Carbon pricing ahoy!
March 2023
The EU’s Emissions Trading Scheme is on the horizon for the shipping industry
Is shipping ready to financially account for its greenhouse gas emissions (GHG)? That’s the question everyone in the maritime industry should be asking now that the EU is poised to incorporate maritime transport into its long-standing Emissions Trading System (ETS).
This potential shot across the bows of global shipping is part of the EU’s “Fit for 55 package” – a series of legislation and policies aimed to ensure a 55% reduction in greenhouse gas emissions by 2030 (compared to 1990 levels).
A central part of achieving Fit for 55 involves a comprehensive review of the Directive that regulates the ETS – one of the most advanced carbon markets in the world and the cornerstone of European climate policies. The ETS already covers GHG emissions from sectors such as the generation of electricity and heat, heavy industries such as refining, iron and steel, cement, ceramics, glass, paper, and chemicals, as well as aviation emissions on intra-European routes.
Currently, companies must report annual emissions and surrender the equivalent emission allowances (as tons of CO2). The total number of emission allowances put into circulation each year depends on the emission reduction target adopted by the EU. Emission allowances can be traded and organisations can sell allowances that they do not need or buy those that they require to fulfil their obligations. In this way, an economic incentive is introduced to reduce emissions: to the extent that a company manages to emit less, it will face lower costs or may even get an income from selling the allowances. However, the Fit for 55 package will significantly reduce the available allowances that will enter the market between now and 2030.
The Shipping Forecast
The newly proposed EU ETS will apply to 100% of the emissions from ships on journeys between European ports, and to 50% of emissions on journeys between EU and third countries. It will also include 100% of the emissions during the stay of the ships in European harbours.
A journey is defined as any movement of a ship that carries passengers or goods for commercial purposes and departs from or arrives at an EU port. The flag of the ship or its origin is irrelevant. If, for example, a Panamanian freighter transports products from China to Greece, its emissions will be covered by the regime.
Under the proposed framework, a measure has been incorporated to avoid a specific case of "carbon leakage" that could occur if ships call at non-European ports close to the EU before reaching their final destination in a European harbour. Consider, for example, a journey from Singapore to Algeciras in Spain that includes a stopover in Tangier. In principle, only 50% of the emissions between Morocco and Spain would be covered. To address this loophole, the new Directive provides that ships departing from a non-EU port calling at another non-EU port less than 300 nautical miles away from an EU harbour will have to pay for 50% of the emissions from the port of origin. The list of ports affected will be determined by the European Commission.
The Directive provides exceptions for journeys to and from outermost regions or between European islands with a population below 200,000 inhabitants.
The ETS shipping scope will apply to emissions from gross tonnage ships dedicated to transportation of goods or passengers equal to or greater than 5,000 tons. Fishing or other activities such as dredging, support to offshore facilities, cable repair, etc. are outside the scope. The responsibility to meet the obligations of the ETS falls on the shipping companies – defined as the shipowner or any other organisation or person who has been entrusted by the owner as responsible for the operation of the ship and has accepted to face the obligations and responsibilities imposed by the International Code of Management for the Operational Safety of Ships and the pollution prevention.
How will ETS work for shipping?
Being part of the ETS will not bring new obligations in terms of monitoring and reporting emissions, as European regulations already impose these requirements. At present they are mainly substantiated through a tool provided by the Commission (the EU monitoring, reporting and verification - MRV - database).
What is new is the obligation to surrender emission allowances as part of the trading system. Shipping companies that don’t surrender their allowances face the threat of fines that amount 100 euros per tonne of CO2 (and the obligation to surrender the allowances persists after paying the fine). If non-compliance continues, the Directive authorises that ships can be immobilized and denied entrance to EU ports – as can other ships of the same company.
Under the new Directive, the maritime transport will not receive free allocation of allowances, so companies will have to go to auctions or to the carbon trading market to acquire the units they need to meet their obligations. However, in order to facilitate the gradual inclusion of the maritime sector, companies will not have to surrender allowances against all their emissions during the first years. In 2025 ships will pay for 40% of 2024 emissions. In 2026, this will rise to 70% for 2025 ones. Only in 2027 will they have to surrender 100% of emissions for the previous year.
Although regulations and instruments for its implementation are centralised at the EU/Commission level, the responsibility for administering the system and ensuring compliance falls on Member States. Specifically, the competent authority for each EU shipping company will be the one where it is registered. In the case of a non-EU company, the competent authority will be the Member State with the highest number of port calls by the shipping company in the last two years. If a non-EU shipping company has not made any trip included in the scope in the last two years, the competent authority will be the Member State from which the shipping company started its first voyage within the scope.
Clearly, a big change is coming for the shipping industry in how they account for GHG emissions and budget for their carbon costs. Throughout 2023 and 2024, Member States will start to implement the new Directive at national and European level. And with carbon prices trading at around 100 euros per ton of CO2, shipping companies need to start planning now for the new regime of carbon price accountability.
If you are interested in hearing more about this topic please reach out to your usual PwC contact or Ismael Aznar Cano using the link at the top of this page.
