The European Union proposed a set of regulations introducing a process that systematically reduces ships’ emission allowances within the EU ETS. The objective of this approach is to gradually expand the scope of emissions covered by the EU ETS and promote long-term emission reduction. As with most new regulations, we expect to see new modifications to the proposed policies along the way, and it is all part of the journey.
Overview
Addressing this issue, the aim of the European Union was to minimize emissions on the long run to the fullest extent possible. At the end of a negotiation process which lasted over 2 years, on April 18th, the European Council endorsed the conclusive version for incorporating shipping into the EU ETS, effective from January 2024. Moreover, on September 4th, 2023, the European Commission prepared a confidential “Implementing Regulation” outlining administrative requirements that shipping firms must adhere to in their interactions with the administering authority, in accordance with the updated Directive 2003/87/EC.
Ships arriving at EU ports will have to comply with the EU ETS, no matter where they are coming from and the location of the ship owner’s incorporation. The EU ETS will include all emissions from journeys within the EU and emissions when ships are docked in EU ports. For voyages that commence or conclude outside the EU, 50% of the emissions will be encompassed by the EU ETS. As of 2024, ships with a gross tonnage below 5000 GT will be exempt from this regulation.
In order for a shipping company to comply and engage in the EU Emissions Trading System (ETS), it is crucial for them to create an account within the Union Registry.
The party overseeing the ship’s operation under the International Management Code for the Safe Operation of Ships and the Prevention of Pollution, whether it is the shipowner or another entity, bears the responsibility of the EU ETS duties.
Documentation and Certification
Entities responsible for these ships will need to submit a document to the administering authority, signed by both parties involved. It is required of ships that are subject to the EU ETS to utilize EU Allowance (EUA) certificates for tracking their emissions.
EUAs are certificates designed explicitly for the ETS Scheme within the European Union and are accessible to other sectors, including industrial and aviation. EU Allowances (EUAs) are governed financial instruments that comply with the MIFID II regulation. Authorized financial intermediaries with direct access to over-the-counter (OTC) markets and official exchanges are able to acquire EUAs.
One Step at a Time
The strategy of the EU ETS involves gradually eliminating allocations of allowances that further complicate matters for major emitters such as shipping operators. The EU ETS relies on allocating allowances, granting the right to emit a specific quantity of greenhouse gases, usually measured in metric tons of CO2 equivalent. Industries vulnerable to carbon leakage receive a substantial share of free allowances. Those surpassing may buy extra allowances through auctions. The system aims to decrease free allocation gradually, promoting investments in cleaner technologies and enhanced energy efficiency.
Large cargo and passenger ships exceeding 5000 gross tons will undergo a gradual introduction to the regulation, starting with 40% compliance in 2024, increasing to 70% in 2025, and finally a 100% compliance in 2026. Similarly, offshore vessels over 5000 gross tons will also undergo a phase-in period, reaching 100% compliance by 2027. For cargo/passenger ships and offshore vessels with a gross tonnage ranging from 400 to 5000, they too will undergo a phased-in approach, reaching 100% compliance in 2027.
If the entity responsible for the ship fails to submit the aforementioned document, they will be held accountable for ETS obligations and must submit a document containing the list of ships falling under Directive 2003/87/EC and the IMO identification number of each ship.
Dates to Note
Shipping firms are required to track their emissions starting on January 1st, 2024 till December 31st, 2024. The verification of emissions should be finalized by March 31st, 2025. EU Allowance (EUA) units of 2024 must be submitted by September 30th, 2025.
Administering Authorities
In determining which administrative authority, a shipping company is assigned to, the country of its registration will serve as the criteria for attribution, taking into account the IMO Unique Identification System. However, should the legal entity be registered outside of the EU, the criterion for its attribution will be based on the port call data archived in the European Union’s maritime information system, SafeSeaNet.
In this case, the administering authority should be the Member State in which the shipping company has had the highest frequency of port calls in the past two years. For shipping companies registered in a third country that haven’t conducted any voyages to or from the EU in the last two years, the authority should be the Member State from which the shipping company concluded its initial voyage falling under the ETS jurisdiction. If there is a transition in the administrative authority of a shipping company, the new authority will be the member state where the shipping line initially made a port call. The newly appointed administration will be granted access to all the information pertaining to the previous shipping company.
Failure to Comply
If a shipping company does not submit their annual allowances as required, they will face a penalty of 100 €/ton, in line with the standard for EU ETS operators. In the event of consecutive failure to surrender allowances for two or more reporting periods, an expulsion order might be issued for the ships under its responsibility. The Member State can then detain these ships and restrict their access to ports within its jurisdiction, except for those under the flag state.