On 29 November, a trilogue between the European Commission, the European Parliament and the EU member states finalized the details of shipping's inclusion in the EU Emissions Trading System (EU ETS). The agreement also brought changes to the monitoring and trading of nitrous oxide and methane emissions, as well as adjustments to the EU Monitoring, Reporting and Verification (MRV) regulation.
But how does the EU ETS work?
EU ETS is a "cap and trade" system where the goal is cost-effective pollution control. In this system the emissions are capped for all participants, then EU ETS legislation creates allowances — rights to emit GHG emissions. The cap level then determines the total number of allowances in the system. Each participant can buy or sell surplus/deficit allowances on the market. In terms of EU ETS, the cap has been set to decrease annually since 2013. Currently we are in the 4th phase of EU ETS (2021–2030), which is also the reason for the revision of the trading system, and the maritime industry has appeared on the agenda.
Key points in terms of EU ETS
- In addition to CO₂ emissions, methane and nitrous oxide emissions will be included in the emission trading scheme, starting from 2026.
- From 2025, shipowners will have to buy emission allowances for 40% of verified emissions reported in 2024. In 2026 this proportion will rise to 70%, but from 2027 onwards there will be no free allowances.
- After the end of the free allowance period, industry-specific emissions are expected to fall under the carbon border adjustment mechanism (CBAM).
- Liability for emissions is set to charterers and operators for employed ships.
- The scope of emission trading was untouched: 100% of emissions for intra-EU voyages, and 50% for voyages that start or end at one of the EU/EEA ports.
Key points for changes in EU MRV
- Companies will have to start reporting nitrous oxide and methane emissions from 2024. The EU Commission's working documents indicate that data collection for companies would start from 1 January 2024, and companies shall submit the updated monitoring plan by 1 April 2024, which needs to be assessed by verifiers.
- General cargo ships and offshore vessels in the range of 400 to 5,000 GT will also be subject to the EU MRV regulation from 1 January 2025. By 31 December 2026, the EU Commission has to decide whether to include these vessels in the EU ETS, based on a report on the results from the collected data.
But is it only an additional expense for the industry?
The short answer to this is — no. Another long-awaited point was finalized during the talks: the creation of an earmarked fund for R&D and innovation. This Innovation Fund would be financed by the revenues from allowance auctioning, and it will generate a significant amount of resources that will be spent directly on the industry's needs for further research on decarbonization efforts and investments in infrastructure.
The finalization of the EU ETS regulations has been long awaited by industry players. The measures agreed on 29 November are still subject to confirmation in December, and we still need to see the final document. The approval and widening of these regulations will have a significant impact on the way of doing business. In terms of reporting and verification, the need for automation is there, since the scope is increasing for all of the information that shipping companies have to report and be in control of.
Here at Nortech AI we like to be on top of the latest developments in the regulatory environment, but more importantly we can be a trusted partner for shipowners when it comes to digitalization and the further enhancement of decarbonization efforts. Our aim is to facilitate operational excellence based on data-driven decision making.
Sources
- TradeWinds. EU includes methane and nitrous oxide in shipping emissions trading scheme.
- Aronnax (Acast). Shipping's in the ETS — what to do with the money.
- Peter Liese. Some say it's historic: EU institutions preliminarily agree to the inclusion of the maritime sector in the EU ETS.
- Council of the European Union. Document ST-10796-2022-INIT.
