender 50% of their emissions emanating from ships performing voyages between a non-EU port and an EU port.

Where a shipowner fails to comply with the aforementioned,  meaning that they do not have adequate EUAs to cover their emissions, they may then be liable to sanctions or penalties. The current penalty system found in the EU ETS Directive will remain applicable. Meaning that any shipping company that does not surrender sufficient EUAs by the 30th of April of each year to cover its emissions during the preceding year, would be liable to a penalty for each ton of carbon dioxide emissions emitted in excess of the surrendered EUAs. The proposal also envisages the introduction of an expulsion order in select circumstances, which may lead to ships being detained by the flag state and denied entry into another Member State’s port.