Regulatory Update: The EU ETS expands to include the maritime sector
The EU ETS has expanded to include the maritime sector. Beginning in 2024, shipowners will have to pay for their vessel’s emissions while traveling to, from, and between ports in the European Union/European Economic Area. To comply with this legislation, shipowners will have to purchase and submit certain amounts of emission allowances annually. Businesses should begin creating and implementing compliance strategies and switching to sustainable biofuels now to prepare for the transition.
Recently, the European Union Emissions Trading System (EU ETS) was officially expanded to include the maritime sector after years of discussion.
A total of almost 2% of global emissions are a result of maritime transport, so this initiative focused on incentivizing its decarbonization has the potential to make a significant impact. Essentially, shipowners will be required to pay for the emissions they emit during voyages to, from, and between EU ports starting in 2024 via European Union Allowances (EUAs) and the EU ETS.
But, for shipowners and operators new to compliance and the EU ETS, understanding where they go from here can be confusing and intimidating. Businesses are asking themselves:
How can I ensure my business meets these new compliance rules? Which EUA procurement strategy is the most timely and cost-effective? How can I minimize business disruption during this transition? How can I make sure my business is prepared?
In this piece, we’ll explore these questions and share some of the insights we’ve gained by having 13 years of experience in the EU ETS.
What does this EU ETS maritime sector expansion mean for shipowners and operators?
This regulatory development means that starting in 2024, shipowners will be required to pay for the greenhouse gas (GHG) emissions they emit during voyages to, from, and between ports in EU/EEA. The authorities hope that by putting a price on emissions, more businesses will switch to sustainable fuels, and the entire industry will be pushed to innovate.
This expansion is aligned with the economy-wide emission reduction goals of the EU.
What ships does it affect?
Starting in 2024, ships of 5,000 gross tons and above are obliged to comply. There are also ambitions to expand this in the future. By 2027, the starting weight of obliged vessels will drop, and ships as light as 400 gross tons will also be affected.
It applies to all vessels subject to MRV regulation, transporting cargo or passengers for commercial purposes calling at all ports in the European Economic Area.
What routes does it affect?
This initiative applies to all voyages operating in ports within EU/EEA, but not equally.
1. Ships voyaging between two ports in EU/EEA must cover 100% of their emissions.
2. Ships voyaging from elsewhere into a port in EU/EEA must cover 50% of their emissions.
3. Ships voyaging from ports in EU/EEA to elsewhere must cover 50% of their emissions.
Understanding the EU ETS
If your fleet – or parts of it – fall under the category of affected ships, your business will have to begin participating in the EU ETS, so it's best to start your compliance journey understanding precisely what that is.
The EU-ETS is a cap-and-trade system where companies buy emission allowances like EUAs from a limited pool. One allowance equals 1 ton of emitted CO2. Beginning in 2024, companies in the maritime sector will need to provide enough allowances at the end of the year to cover their ships' emissions for that year. Surplus allowances can be sold or kept for the following year.
Therefore, shipping companies are obligated to cover each ton of CO2 emitted by every ship that they own that fits the criteria annually. This is done by purchasing and submitting the correct amount of EUAs to the authorities. The initiative refers to the "shipping company" being the party responsible for surrendering allowances, further defined as "owner, manager, or bareboat charterer."
How can you ensure your business meets compliance targets?
Ensuring compliance means procuring and surrendering enough allowances to cover a certain amount of your emissions and staying up to date with how the number of emissions you need to cover changes over time.
For example, in 2024, only 40% of emissions need to be covered by EUAs. This increases to 70% in 2025, and by 2026, your business will need to cover 100% of your emissions with EUAs.
The types of greenhouse gas emissions you need to cover will also change. In 2024, your business only needs to worry about CO2, but by 2026, CO2 equivalent emissions such as nitrogen oxide and methane also need to be addressed.
The best approach to achieving and maintaining compliance is to partner with sustainability market and legislative experts who can inform you of changes ahead of time, so you have the chance to act.
How can you minimize disruption to your business?
After over a decade of helping businesses hit compliance targets, take it from us: you can’t start too early. It might seem like 2024 is far away, but it takes time to identify, create, and implement the best possible compliance EUA procurement strategy for your business.
Acting early will also give you more budgetary transparency earlier on, helping you plan better. This will help ensure your business can afford and access the EUA volumes it needs to hit targets, minimizing any friction or risks of service stops. It also allows you the time to explore other routes, like switching to sustainable biofuels to reduce your fleet’s emissions, meaning you can buy fewer EUAs and still be compliant.
What are the repercussions of non-compliance?
Not meeting these compliance targets has significant, expensive, and disruptive consequences.
Businesses that don’t surrender the correct number of allowances each year will pay an extra €100 fine per ton of CO2 equivalent. Businesses that are non-compliant for two consecutive years may be denied entry to ports in EU/EEA until their allowance obligations are fulfilled.
How can ACT help your business comply?
By providing your business with EUAs and procurement strategies optimized for your business needs.
ACT Financial Solutions, our in-house MIFID-II licensed investment firm, is dedicated to ensure you meet your new EU ETS obligations and explore the most suitable compliance strategies.
They have the market experience and expertise to offer you the needed support in procurement of Emission allowances in the EU ETS and hit compliance targets efficiently and cost-effectively. ACT’s agile and adaptive approach allows us to adjust to changing markets and legislation.
By providing your business with the sustainable biofuels it needs to lower its emissions
The entire point of the EU ETS expanding to include the maritime sector is to incentivize it to decarbonize by making shipowners pay for their emissions. However, by taking action to lower their emissions instead of just paying for them, businesses can decarbonize and therefore lower the number of EUAs they must purchase.
In fact, biofuels can reduce a vessel’s CO₂ emissions by up to 90%. Our sustainable biofuels are drop-in, meaning that they are compatible with existing engines. This ensures that the transition is quick and easy and causes no disruption to businesses. Our sustainable biofuels are also made from sustainable waste streams, meaning their creation causes no land-loss nor water usage.
We’ve been producing and providing biofuels worldwide since 2014. Businesses depend on us for reliable and consistent supplies, short and long-term commitments, and competitive prices.
Get started today
With our teams dedicated to staying up to date on emission regulations, 13 years of EU ETS experience, and sustainable biofuel expertise, we are the ideal partner for helping businesses meet compliance targets.
Reach out directly to our Maritime Solutions team to learn more: firstname.lastname@example.org
**This content is based on the current draft proposal of the EU Parliament, Commission and Council. ACT will provide further updates should the final version published in the official journal be different.