Carbon taxes have long been a discussion point to achieve global net-zero targets. Introduced in 2005, the European Union’s Emission Trading System (ETS) was one of the first tax versions implemented with the aim to reduce greenhouse gas emissions of high-polluting sectors through an emissions cap-and-trade system, It currently covers emissions from the following sectors within the EU: Aviation, Cement, Iron and steel, Aluminium, Fertilisers, Electricity, Hydrogen, and various other high-intensity sectors. As of 1st January 2024, new measures are being introduced to include the maritime sector within the ETS.
As a consequence, ship owners or shipping lines will be responsible for complying with the EU ETS. They will need to monitor and report verified CO2 emissions to the administering authority on a yearly basis, and be responsible for surrendering the required EU Allowances to the competent authority.
Under the ETS, a limit is set on the total amount of greenhouse gas emissions that can be emitted by sector-specific manufacturers or aircraft operators covered by the system. The cap is reduced annually in line with the EU’s climate targets, ensuring that emissions decrease over time towards net-zero.
The cap is managed through emission allowances purchased by the emitters, where one allowance gives the right to emit one tonne of carbon dioxide. Failure to report CO2 emissions will result in a fine. Companies can trade allowances with each other should they have excess allowances, meaning if any allowances are not used in one year, they can either keep them for the following year or sell them.
The impact of the EU ETS will likely lead to additional surcharges for shippers or an outright increase in shipping costs in order for the ‘allowance’ costs to be absorbed by the shipping company. As of 8/11/23, the current ETS rate for the cost of 1 tonne of carbon dioxide produced is €79.65/£69.32. Below, please find an overview of the vessels and voyages impacted as well as exemptions.
Scope of Vessels Included:
- Commercial ships: 5000 gross tonnes or more that call at any EU port, regardless of flag or of the owner's jurisdiction of incorporation. This includes both cargo and passenger ships.
Scope of Vessels Excluded:
- Offshore Ships: excluded initially, however, the ETS will be expanded to include these from 1 January 2027. No definition is given within the measures as to what constitutes an “offshore ship” yet but offshore vessels would typically include vessels that serve operational purposes in connection with oil and gas exploration and production, wind farms, etc.
- Ice-class ships: although it is recognised that these vessels are ‘fuel-inefficient’, they have been given a dispensation until 31 December 2030 that requires owners only to surrender a reduced quantity of allowances (5% fewer than their verified emissions). This dispensation only applies to ships with ice class IA, IA Super, or equivalent.
- Particular ships: there are some specific ships that are excluded from the EU ETS. These include military vessels and government ships used for non-commercial purposes. Ships not propelled by mechanical means, wooden ships and fishing vessels (catching or processing), are also excluded.
Other exemptions include:
- Small island exemption: no road or rail link to the mainland and have a population of less than 200,000
- Geographical exemption: ferries operating between states that have no land borders
Voyage emissions that will fall under the scope of the EU ETS:
- 100% of CO2 emissions from voyages starting and ending at EU ports (e.g. Hamburg to Marseille)
- 100% of CO2 emissions from vessels whilst at berth in EU ports
- 50% of CO2 emissions from voyages that start or end at EU ports, with a destination or starting point outside the EU (e.g. Yantian to Rotterdam)
The EU ETS for shipping will undergo a gradual phase-in following the guidelines/milestones below:
- By 2024 40% of CO2 emissions need compensation with allowances
- By 2025 70% of CO2 emissions need compensation with allowances
- By 2026 100% of CO2, CH4, N2O (amongst other greenhouse gases) emissions need compensation with allowances
What data will carriers need to report?
Emission calculations will not be determined by the actual content of CO2 released into the air per ship but instead by measuring the fuel consumption of the shipowner's operations at a company-wide level. This data is then submitted and the CO2 emissions calculated using an approved emission factor, and necessary allowances are retired. It is then down to the shipowner to charge customers appropriately.
Shipboard machineries whose fuel consumption must be monitored include:
- Main engines
- Auxiliary engines
- Gas turbines
- Boilers – including main and auxiliary
- Inert gas generators (for tankers and gas carriers
- Gas combustion unit (for LNG carriers)
There will be a combination of methods used to measure fuel consumption:
- Bunker Delivery Notes to determine the quantity of fuel delivered on the ship per year
- Bunker tank measurements
- Flow meters installed on various machineries
- Cargo tank measurement – where cargo is used as a fuel for gas carriers
Please note that the use of carbon offset credits will not reduce the cost of EU ETS fees, as the baseline emissions that are created remain the same.
Penalties for non-compliance with the EU ETS:
- Excess emissions monetary/penalty - fines
- Expulsion order/detention - banned from European ports
- ‘Name and Shame’ - a list of companies who do not comply will be published
Should you have any questions on your global supply chain or on how to make your supply chain more environmentally sustainable, please contact us here.
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