The European Union Emissions Trading System (EU ETS) is coming into effect for the maritime transportation sector on January 1, 2024. Here’s what that means.
Background
The EU ETS launched in 2005 and on May 10, 2023 was revised to include maritime transportation activities starting in 2024.1 The European Parliament remarked that “[a]ll sectors of the economy need to contribute to achieving … emission reductions” and that they are amending the EU ETS “to include maritime transport activities … in order to ensure that those activities contribute their fair share to the increased climate objectives of the Union as well as to the objectives of the Paris Agreement.” 2
The goal of the EU ETS is for EU Member States to achieve climate neutrality by 2050.3 A “cap and trade” system will set limits on the total amount of greenhouse gasses a company is allowed to emit. Companies will be able to buy allowances on the EU carbon market, and will receive some for free, but the cap will be reduced annually to match the EU’s emissions decrease goal. One emission allowance gives the company the right to emit one ton of carbon dioxide equivalent (CO2eq) when it is “surrendered” (used).4 Companies are allowed to trade allowances with each other, and leftover allowances can be sold or kept to use in the future.5
The EU ETS covers greenhouse gas emissions from around 10,000 installations in in the energy, manufacturing, and aviation sectors. It applies in EU member states, European Free Trade Association countries, as well as Northern Ireland for electricity generation.6
Application to the Maritime Transportation Sector
Participation in the EU ETS is mandatory for companies in the maritime sector. The system will cover 50% of carbon dioxide (CO2) emissions from voyages starting or ending in an EU Port and 100% of emissions from voyages between two EU ports and when ships are within EU ports. In addition to CO2, the system will also target methane (CH4) and nitrous oxide (N2O) emissions.7
Starting in 2024, the EU ETS will apply to ships of 5,000 gross tons and above with respect to greenhouse gas emissions released during voyages transporting commercial cargo or passengers to a port of call under the jurisdiction of an EU Member State. General cargo ships below 5,000 gross tons but not below 400 gross tons will be included in the EU ETS from 2025. Offshore ships of 400 gross tons and above will also be included from 2025. Over the course of 2024, the European Commission will assess whether additional ship types below 5,000 gross tons but not below 400 gross tons should be included in the EU ETS. 8
Shipping companies will have to purchase EU ETS emission allowances for each ton of reported CO2 or CO2 equivalent emissions within the scope of the system. Compliance will be monitored by EU Member States, and heavy fines will be imposed for a company’s failure to surrender enough allowances to fully account for their emissions.9 The system will have an initial phase-in period, during which companies need only surrender allowances for a portion of their emissions: 40% for emissions reported in 2024, 70% for 2025, and 100% starting in 2026.10
Maritime transportation is one of the most energy-efficient modes of transportation. In 2018, global shipping emissions represented 1,076 million tons of CO2 (around 2.9% of global emissions caused by human activities and 3-4% of the EU’s total CO2 emissions). However, projections show that these emissions could increase by up to 130% of 2008 emissions by 2050 if actions like the requirement to purchase EU ETS are not put in place.11
1 Regulation (EU) 2023/957 of the European Parliament and of the Council of 10 May, 2023, (eur-lex.europa.eu/eli/reg/2023/957).
2 Id.
3 Directorate-General for Climate Action, Emission Cap and Allowances, European Commission, (climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/emissions-cap-and-allowances_en).
4 Directorate-General for Climate Action, What is the EU ETS?, European Commission, (climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/what-eu-ets_en).
5 Id.
6 Directorate-General for Climate Action, Scope of the EU Emissions Trading System, European Commission, (climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/scope-eu-emissions-trading-system_en).
7 Id.
8 Regulation (EU) 2023/957 of the European Parliament and of the Council of 10 May, 2023, (eur-lex.europa.eu/eli/reg/2023/957).
9 Directorate-General for Climate Action, What is the EU ETS?, European Commission, (climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/what-eu-ets_en).
10 Directorate-General for Climate Action, Reducing Emissions from the Shipping Sector, European Commission, (climate.ec.europa.eu/eu-action/transport/reducing-emissions-shipping-sector_en).
11 Id.
