Outpacing global regulator, EU moves to introduce carbon pricing for shipping and Ocean Fund

The European Parliament’s Environment Committee (ENVI) has voted to adopt the European Commission’s proposal to include shipping in the EU Emissions Trading System (ETS), surpassing the (in)activity of the UN maritime body, the International Maritime Organization (IMO), to introduce a similar system.

The move is seen as one of the crucial steps to achieving the targets of the European Green Deal, a set of policy initiatives by the European Commission with the overarching aim of making Europe climate neutral in 2050. It also comes one year after the EU Commission’s Fit for 55 climate package was introduced.

To remind, shipping emissions are said to represent around 13% of the overall EU GHG emissions from the transport sector and the EU has been exploring different ways of cutting the sector’s CO2 footprint.

Specifically, the amended EU ETS seeks to cover 100% of emissions from intra-European routes as of 2024 and 50% of emissions from extra-European routes from and to the EU from 2024 until the end of 2026.

From 2027, emissions from all trips should be covered 100% with possible derogations for non-EU countries where coverage could be reduced to 50% subject to certain conditions.

What is more, the plan is to include GHG emissions other than CO2, such as methane nitrous oxides.

As the EU Parliament stressed earlier, Members of the EU Parliament (MEPs) agree that CO2 emission reporting obligations of the EU and IMO should be aligned. However, they recognized the fact that the IMO had made insufficient progress in establishing a global carbon levy.

Last year, the International Chamber of Shipping (ICS) proposed a global levy on carbon emissions from ships, calling for an internationally accepted market-based measure to accelerate the uptake and deployment of zero-carbon fuels. The money collected would go into the IMO Climate Fund, to be used to develop clean fuel bunkering infrastructure.

Separately, governments also proposed a $5 billion research and development fund that would be used to fund the research and development of alternative zero-carbon fuels and propulsion systems.

However, governments at the IMO are yet to adopt crucial decision that would help the industry achieve net zero CO2 emissions by 2050.

On the other hand, the EU MEPs now made progress in this direction as well, outpacing IMO. They greenlighted an Ocean Fund to make ships more energy efficient and support investment in innovative technologies and infrastructure, such as alternative fuels and green ports.

75% of the revenues generated from the auctioning of maritime allowances shall be put into an Ocean Fund, with the minor part of revenues used for marine ecosystems protection and restoration.

Parliament commits to enforcing the “polluter-pays” principle

In a separate statement, European shipowners have welcomed the strong cross-party support by the European Parliament for key provisions under the revised ETS for shipping.

Specifically, the European Community Shipowners’ Associations (ECSA) welcomed the Parliament’s commitment to enforce the ‘polluter-pays’ principle, by ensuring the mandatory pass-through of the ETS costs to the commercial operators of the vessels through contractual clauses.

Last month, an alliance of Greek and Swedish shipowners, along with Transport & Environment (T&E) wrote a letter to the European Commission’s Executive Vice-President Frans Timmermans and Commissioner Valean to demand that the maritime emissions trading system is both ambitious and tailor-made to the maritime industry. They called for the polluter pays principle to be at the core of the amended EU ETS proposal for shipping.

ECSA further said that it supports the proposal of the Parliament to create a sector-dedicated fund and to earmark 75% of the revenues generated by the shipping allowances to the energy transition of the sector.

It believes that the outcome of the vote in the Environment Committee is a good starting point for future negotiations between the European Parliament and the Council.

“Although our first preference has always been an international regulation for shipping at the IMO level, European shipowners recognise that the sector should contribute its fair share to address the climate crisis at the EU level as well,” Philippos Philis, ECSA’s President, commented.

“The mandatory pass-through of the ETS costs to the entities responsible for operational decisions will ensure the proper implementation of the ‘polluter pays’ principle. Although the position of the Parliament needs to be improved on certain points, it is a significant step forward.”

“A lot of work still needs to be done but the outcome of the vote today is a strong signal that the European policy-makers are keen to listen to the proposals of the shipping sector. The earmarking of the revenues is essential to finance R&D projects and to bridge the price gap between cleaner and conventional fuels,” Sotiris Raptis, ECSA’s Secretary-General, said.

“80% of the current ETS revenues are used for the energy transition of the European economy and we want to see the same happening for shipping. It’s a make-or-break moment for the decarbonisation of shipping and the competitiveness of the sector.”

Amendments are a step forward but there is still room for improvement

Trade organisations Danish Shipping and World Shipping Council share the view that the revision of the EU ETS is a crucial step towards achieving EU climate targets but believe that improvements to the proposals are still needed.

“Yesterday’s vote is an expression of an ambitious green agenda, but there is room for improvement and the need for adjustments so that the ETS system can truly drive the transition to green fuels,” Maria Skipper Schwenn, Director of Climate, Environment and Safety at Danish Shipping, pointed out.

“It is important for Danish shipping companies that all greenhouse gases – not just CO2 – must be included in the emissions trading scheme. It is positive that the Environment Committee has chosen to include greenhouse gases in a broad sense, which is a prerequisite for the industry’s move away from fossil fuels.”

“Conversely, it is a pity that there has been no understanding of a favourable system when ships recycle carbon in new and significantly more expensive alternative fuels such as Power-to-X, which converts green power into fuels. An ambitious green legislation should ensure the incentive for first movers to invest in new fuels and zero-emission technologies,” Skipper Schwenn added.

Danish Shipping has also had as a priority that the industry itself must clarify how the payment of the allowances is to take place when contracts are made between the ship owner and the charterer.

“As part of the EU Green Deal, the proposal from the European Commission on the revision of the EU ETS Directive is a vital opportunity for the EU to contribute to the transition to zero carbon for shipping. Policymakers in the European Parliament have a key responsibility in working for good policy and ensuring that the EU ETS carbon price is not simply a tax but also an incentive that drives sustainable change,” according to WSC.

“While WSC acknowledges the ENVI Committee’s commitment to strengthening the EU’s climate ambitions through the reform of the EU ETS, the report adopted in the ENVI Committee could put at risk the needed drive to reduce GHG emissions in the maritime sector.”

Ahead of the vote on the adoption of the EU ETS report in Plenary and the subsequent trilogue negotiations, WSC is calling on regulators to consider the following crucial factors:

• The design of the EU ETS needs to take into account the life-cycle emissions of renewable and low-carbon fuels in order to incentivise first-mover action.
• Reconsider the misconception that a broader geographical scope is equal to higher ambition.
• All parties that can influence the design and operation of ships should share the EU ETS costs.

EU ETS can pave the way for global regulation

EU’s forthcoming regulation on CO2 emissions from e.g. shipping can be important in paving the way for the regulation at a global level but the setup of the system is crucial. That was one of the points raised at Danish Shipping’s webinar on Fit for 55 held earlier this month.

“We need a global solution from IMO, but in its continued absence, in EU we must do as much as we can to push for a worldwide solution. In that context, the emissions trading system has the potential to be a steppingstone towards carbon neutral shipping” Linea Søgaard-Lidell, member of the European Parliament for Venstre (the Danish Liberal Party) stressed.

She emphasized that the EU should set an early starting date for when all shipping to and from EU ports must be included in the carbon regulation.

Looking forward, all eyes are now on the upcoming negotiations with EU member states about the final regulation which is expected to enter into force at the turn of the year.

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