The European Union’s Emissions Trading System (ETS) was established in 2005 and is the world’s largest compliance carbon market. It is the EU’s flagship tool to combat climate change, targeting a 62% reduction in emissions by 2030 and a 90% drop by 2040 compared with 2005 levels.

The objective is simple - to reduce greenhouse gas (GHG) emissions by capping the amount of CO2e compliance operators can produce. By putting a price on CO2 and gradually reducing the supply of allowances, it aims to incentivise the transition to low-carbon, clean technologies. This is known as the ‘polluter pays’ principle. Companies in scope of the EU ETS must surrender allowances equal to their emissions on an annual basis.

Maritime transport emissions were brought into scope of the ETS from Jan. 1, 2024. Shipping companies are now exposed to ETS compliance regulations for:

·       100% of emissions from voyages within the EU/EEA (intra-EU).

·       100% of emissions that occur in an EU/EEA port of call, including while at berth.

·       50% of emissions from voyages starting or ending outside of the EU/EEA (extra-EU).

No free allowances have been allocated so shipping emissions will be phased-in during an initial three-year introduction period. Allowances will need to be purchased according to this timeline:

·       40% of verified emissions reported for 2024;

·       70% of verified emissions reported for 2025;

·       100% of verified emissions reported for 2026 and each year thereafter.

Cargo and passenger vessels ≥ 5,000 GT regardless of their flag. From Jan. 1, 2027, the scope will be extended to offshore vessels ≥ 5,000 GT. Possible inclusion of cargo, offshore, and passenger ships between 400-5,000 GT will be reviewed from 2027.

The EU ETS covers all carbon dioxide (CO2) emissions from 2024 and will include all methane (CH4) and nitrous oxide (N2O) emissions from 2026.

EU ETS and MRV Regulations place compliance obligations on the ‘Shipping Company’, which is defined as being the shipowner or any other organisation or person that has assumed responsibility for the operation of the ship. In practice this means that the entity responsible for compliance in respect of emissions can be either the registered owner or the ISM Company/DOC Holder. The shipowner and manager/operator must agree on which entity is responsible for ETS obligations, and there must be contractual proof of this agreement.

Owners and ISM Companies are both responsible for informing the Administering Authority about which ships they have assumed the ETS & MRV role for. In the absence of an agreement the owner will be considered responsible by default.

The EU Commission published a list of Shipping Companies on Jan. 31, 2024, specifying which Administering Authority they need to register a Maritime Operator Holding Account (MOHA) with. This is the authority of the Member State in which they are domiciled or, if domiciled outside the EU, the Member State their vessels visited most frequently in the last four monitoring years. The list is based on THETIS-MRV and SafeSeaNet data.

If a company is not registered in a Member State and did not have relevant port calls in the four preceding years, the Member State where a ship has started or ended its first relevant voyage will be the Administering Authority.

EU allowances (EUAs) must be surrendered to the EU against the total number of verified emissions over a calendar year. One EUA represents an allowance to emit one tonne of carbon dioxide equivalent.

EUAs can be purchased directly from primary market auctions hosted on the European Energy Exchange (EEX) which is currently contracted by the EU and its EU Member States to manage the sales process. EUAs can also be bought and sold on a secondary market via EEX, the Intercontinental Exchange (ICE), or through a partner like Carlton Carbon.

No. EUAs currently in circulation do not expire until they are surrendered and may be banked for use in future years. An allowance that has been surrendered cannot be retrieved.

Shipping companies have been required to submit Monitoring, Reporting and Verification data for emissions from EEA-related voyages since 2018.

Aggregated company emissions data which must now be submitted through the THETIS-MRV platform, and this information will be used to determine the corresponding number of EUAs required to comply with ETS obligations.

In line with the expansion of the ETS, MRV regulations will include methane and nitrous oxide emissions from 2024. Cargo, passenger, and offshore ships between 400-5,000 GT plus offshore vessels ≥ 5,000 GT will be included from 2025.

From 2024, the shipping company must submit to the responsible Administering Authority a revised monitoring plan for each ship by April 1, or no later than three months after the first port call under the jurisdiction of a Member State. This needs to conform with the requirements of the revised MRV Regulation which now includes methane and nitrous oxide emissions and must be submitted via the THETIS-MRV platform.

From 2025, by March 31 each year, companies must submit a verified emissions report to the Administering Authority for each ship covering the previous calendar year. It must also submit aggregated emissions data at company level by the same date via the THETIS-MRV platform.

Administering Authorities can request the emissions reports earlier than March 31, but not before Feb. 28. Every ship must carry a Document of Compliance (DOC) upon completion of the annual MRV process.

The shipping company then has until Sept. 30 to surrender the corresponding number of EUAs via their MOHA for the same reporting year as the MRV data.

Based on 2022 figures* an average vessel would have an annual emissions cost liability of:

·       €344,000 in 2024 (40%)

·       €603,000 in 2025 (70%)

·       €861,000 in 2025 (100%)

*The average cost of one EU Allowance (EUA) in 2022 was €81.20. The average total verified emissions per vessel in 2022 was 10,600 tCO2.

Failure to surrender the correct number of EUAs against total verified emissions will result in a penalty of €100/tonne, plus the market cost of purchasing the additional allowances. This is the same penalty as existing ETS participants. The name of the penalized company will also be disclosed to the public.

If a shipping company fails to surrender allowances for two or more consecutive reporting periods, an expulsion order may be issued against its ships. Every Member State would be required to refuse entry into any of its ports, until the company fulfils its surrendering obligations.

For a ship flying the flag of a Member State entering or found in one of its ports, the concerned EU Member State will, after giving the opportunity to correct the issue, detain the ship until the company does so.

The EU will allocate specific ETS revenue to accelerate the decarbonisation of shipping via the Innovation Fund. The sales proceeds from 20 million allowances through to 2030 will be deployed for this sole purpose. All other auction revenues must be used by Member States for climate-related purposes.

Yes. Until Dec. 31, 2030, the following exemptions will apply:

·       Ice class vessels may surrender 5% fewer allowances versus verified emissions, whether sailing in ice conditions or not.

·       Passenger ships (other than cruise and ro/pax ships) performing voyages between ports of certain islands of a Member State with fewer than 200,000 residents and ports located in the same Member State.

·       Voyages between an outermost region of an EU Member State and a port located in the same EU Member State.

·       Public Service Obligation or Contract (PSO/PSC) voyages between two Member States.