The Complete Guide to EU ETS: Part 1

Since January, the European maritime sector has been participating in the European Union’s emissions trading system. Known as the EU ETS, this groundbreaking regulatory initiative calls for the maritime shipping sector to reduce greenhouse gas (GHG) emissions using a phased approach. Joining efforts with other sectors, the overarching goal is to slash GHG emissions by 55% by 2030 and to become climate neutral by 2050.

However, complying with the EU ETS need not be a daunting task. Companies can utilize tools such as the ones offered by Searoutes to learn how their shipping choices can be compliant. These tools also enable businesses to better gauge the price of adhering to this regulatory system. 

The Genesis of EU ETS

The EU ETS has one overarching goal: to reduce carbon emissions for Europe’s industrial sector, thus slowing down or alleviating environmental impacts stemming from climate change. The EU says the program, which kicked off in 2005, creates a financial incentive for the biggest emitters to cut back on their emissions. Broadly, EU member states are aiming to be climate neutral by 2050 in accordance with European climate law. Climate neutral means to have an economy that results in net-zero GHG emissions.  

The EU ETS applies to a host of companies within the energy and manufacturing sectors, including refineries, producers of chemicals, glass and paper products, and manufacturers of metals, cement, and aluminum. 

The emissions trading system now applies to the maritime shipping sector too. Starting in 2024, emissions from maritime transport have been folded into the trading scheme. That’s because in July 2021, the European Commission unveiled a package of proposals, known as Fit for 55, which aimed to reform EU climate and energy policy and get the EU to reduce GHG emissions by 55% of 1990 levels by 2030 and reach climate neutrality by 2050. EU member states adopted these proposals in June 2023, and within these proposals were calls to cut emissions from the transport sector. 

How EU ETS Works: The Basics

EU ETS calls for businesses to trade international emissions allowances via a cap-and-trade program. The program places a cap on how much GHG emissions a company can emit annually. A company receives a set amount of carbon allowances that accounts for how much carbon emissions it can produce in a year. 

If a company exceeds its emissions limits, it faces significant fines or it may choose to trade allowances with another company that has leftover allowances. The company with leftover allowances had cut its carbon emissions more than its prescribed limit. That is why the company has extra allowances, which it can use to sell or to hold on for another year. As this cap-and-trade program continues, technologies to slash emissions are produced, and shipping companies are given fewer emissions allowances as the years go forward. The hope is that using these technologies cuts emissions, thus tackling climate change.

As the EU ETS program expanded over the years, it has extended its reach as part of a broader effort to cut emissions even further and meet reduction targets. The trading initiative covers emissions from about 10,000 installations in the energy sector and the manufacturing industry, as well as planes flying within the EU, Switzerland, and the U.K. This represents about 40% of the EU’s total emissions, according to a website describing the trading scheme. 

The Evolution of EU ETS

While the EU may have launched its emissions trading system in 2005, the impetus behind it spans a few years beforehand. The Kyoto Protocol of 1997, sponsored by the United Nations, set emissions reduction targets for GHG emissions such as carbon emissions, methane, and nitrous oxide for 37 industrialized countries to follow. A green paper presented by the European Commission in March 2000 provided a framework that served as guidance toward crafting today’s EU ETS. 

The implementation of the EU ETS has occurred in four stages so far, with each phase adding more sophistication to the program. 

Indeed, in the first phase, which occurred from 2005 to 2007, the EU ETS used emissions estimates for how many allowances companies should receive since there wasn’t any reliable data yet to base the emissions estimates. As a result, the total amount of allowances issued exceeded emissions, which meant that the price for allowances was around zero because their supply exceeded demand, according to an EU page on the program’s history. 

In the second phase, regulators were able to use verified annual emissions data, which resulted in lowering the cap on allowances. However, the 2008 financial crisis cut emissions more than expected, causing surpluses in allowances and credits and putting pressure on the price of carbon. 

However, these events helped regulators strengthen the EU ETS in the third phase, which occurred between 2013 and 2020. In this third phase, a number of changes were made, including the creation of a single, EU-wide cap on emissions versus national caps and the use of auctions to allocate allowances. Actions were also taken to use some of the allowances to fund the deployment of renewable energy technologies and carbon capture and storage.

The Integration of Shipping into EU ETS

Although maritime transport is already an energy-efficient mode of transportation, projected emissions increases within the sector of up to 130% by 2050 could undermine climate change remedies occurring elsewhere in Europe, according to the EU.

To address this, the EU and other bodies have taken action, such as the International Maritime Organization’s July 2023 commitment to develop new targets and strategies for GHG emissions reductions.

Meanwhile, as of this January, the EU ETS applies to cargo and passenger ships with a gross tonnage of 5,000 metric tons or more, and by 2027, the EU ETS will apply to offshore ships with a gross tonnage of 5,000. This means that vessels, regardless of the flag they fly, will have to account for the emissions. If the vessel sails between two EU ports, then the vessel will eventually have 100% of its emissions covered by the EU ETS. If the vessel sails to or from the EU, then 50% of its emissions will be covered by the EU ETS.

The type of emissions covered will also expand in the coming years. For now, the EU ETS covers only carbon emissions, but in 2026 it will also include emissions of methane and nitrous oxide.

By incorporating maritime transport into the EU ETS, shipping companies will have caps on how much emissions they can produce, as well as access to ETS allowances so that the broader sector can meet the goal of reducing emissions by 55% by 2030. 

As with other industries, the EU expects to lower the emissions cap over time so that the broader transport industry will be encouraged to become more energy efficient and develop lower carbon alternatives such as alternative fuels. Conversely, this also means penalizing dirty ships and shipping companies that don’t take action to reduce their emissions. This is similar to the “polluter pays principle,” in which the cost of pollution should be borne by its creators. 

To ease the maritime transport sector into this regulatory scheme, the EU has put compliance guidelines in phases so the share of emissions covered by allowances will grow over the next three years. By 2025, 40% of shipping companies’ emissions reported in 2024 will be covered by allowances; in 2026, that percentage will rise to 70% of emissions reported in 2025. By 2027, shipping companies will be responsible for 100% of their reported emissions, according to the EU.

To comply with the EU ETS, shipping companies might employ dynamic pricing to facilitate their adoption of GHG emission-reduction strategies. Through dynamic pricing, shipping companies set an internal carbon price that may be indexed to the emissions trading scheme, using factors such as container type and trade lane and which carrier is involved to enable them to be more agile and responsive to changing emissions allowance prices. Dynamic pricing also helps companies incorporate compliance costs that could add up to 5% of freight spend.

As maritime stakeholders comply with the EU ETS, carriers and shippers will have to navigate cost allocation. For instance, carriers will be responsible in 2025 for paying for emissions that occurred in 2024, but how carriers and shippers split the costs will need to be determined by the parties involved.

Supporting Decarbonization Efforts

Lowering maritime transport emissions is not the only way that the EU ETS will impact the transport sector. Revenue from 20 million allowances designated for the shipping sector will feed into the Innovation Fund, an EU program that will support investments in innovative low-carbon technologies. 

Projects that could be funded include carbon capture and storage, renewable energy generation, energy storage, and net-zero mobility and buildings. 

Searoutes Can Help Shipping Companies Navigate EU ETS

While companies might need to adjust some operations and procedures to comply with the EU ETS, this initiative also provides opportunities for businesses to be proactive in taking care of the environment. It also enables shipping companies to encourage environmental stewardship among their customers.

For companies looking to navigate these changes and gain insights into their emissions, Searoutes offers the tools and expertise needed to transition smoothly into a more sustainable future. Searoutes’ three offerings aim to help procurement professionals see how emissions reductions can occur throughout the whole supply chain. Our tools include:

• Vessel API helps you keep track of a vessel’s position and provides historical tracking information of numerous vessels.
• Routing API monitors fuel consumption, tracks carbon emissions, and calculates accurate routes and sea distances.
• CO2 API enables users to search for optimal routes and their related carbon emissions.

Contact Searoutes today to learn how our tools can help you navigate and comply with the EU’s new emissions trading scheme for the maritime sector.