Update on the extension of EU ETS to include maritime transportation

The EU Emissions Trading Scheme (ETS) is part of the "Fit for 55 in 2030 package", which is the EU's plan to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels in line with the European Climate Law. In July last year, the EU Commission presented a proposal for a reformation of the EU ETS, proposing, inter alia, to enlarge its scope to include maritime transportation as well as a number of other amendments.

The Commission's proposal has been the subject of extensive discussions in the European Parliament and the European Council since it was published, but on 7 June 2022 the process almost derailed as the European Parliament voted to reject a proposed reform of the EU ETS. However, on 22 June 2022, a compromise solution was found and the European Parliament have now adopted their position on the revision of the EU Emissions Trading System (ETS), including the extension of EU ETS to maritime transportation.

Compared to the initial proposal by the EU Commission of July last year, the position now adopted by the European Parliament entails a number of important changes:

• Maritime transportation will be included in the EU ETS from 2024 instead of 2023

• There will be no phase in period as originally proposed, meaning that shipping companies from 2024 shall be liable to surrender allowances corresponding to 100% of verified emissions reported for each calendar year

• For the period 2024 – 2026, the proposal is still that the EU ETS shall cover 100% of emissions from intra-European routes and 50% of emissions from extra-European routes to and from the EU. Note, however, that the proposal also entails that where the distance to or from the EU port is less than 300 nautical miles, 100% of the emissions for that voyage will be included in the calculation of annual emissions. The purpose is to avoid so-called "evasive port calls in neighbouring non-EU countries"

• From 2027, emissions from all trips (intra-European and extra-European) will be covered 100% with possible derogations for non-EU countries where coverage could be reduced to 50% subject to certain conditions. These conditions are restricted to situations where a third country has a carbon pricing mechanism at least equivalent to that of the EU ETS, or a third country is a Least Developed Country or a Small Island Developing State with a GDP per capita less than the EU average and includes emissions under its nationally determined contributions under the Paris Agreement

• For the period 2024 – 2026, emissions from maritime transportation carried out by ships of 5,000 gross tons and above will be included, but from 2027 this will be lowered to 400 gross tons and above

• The EU ETS will be extended to cover methane (CH₄) and nitrous oxides (N₂O), not only CO₂

• 75% of the revenues generated from auctioning maritime allowances shall be put into an Ocean Fund to support the transition to an energy efficient and climate resilient EU maritime sector

• Shipping companies may pay an annual membership contribution to the Ocean Fund in accordance with their total emissions reported for the preceding calendar year to limit the administrative burden for shipping companies, whereupon the Ocean Fund shall surrender allowances collectively on behalf of shipping companies that are members of the Ocean Fund. This may be particularly important for small and medium-sized shipping companies not normally involved in the business of purchase and trade of carbon emission allowances

• The responsible entity is still the "shipping company" (the ISM DOC holder), but emissions costs should be passed to the charterers to ensure that the "polluter pays principle" is fully respected and to encourage the adoption of efficiency measures and cleaner fuels

The final outcome of the proposal to extend EU ETS to maritime transportation, and whether the position now adopted by the European Parliament will become hard law is yet uncertain. The European Council now needs to adopt their position for trilogue negotiations with member states to begin.