??Navigating a Greener Future: EU ETS in Shipping - Newsletter #5 ??

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???? EXCITING MARITIME UPDATE! ????

Ahoy there, maritime enthusiasts! ?? Get ready to set sail into the latest waves of regulatory news that'll leave you intrigued and informed! ??? Don't miss out on these noteworthy updates:

• High Seas Treaty Advances Ocean Conservation. It was signed in New York on 20 September. With 81 signatories, it is set to enter into force, enhancing global efforts to protect oceans.
• World’s first trans-Pacific green shipping corridor. The Ports of Los Angeles, Long Beach, and Shanghai, along with major carriers and cargo owners, launch a groundbreaking Green Shipping Corridor initiative to reduce emissions, promote decarbonization, and enhance shipping efficiency.
• Fire not the only danger with lithium-ion batteries. TT Club, an international freight insurance provider, emphasizes the hidden dangers of toxic gas emissions associated with lithium-ion battery fires, highlighting the need for awareness and safety measures.
• IBF Agreement Boosts Wages for Mariners, Secures Other Gains. The International Bargaining Forum (IBF) has agreed to a 6% pay increase for seafarers in the 2024-2027 IBF Framework Agreement, benefiting over 250,000 seafarers. The agreement also addresses safety, working conditions, and future industry challenges..

In the vast expanse of global trade, the maritime industry has long been the unsung hero, ensuring the seamless movement of goods across continents. Yet, behind the scenes, this industry has quietly contributed (approx. 3% of global emission caused by humans) to a growing environmental crisis – greenhouse gas (GHG) emissions. We will explore here the significant changes on the horizon for maritime businesses as the EU Emissions Trading System (ETS) extends its reach to include this industry, offering valuable insights and practical takeaways for navigating this transformation.

What's New? ??

In January 2024, a monumental shift will take place as the EU's Emissions Trading System expands to encompass CO2 emissions from all large ships entering EU ports, regardless of their flag. This landmark move represents a significant step towards addressing the maritime industry's contribution to greenhouse gas emissions.

Here's what you need to know:

1. The EU ETS will cover 50% of emissions from voyages starting or ending outside the EU and 100% of emissions occurring between two EU ports or within EU ports themselves.
2. It includes CO2, methane (CH4), and nitrous oxide (N2O) emissions, with the latter two being incorporated starting from 2026.
3. From 1 January 2025, under the EU MRV Maritime Regulation, offshore ships and general cargo ships below 5000 GT but not below 400 GT must report their emissions.
4. Shipping companies must surrender (use) their first ETS allowances by 30 September 2025 for emissions reported in 2024.The share of emissions that must be covered by allowances gradually increases each year: -- 2025: 40% of emissions reported for 2024 must be covered by emission allowances;- 2026: 70% of emissions reported for 2025;- 2027 and beyond: 100% of reported emissions.
5. The EU ETS Directive is applicable to:- from 2024: cargo and passenger ships of or above 5000 gross tonnage (GT);- from 2027: offshore ships of or above 5000 GT.
6. Emissions from maritime transport are now part of the overall ETS cap, which is progressively reduced to align with the EU's climate objectives.

Why Does It Matter? ????

The maritime industry plays an indispensable role in the EU economy, but it also stands as a significant contributor to greenhouse gas emissions. These emissions have dire implications for global climate goals, including the Paris Agreement's target to limit global warming. The extension of the EU ETS to maritime transport is a pivotal development with far-reaching implications:

• By holding shipping companies accountable through emissions allowances, the EU ETS will stimulate energy efficiency, promote low-carbon solutions, and reduce the price gap between traditional and alternative fuels.
• Compliance with these new regulations will become obligatory, starting with 40% of emissions in 2025 and progressing to 100% by 2027.
• This move aligns with the broader European Green Deal, which seeks to reduce greenhouse gas emissions and promote cleaner fuels and technology across the maritime sector.

How does it works? ??

The EU Emissions Trading System (ETS) operates as a 'cap-and-trade' system. A cap sets the maximum allowable greenhouse gas emissions for covered operators.

• The cap is quantified in emission allowances, where one allowance corresponds to the right to emit one tonne of CO2eq (carbon dioxide equivalent). Operators cannot exceed their allowances; otherwise, they face substantial fines.
• Companies under the EU ETS must surrender their EU allowances for their emissions in the Union Registry.
• Emission allowances are traded on the European Energy Exchange (EEX) and can be bought and sold in secondary markets.

The process for opening trading accounts takes place online and is open to non-EU citizens.

Deepen into its application ????

The system is flag-neutral and route-based. This means it covers emissions from maritime transport as follows:?

• 100% of emissions from ships performing voyages departing from a port under the jurisdiction of an EU Member State and arriving at a port under the jurisdiction of an EU Member State (e.g. Gdansk to Gothenburg and Gothenburg to Gdansk);?
• 100% of emissions from ships within a port under the jurisdiction of an EU Member State (e.g. in the port of Rotterdam), i.e. emissions released at berth and during movements within such a port;??
• 50% of emissions from ships performing voyages departing from a port under the jurisdiction of an EU Member State and arriving at a port outside its jurisdiction (e.g. Barcellona to Singapore);?
• 50% of the emissions from ships performing voyages departing from a port outside the jurisdiction of an EU Member State and arriving at a port under the jurisdiction of an EU Member State (e.g. Perth to Gioai Tauro).

For certain voyages to outermost regions or some small islands, or to the benefit of ships using renewable fuels some derogations exist.

For what concerns the stops, the following are excluded: ?

• stops for the sole purposes of refuelling,
• stops for obtaining supplies,
• stops for relieving the crew (other than an offshore ship),
• stops for going into dry-dock or making repairs to the ship and/or its equipment,
• stops in port because the ship is in need of assistance or in distress,
• ship-to-ship transfers carried out outside ports,
• stops for the sole purpose of taking shelter from adverse weather or rendered necessary by search and rescue activities,
• stops of containerships in the neighbouring container transhipment ports listed in the implementing act to be adopted by the end of 2023.

Who is responsible for surrendering allowances? ?????

The shipping company (DOC holder) always remains the responsible entity for surrendering allowances.

In case the responsibility for the purchase of the fuel and/or the operation of the ship is assumed by an entity other than the shipping company pursuant to a contractual arrangement, the shipping company is entitled to reimbursement from that entity for the costs arising from the surrendering of allowances. EU Member States must take national measures to ensure that the shipping company is entitled to reimbursement in such situations and must provide the corresponding access to justice to enforce that entitlement.

Although this entitlement to reimbursement should be made effective by EU Member States regardless of contractual arrangements, shipping companies and entities responsible for the purchase of the fuel and/or the operation of the ship are expected to develop contractual clauses to pass on the ETS surrendering costs as appropriate. A notable example is given by BIMCO in their ETS - EMISSION TRADING SCHEME ALLOWANCES CLAUSE FOR TIME CHARTER PARTIES 2022

Nevertheless, the shipping company remains the responsible entity for surrendering allowances.

What's on the Horizon? ??

The European Commission aims to provide sector-specific rules and templates in implementing and delegated acts by the end of 2023 to ensure consistent implementation of the EU ETS and MRV rules. Shipping companies will need to surrender EU allowances corresponding to aggregated emissions data at the company level to be reported under the EU ETS Directive.

Sanctions ????

Companies that fail to surrender allowances are liable to an excess emissions penalty of EUR 100 (corrected for inflation) per tonne of CO2 equivalent, and are still liable for the surrender of the required allowances. Names of the penalised companies are also disclosed to the public.

In case a shipping company has failed to comply with surrendering obligations for two or more consecutive reporting periods, and where other enforcement measures have failed to ensure compliance, the competent authority of the EU Member State of the port of entry may, after giving the opportunity to the company concerned to submit its observations, issue an expulsion order.

Reduce allowances to surrend ????

Emissions resulting from the combustion of sustainable biomass compliant with the sustainability criteria established by the Renewable Energy Directive have an emission factor of zero under the ETS.

Furthermore, the EU ETS Directive provides for specific provisions with regards to Carbon Capture and Utilization or Storage technologies. Companies must not surrender allowances for the following:

• CO2 captured and transferred to an installation to be stored in a storage site in accordance with the CCS Directive;
• CO2 utilised to become permanently chemically bound in a product so that it doesn’t enter the atmosphere (implementing acts under development).

Practical Takeaways ????

As the maritime industry sails towards a greener future, here are some actionable recommendations for businesses in this sector:

1. Prepare for Compliance: Familiarize yourself with the EU ETS regulations and the reporting requirements to ensure a smooth transition and avoid penalties.
2. Invest in Efficiency: Explore energy-efficient technologies and practices to reduce emissions and minimize the impact of emissions allowances on your operations.
3. Explore Alternative Fuels: Keep an eye on developments in alternative and low-carbon fuels, as these will play a pivotal role in meeting emissions targets.
4. Update your MRV plan: The monitoring plan should follow updated templates that will be adopted by the Commission by the end of 2023. These updated templates will reflect the revisions brought to the MRV Maritime Regulation, in particular the inclusion of CH4 and N2O emissions within the scope of that Regulation.
5. Stay Informed: Stay updated on international regulations and agreements, as they can influence the direction of the maritime industry's sustainability efforts.

The maritime industry is at a critical juncture, with the EU ETS extension marking a significant turning point. Embracing sustainability is not just a legal requirement but also a pathway to securing a greener and more prosperous future for this essential sector. Together, we can navigate the waves of change and steer towards a more sustainable and responsible maritime industry.