EU ETS SCHEME

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 Established in 2005, the EU ETS was the first emissions trading system in the world and remains the largest greenhouse gas emissions trading system across multiple countries and multiple sectors. It operates as a cap and trade system: a maximum amount of allowances is available in the scheme and these are allocated to participants either via free allowances or auctions, where participants purchase allowances. If the allowances which a particular participant has are insufficient to meet its needs, then it has a choice: to reduce carbon emissions to fall within its allowances or to purchase further allowances which are traded on a secondary market.

One allowance gives the holder the right to emit 1 tonne of CO2 (or its equivalent). Participants covered by the EU ETS must monitor and report their emissions each year and surrender enough emission allowances to cover their annual emissions.

Participants who are likely to emit more than their allocation have a choice between taking measures to reduce their emissions or buying additional allowances; either from the secondary market – for example companies who hold allowances they do not need – or from Member State held auctions.

  The EU’s legislative bodies have reached an agreement on including shipping in its Emission Trading System (EU ETS). Subject to final adoption, ships above 5000 GT transporting cargo or passengers for commercial purposes in the EU will be required to acquire and surrender emission allowances for their CO2 emissions from 2024. Offshore ships will be included from 2027. 

The European Parliament (EP), Council of the European Union, and the European Commission have reached an agreement on including shipping in the EU’s Emission Trading System (EU ETS) from 2024. There is no consolidated text available yet and this newsletter is based on the available information about the agreement and otherwise the Commission proposal from 14 July 2021. The EP and Council are expected to formally adopt the revised directive later. Further details on the requirements and processes can be expected as the final text is adopted, and the European Commission adopts related implementing and delegated acts.

Under the EU ETS each company with ships trading in the EU/EEA is required to surrender emission allowances corresponding to a certain amount of its GHG emissions emitted over a calendar year starting with 2024. The requirements apply to the shipping company which is the shipowner or any other organization or person, such as the manager or the bareboat charterer, who has assumed the responsibility for the operation of the ship including duties and responsibilities imposed by the ISM Code. The emissions will be reported and verified through the existing EU MRV (Monitoring, Reporting and Verification) system, which will be revised and extended to cover necessary GHG emissions, ship types and sizes.

From 2024 the EU ETS will include ships above 5000 GT transporting cargo or passengers for commercial purposes. The EU MRV system will be extended from 2025 to apply to offshore ships above 400 GT and general cargo ships between 400 and 5000 GT transporting cargo for commercial purposes. Offshore ships above 5000 GT will from 2027 be included in the ETS. By 2026 the European Commission will review whether general cargo and offshore ships between 400 and 5000 GT will also be included in the ETS.

 From 2024 the EU ETS will include CO2 emissions only, while the EU MRV will be extended the same year to include reporting of methane (CH4) and nitrous oxide (N2O) which are two other greenhouse gases (GHG) emitted by ships. From 2026 the EU ETS will also include these two GHGs.

 All 100% of emissions on voyages and port calls within the EU/EEA, and 50% of emissions on voyages into or out of the EU/EEA are subject to the EU ETS. To avoid evasive behaviour, container ships stopping in transhipment ports outside the EU/EEA but less than 300 nm from an EU/EEA port, need to include 50% of the emissions for the voyage to that port as well, rather than only the short leg from the transhipment port. The EU will provide a list of transhipment ports.

 The emissions in scope for surrendering allowances will be gradually phased-in, starting with 40% of emissions according to the scope described above for 2024, increasing to 70% for 2025 and to 100% for 2026 onwards.

 Each company will need to be registered with an administrating authority. For companies registered in the EU, the administrating authority will be the member state where it is registered, while for companies outside the EU it is the member state with the largest number of port calls from voyages performed by the ship company the last two monitoring years, or, if it has not traded in the EU the last two years, the member state of the first port call in the EU. The EU will prepare a list of the administering authorities per company, which will be updated every two years.

Within three months after entry into force of the revised directive (to be decided at adoption), an updated ship EU MRV monitoring plan must be verified by an accredited verifier and submitted to the administrating authority of the company. The monitoring plan shall describe the method for monitoring and reporting of methane and nitrous oxide. From 1 January 2024, each ship needs to start reporting according to the revised monitoring plan.

By 31 March each year from 2025, a verified company emission report needs to be submitted to the administering authority. The company emission report aggregates the emissions within the scope of the EU ETS reported and verified for each ship under the responsibility of the company during the reporting period (i.e., the calendar year). Note that this in practice means that the ship emissions report needs to be verified and submitted a month earlier than under the current EU MRV system. By 30 September (indicated, subject to confirmation) each year the necessary emission allowances are required to be surrendered to the administering authority.