What is the EU ETS?
The European Union Emissions Trading System (“EU ETS”) consists of a “cap and trade” system which caters for the trading of emission allowances in an attempt to combat climate change in an efficient and cost-effective manner. This market-based system sets an absolute cap on the total amount of greenhouse gases which can be emitted by certain regulated entities, each year. These entities purchase or receive1 emissions allowances which can be subsequently traded with one another. At the end of a given year, the entities must surrender enough allowances to cover their emissions. Entities may elect to save any extra allowances for future needs or otherwise sell them to an entity which lacks allowances.
The EU ETS was introduced in 2005 as the world's first emissions trading system and has since undergone various changes.2 One recent proposal concerns the extension of this system to the maritime sector.
The Extension of the EU ETS to the Maritime Sector
The success of this system coupled with the EU's climate target has led to the EU's proposal to revise the existing EU ETS (the “Proposal”).3 One proposed amendment consists of an extension of the EU ETS to the maritime sector. The Proposal sets out this extension in respect of 100% of emissions from intra-EU voyages, 50% of the emissions from extra-EU voyages and 100% of emissions occurring at berth in an EU port. Accordingly, existing provisions on auctioning, transfer, surrender and cancellation of allowances, penalties and registries which apply to other sectors, would also apply to the maritime sector. The Proposal provides for the gradual phase-in of the obligation to surrender allowances over the period of 2023 to 2025 and shipping companies shall be required to surrender 100% of their verified emissions as of 2026.
The proposal is that the application of the EU ETS to the maritime sector will be monitored and enforced by the EU member states and each shipping company will be supervised by a particular “administering authority”. Typically, this will be the member state in which that shipping company is registered.
The applicability of this system to the maritime sector will come at a significant cost to the industry. Shipping companies will need to implement systems to monitor and report their emissions, which will imply a further administrative cost for the industry.4 At the end of a reporting period, shipping companies will need to surrender allowances in respect of their emissions for voyages falling within that period.
If a shipping company fails to comply with its obligations under the EU ETS it will be subject to a fine. In more extreme circumstances, a shipping company may also risk the imposition of an expulsion order whereby the shipping company's vessels will be denied entry in all EU ports.
Notwithstanding that the Proposal is yet to become EU law, when negotiating and drafting contracts, parties should ensure that any obligations and costs resulting from this system are adequately addressed.
Footnotes
1 The availability of free allowances is dependent on the sector in which the regulated entity operates.
2 This scheme is regulated by Directive 2003/87/EC of the European Parliament and of the Council of 13 October establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC.
3 “Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and Regulation (EU) 2015/757”, published by the European Commission on 14 July 2021 COM(2021) 551 final.
4 Certain ships may already fall within the ambit of Regulation (EU) 2015/757 of 29 April 2015 on the monitoring, reporting and verification of carbon dioxide emissions from maritime transport, and amending Directive 2009/16/EC (the MRV Regulation). Accordingly, the Proposal intends to supplement this regulation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
