European Union Emissions Trading System (EU ETS) implementation – January 2024

November 15, 2023 /

The EU ETS is a cornerstone of the EU's policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively. It is the world's first major carbon market and remains the biggest one.

It is an emission cap-and-trade system designed to curtail carbon emissions within the European Union. It sets a cap on the total allowable emissions and allows companies to trade emission allowances. This cap diminishes annually, aligning with the EU’s ambitious climate goals – a 55 percent emissions reduction by 2030 and climate neutrality by 2050. Starting from 2024, ships above 5,000 gross tonnage engaged in commercial activities within the EU must acquire and surrender emission allowances for their GHG emissions.

Under the European Climate Law, EU Member States will work collectively to become climate neutral by 2050. As a first milestone, the EU is aiming to reduce net emissions by at least 55% by 2030 compared to 1990. The revised EU ETS will contribute to delivering this target.

To achieve the necessary emission reductions cost-effectively, the EU ETS has been strengthened, and its scope expanded to maritime transport. Altogether, the cap is tightened to bring emissions down by 62% by 2030 compared to 2005 levels. In parallel, operational parameters of the Market Stability Reserve have been calibrated to continue foste

The EU ETS will now also cover emissions from maritime transport from 2024.

While maritime transport plays an essential role in the EU economy and is one of the most energy-efficient modes of transport, it is also a large and growing source of greenhouse gas emissions. In 2018, global shipping emissions represented 1 076 million tonnes of CO2, and were responsible for around 2.9% of global emissions caused by human activities.

Projections show that these emissions could increase by up to 130% of 2008 emissions by 2050. If the climate change impact of shipping activities grows as projected, it will undermine the objectives of the Paris Agreement: a global framework to avoid dangerous climate change by limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C.

At EU level, maritime transport represents 3 to 4% of the EU’s total CO2 emissions, or over 124 million tonnes of CO2 in 2021.

In order to significantly reduce greenhouse gas (GHG) emissions from international shipping, effective global measures are desirable. In July 2023 the International Maritime Organisation (IMO) made a step on this path committing to new targets for GHG emissions reductions and to develop and adopt in 2025 a basket of measure(s), delivering on these reduction targets. The next years to come will show which measures will be adopted and become applicable and whether they will commensurate with achieving these targets and the objectives of the Paris Agreement. The EU action to make sure maritime transport plays its part in achieving climate neutrality in Europe by 2050 is an essential step in incentivising the necessary reductions.

In January 2024, the EU's Emissions Trading System (EU ETS) will be extended to cover CO2 emissions from all large ships (of 5 000 gross tonnage and above) entering EU ports, regardless of the flag they fly.

The system covers:

50% of emissions from voyages starting or ending outside of the EU (allowing the third country to decide on appropriate action for the remaining share of emissions);
100% of emissions that occur between two EU ports and when ships are within EU ports.
The EU ETS covers CO2 (carbon dioxide), CH4 (methane) and N2O (nitrous oxide) emissions, but the two latter only as from 2026.

Emissions from maritime transport are included in the overall ETS cap, which defines the maximum amount of greenhouse gases that can be emitted under the system. The cap is reduced over time to ensure that all ETS sectors contribute to the EU’s climate objectives. This will incentivise energy efficiency, low-carbon solutions, and reductions of the price difference between alternative fuels and traditional maritime fuels.

The system builds on the provisions in place for other EU ETS sectors, as well as the recently revised EU Monitoring, Reporting and Verification Regulation for maritime transport (‘MRV Maritime Regulation’).

In practice, shipping companies have to purchase and surrender (use) EU ETS emission allowances for each tonne of reported CO2 (or CO2 equivalent) emissions in the scope of the EU ETS system. It is the role of administering authorities of EU Member States to ensure compliance using similar rules as for the other ETS sectors.

To ensure a smooth transition, shipping companies only have to surrender allowances for a portion of their emissions during an initial phase-in period:

2025: for 40% of their emissions reported in 2024;
2026: for 70% of their emissions reported in 2025;
2027 onwards: for 100% of their reported emissions.

A reporting and review clause is included to monitor the implementation of the rules applicable to the maritime sector and to take into account relevant developments in the International Maritime Organisation (IMO).

The EU ETS is set to exert a substantial influence on the operations, costs, and contractual agreements of multipurpose ships. As of May 2023, the ETS emission allowance price stood at approximately €90 per tCO2, adding €290 to the cost per tonne of fossil fuel combusted. This represents nearly a 50 percent surge in fuel costs for operations within the EU, assuming a fuel cost of around E600 per tonne, according to data from DNV.

If you need support or futher information please contact us.

Source: European Commission / Breakbulk