Key legislative pillars impacting the maritime industry within the “Fit for 55” package
The Fit for 55 Package encompasses a comprehensive set of proposals designed to revise and enhance existing EU legislation while introducing new initiatives, all aimed at aligning EU policies with the climate goals agreed upon by the Council and the European Parliament. This package aims to establish a framework that enables the achievement of the EU’s climate objectives and its measures aim to achieve a minimum 55% reduction in net greenhouse gas emissions compared to 1990 levels by 2030 and reach climate neutrality by 2050.
Within the “Fit for 55” package, the maritime industry is impacted by five key legislative pillars, which are as follows:
- EU ETS trading scheme: Starting from 2024, this scheme will include shipping emissions, thereby expanding its coverage. Further details on this topic will be explored in this article.
- FuelEU Maritime initiative: Effective from 2025, this initiative mandates vessels with a gross tonnage of 5000GT and above to reduce the greenhouse gas intensity of the energy they use onboard.
- Alternative fuel infrastructure regulation (AFIR): This scheme aims to enhance the availability of greener fuels within the European Union and facilitate the provision of climate-friendly electrical power supplies at ports.
- Renewable energy directive (RED): Designed to promote the use of energy from renewable sources, this directive seeks to foster improved integration of renewable energy into the overall energy system.
- European taxation directive (ETD): This directive is intended to establish a tax structure that ensures higher taxes on polluting fuels. However, discussions are ongoing, and a specific enforcement date has not yet been determined.
While several of these regulations are undergoing revisions to align with the current climate goals of the European Union (EU), both the EU ETS trading scheme and the FuelEU maritime legislation are set to be enforced in the near future. As these new regulations come into effect, there is a heightened level of uncertainty surrounding their implementation.
Among these regulations, the EU ETS trading system poses a particular challenge for shipping companies, making it crucial to navigate this regulation effectively. Although the concerns related to other regulations may not be imminent, the EU ETS trading scheme demands immediate attention and strategic planning.
How is the EU trading system going to impact shipping?
The EU ETS is a trading system spanning multiple countries and sectors. The adoption of this system includes a few key milestones:
- 2005: The EU ETS was launched in 2005, primarily targeting power and heat generation as well as energy-intensive industrial installations.
- 2023: In 2023, the EU ETS directive was revised and approved to include the shipping sector within the trading system.
- 2024: The revised directive is set to enter into force in 2024, marking the official inclusion of the shipping industry in the EU ETS.
The trading scheme operates on a cap and trade system, wherein a predetermined maximum number of allowances is made available in the market. Participants receive these allowances through free allocation or auctions. Each country’s emission reduction targets determine the cap on allowances.
Over time, the emissions cap gradually decreases, reducing the total available allowances in the market. The linear reduction factor for carbon allowances is -4.3% from 2024 to 2027 and -4.4% from 2028 onwards.
Shipping companies participating in the EU ETS can only emit up to the amount covered by their allowances. If they lack sufficient allowances, they must purchase additional ones or take measures to reduce emissions. Conversely, if a shipping company holds surplus allowances, it can retain them or sell them back in the market.
As the EU ETS expands, shipping companies will be required to surrender allowances equivalent to the following requirements:
Concerns arise regarding the potential for shipping companies to exploit neighboring ports to minimize costs and reduce carbon allowances. In response, the European Union plans to publish a list of neighboring container trans-shipment ports, which will undergo updates every two years.
In this scenario, if a shipping company utilizes one of the listed trans-shipment ports, the credit allowances will be calculated based on the distance between the port of origin and the European port, or vice versa. This measure aims to ensure that shipping companies cannot circumvent their carbon obligations by strategically selecting ports.
How emissions will be reported under the EU ETS scheme?
The implementation of the EU ETS for the shipping industry involves several key aspects to take into account:
- Scope of the EU ETS: The EU ETS will apply to ships visiting EU ports, irrespective of the flag they fly or the country where the ship’s owner is incorporated.
- Responsibility for Non-EU Shipping Companies: For shipping companies falling under the EU ETS but not incorporated in an EU Member State, the administration of the scheme will be the responsibility of the Member State that the non-EU shipping company visits most frequently within a two-year period. If the non-EU shipping company has not made any voyages within the EU in the previous two years, the responsibility will lie with the first EU port it visits.
- Reporting and Verification: Emissions will be reported and verified using the existing EU MRV (Monitoring, Reporting, and Verification) system. This system will be expanded and revised to encompass the necessary greenhouse gas (GHG) emissions, ship types, and sizes.
- Collection of GHG Emissions: Vessels falling under the scope of the regulation have already started the collection of GHG emissions data in accordance with the EU’s Monitoring, Reporting, and Verification Regulation.
- Obligations and Responsibility: The requirements of the EU ETS apply to the shipping company, which includes the shipowner and any other organization or person (such as the manager or bareboat charterer) assuming responsibility for the ship’s operation.
- Chartering of Ships: In cases where a ship is chartered to another shipping company, the EU ETS system applies to the identity of the shipping company rather than the ship itself. The shipowner remains responsible for surrendering allowances but can contractually pass on the associated costs to the entity operating the ship.
- Entity Responsible for EUA Purchase: The entity responsible for financing the purchase of EUAs can be either the shipping company or the entity in charge of fuel procurement and/or ship operation.
While challenging and complex to navigate, these measures aim to ensure transparency and accountability in reducing greenhouse gas emissions within the maritime sector.
The impact of just-in-time arrivals to reduce carbon credits costs
The intricacies of the EU trading system contribute to the current heightened uncertainty within the market. A closer examination of carbon prices reveals their reflection of market participants’ expectations regarding long-term supply and demand equilibrium, with forward prices influenced by interest rate developments. Consequently, the European carbon market is characterized by speculation and high volatility.
In light of these circumstances, shipping companies will be forced to implement measures to optimize their performance and proactively address emissions, fuel consumption, and carbon allowance costs. As shipping companies contend with the financial burden of carbon allowances, cost reduction becomes a key objective. One effective approach to achieve this is through the adoption of operational measures such as just-in-time arrivals.
Furthermore, the implementation of the EU ETS system for maritime transport would incentivize companies that adapt fast and take proactive steps to reduce their carbon footprint. These companies would have the opportunity to sell surplus allowances, thereby generating an additional revenue stream as a reward for their environmental efforts.
In summary, the current market dynamics require strategic actions from shipping companies to mitigate carbon allowance costs by optimizing operations and embracing environmentally conscious practices. The adoption of the EU ETS system in maritime transport offers both financial incentives and the chance to make a positive environmental impact.
