EU poised to start taxing shipping emissions in 2024

In the final round of talks over the weekend, the EU Council and the European Parliament hammered out a provisional political agreement on legislative proposals of the ‘Fit for 55’ package that aim to further reduce emissions and address their social impacts.

The ‘Fit for 55’ package is aimed at enabling the European Union to reduce its net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels and to achieve climate neutrality in 2050.

The deal is pending formal adoption in both institutions.

The EU Emissions Trading System (EU ETS) is a carbon market based on a system of cap-and-trade of emission allowances for energy-intensive industries and the power generation sector. It is the EU’s main tool in addressing emissions reductions, covering about 40% of the EU’s total CO2 emissions.

For the first time, the two institutions agreed to include maritime shipping emissions within the scope of the EU ETS. They agreed on a gradual introduction of obligations for shipping companies to surrender allowances: 40% for verified emissions from 2024, 70% for 2025, and 100% for 2026.

“The agreement on the EU Emissions Trading System and the Social Climate Fund is a victory for the climate and for European climate policy. This will allow us to meet climate objectives within the main sectors of the economy, while making sure the most vulnerable citizens and micro-enterprises are effectively supported in the climate transition. We can now safely say that the EU has delivered on its promises with ambitious legislation and this puts us at the forefront of fighting climate change globally,” said Marian Jurečka, Czech minister for the environment.

“This is a new major European agreement for the climate! Our industries will have to reduce their emissions by 62 % by 2030 compared to 43% before this agreement. Nearly 50 billion euros will be available to support innovation and accelerate the decarbonization of industries. After the recent agreements on the carbon border adjustment mechanism and the law on deforestation, last night’s agreement on the reform of the European carbon market closes a completely unprecedented acceleration for the climate,” MEP Pascal Canfin (L’Europe Ensemble, France) chair of ENVI committee comments on the agreement:

Most large vessels will be included in the scope of the EU ETS from the start. Big offshore vessels of over 5000 gross tonnage and above will be included in the ‘MRV regulation’ on the monitoring, reporting and verification of CO2 emissions from maritime transport regulation from 2025 and in the EU ETS from 2027. General cargo vessels and off-shore vessels between 400-5 000 gross tonnage will be included in the MRV regulation from 2025 and their inclusion in EU ETS will be reviewed in 2026.

In addition, the agreement takes into account geographical specificities and proposes transitional measures for small islands, ice class ships and journeys relating to outermost regions and public service obligations and strengthens measures to combat the risk of evasion in the maritime sector.

Certain member states with a relatively high number of shipping companies will in addition receive 3,5% of the ceiling of the auctioned allowances to be distributed among them.

The co-legislators agreed to include non-CO2 emissions (methane and N2O) in the MRV regulation from 2024 and in the EU ETS from 2026.

The Council and Parliament agreed to increase the overall ambition of emissions reductions by 2030 in the sectors covered by the EU ETS to 62%, and have not backed the level of ambition proposed by the European Commission.

This represents a substantial increase of 19 percentage points compared to the 43% reduction under the existing legislation. 

 “This would have been a good deal ten or twenty years ago, but in 2022 it’s too little too late. And it favors big polluters over helping citizens get off expensive fossil fuels, by continuing to hand out billions in free emissions allowances with few strings attached, ”Alex Mason, Head of Climate and Energy at World Wildlife Fund (WWF) European Policy Office, said.

However, WWF said that the target falls below what is required to hold global temperature increase below dangerous levels. To fix this and to be sure the 2030 target is met, ETS sectors should reduce their emissions by at least 70%. 

The co-legislators agreed to a rebasing of the overall emissions ceiling over two years of 90 and 27 million allowances respectively and increase the annual reduction rate of the cap by 4,3 % per year from 2024 to 2027 and 4,4 from 2028 to 2030.

As regards sectors covered by the Carbon Border Adjustment Mechanism (CBAM) – cement, aluminium, fertilisers, electric energy production, hydrogen, iron and steel, as well as some precursors and a limited number of downstream products – the Council and Parliament agreed to end free allowances for these sectors, over a nine-year period between 2026 and 2034.

“While it’s welcome that co-legislators agreed on phasing-in the Carbon Border Adjustment Mechanism (CBAM) in 2026 and phasing out almost half of free ETS allowances for CBAM sectors by 2030, the pace of this phase-out is far too slow. With a full phase-out due to happen only in 2034 for CBAM sectors, big polluters will continue to receive billions of freebies in the next decade,” WWF commented.

The institutions agreed on increasing the volume of the Modernisation Fund through the auctioning of an additional 2.5% of the cap for which 90% must be used to support priority investments. Three additional member states will be eligible to receive funding (Greece, Portugal and Slovenia).

Although natural gas projects will in principle not be eligible for funding, a transitional measure will allow the current beneficiaries of the fund to continue time-limited financing natural gas projects under certain conditions.

The Council and the Parliament also strengthened the Innovation Fund. In comparison to the current size of the fund, an extra 20 million allowances coming from the extension of the scope of EU ETS maritime to additional large vessels and inclusion of methane and nitroxides was added. There will be dedicated calls to decarbonise the maritime sector under the fund.

This amount corresponds to 1.5 billion euros under the current ETS carbon price that was allocated to maritime projects.

“EU countries will now have to spend all their ETS cash on climate action, and this is definitely a step forward. Unfortunately, the quality of a ‘climate action spending’ is still entirely up to Member States. It means they could continue as before, and still use money to subsidise fossil coal and gas,” Romain Laugier, Climate & Energy Policy Officer at WWF European Policy Office, said.

The Council and Parliament also agreed on a deal on an ETS for buildings and road transport (ETS2), as well as the Social Climate Fund, whose size will be linked to the ETS2. 

The system will start in 2027, and the emissions reduction trajectory and the linear reduction factor was set at 5.10 from 2024 and 5.38 from 2028.

The Council and Parliament agreed to establish a Social Climate Fund to support vulnerable households, micro-enterprises and transport users cope with the price impacts of an emissions trading system for the buildings and road transport and fuels for additional sectors.

The fund would support investments in energy efficiency measures such as home insulation, heat pumps, solar panels, and electric mobility. It will also be able to provide direct income support covering up to 37.5% of the new national Social Climate Plans. It will start operating in 2026, before the entry into force of the new ETS for transport and building fuels, and will be financed by €65 billion from the EU budget, plus 25% co-financing by Member States.

Member states will be contributing nationally from their own budgets to the measures undertaken (co-financing 25%).

“Against the backdrop of Russia’s invasion of Ukraine, this agreement shows once again the EU’s determination to become climate neutral by 2050, transform our economy and society, leave nobody behind, and ensure our energy security. To complement the substantial spending on climate in the EU budget, Member States will spend the entirety of their emissions trading revenues on climate and energy-related projects and to address social aspects of the transition,” the European Commission said in a statement.