In July 2021, the European Union (EU) set sail on a transformative journey with the enactment of the 'Fit for 55' package, a comprehensive initiative targeting the reduction of greenhouse gas (GHG) emissions, particularly within the shipping industry.
The maritime and shipping transport sector currently accounts for approximately 13.5% of the EU's GHG emissions arising from transportation. The 'Fit for 55' package, a multifaceted approach to environmental responsibility, introduces a pivotal measure – the extension of the EU ETS to maritime activities. Originating in 2005, the EU ETS has been a linchpin of EU climate policy, covering 40% of the region's total GHG emissions through a cap-and-trade mechanism.
Setting Sail into a New Era
On January 1, 2024, the existing EU ETS has been broadened to include maritime transport emissions. Shipping companies will adopt the same principles applied to other industries within the EU ETS framework, monitoring and reporting their emissions. Companies will also purchase and surrender ETS emission allowances for each tonne of GHG emissions reported, fostering a sustainable paradigm shift.
Key features of the extended ETS include a phased approach, with a 40% obligation on emissions reported in 2024 and a 70% obligation in 2025. From 2026 onward, the full emission allowance price will be applicable. Each shipping company will align with the administering authority of an EU Member State, building on existing frameworks for emission monitoring, reporting, and verification.
Scope
The geographical scope of the EU ETS for maritime transport will encompass 100% of voyages taking place within EU territorial waters and 50% of voyages taking place outside the EU as from January 1, 2024. Initially covering CO₂ (carbon dioxide) emissions, the scope will expand to include CH₄ (methane) and N₂O (nitrous oxide) emissions from 2026. The extension primarily targets ships exceeding 5000 gross tonnage engaged in the transport of passenger or cargo for commercial benefit, with plans to widen the scope from 2027.
Enforcement and funding
Member States will play a crucial role in enforcing the extended ETS, ensuring penalties are effective, proportionate, and dissuasive. Penalties for non-compliance include a €100 fine per tonne of emissions not surrendered, which is inflation-linked. As an added measure, ships failing to comply for two or more consecutive years could be denied entry into EU ports. Revenues derived from the auctioning of allowances will be reinvested by Member States to combat climate change, specifically in targeting the decarbonization of the maritime sector.
Written by Gregory Mifsud Orlando, Junior Lawyer