EU Agrees To Include Shipping In Emissions Trading System (At Last!)

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Beginning in 2005, the EU Emissions Trading System has sought to set a price on carbon dioxide and other emissions. The idea is that if emitters have to pay for their emissions, they will take steps to limit them without the need for heavy-handed government regulations. Here’s how it works, according to the European Commission:

“A cap is set on the total amount of certain greenhouse gases that can be emitted by the installations covered by the system. The cap is reduced over time so that total emissions fall. Within the cap, installations buy or receive emissions allowances, which they can trade with one another as needed. The limit on the total number of allowances available ensures that they have a value.

“After each year, an installation must surrender enough allowances to cover fully its emissions, otherwise heavy fines are imposed. If an installation reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another installation that is short of allowances.

“Trading brings flexibility that ensures emissions are cut where it costs least to do so. A robust carbon price also promotes investment in innovative, low carbon technologies.”

The EU Emissions Trading System is the oldest and largest such program in the world, but it had one glaring weakness. It covered generating stations and manufacturing facilities but excluded emissions from shipping. In a landmark agreement last week, negotiators agreed to correct that oversight.

Starting in 2024, Reuters says, shipping companies will have to buy EU carbon permits to cover 40% of their emissions, including methane and nitrogen oxides, rising to 70% in 2025 and 100% in 2026. The inclusion of methane alongside CO2 and nitrous oxide in the ETS ensures that ships running on LNG are also required to pay for everything they emit. It is a clear signal that LNG is not a clean solution for shipping, says T&E.

The new rules apply to all shipping within the EU, but there is an important additional provision. For the first time ever, 50% of emissions from international shipping that begins or ends in the EU will be included as well. “This will not only help the climate but also improve air pollution in cities close to rivers and the coast,” Peter Liese, lead EU lawmaker on the rules, said after the agreement was reached, Reuters reports.

Jacob Armstrong, sustainable shipping officer at Transport & Environment, said: “The EU’s deal marks a watershed moment for shipping decarbonization. No longer will shipping be let off the hook for its massive climate impact. No longer will international emissions be ignored by national policymakers. With this ambitious Emissions Trading System covering all greenhouse gases, offshore vessels and ensuring funding for green shipping, the EU has thrown the gauntlet down to other jurisdictions like the US, China, and Japan to make this hugely important first step towards zero-emission shipping.”

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Shipping Companies Approve

You might think the new agreement would make ship owners frown, but that is not the case. For years, dominant ocean freight companies like Maersk have been pushing to reduce their emissions, but smaller companies have always resisted spending the money needed to upgrade their 30-year-old ships. By continuing to burn bunker oil — the dirtiest fossil fuel there is — they have been able to undercut the the larger shippers who are trying to do the right thing.

No more, which pleases the big companies. According to gCaptain, the European Community Shipowners’ Association said the deal can mark a turning point for European shipping and decarbonization. It praised legislators for embracing calls of the industry stakeholders to earmark EU ETS revenues back to the maritime sector to support its energy transition. The ECSA says at least 20 million ETS allowances, which correspond to 1.5 billion euros at the current ETS carbon price, will be allocated to maritime projects under the Innovation Fund.

“European shipowners welcome the increased climate ambition of the ‘Fit for 55’ package, recognising that the climate crisis is one of the greatest economic and environmental challenges faced by our society. Decarbonising shipping is not a question of ‘if’ but a question of ‘how’,” said Sotiris Raptis, ECSA’s Secretary General. Fit for 55 refers to the EU’s target of reducing net greenhouse gas emissions by at least 55% by 2030.

“Setting aside part of the ETS revenues for maritime is a victory for the decarbonisation of the sector. Dedicated support through the Innovation Fund is key to bridging the price gap with clean fuels, improving the energy efficiency of ships, fostering innovation and building the infrastructure in ports. We look forward to working with the Commission and the stakeholders to develop effective tools for the industry’s transition,” Raptis added.

ECSA also welcomed the upholding of the “polluter-pays principle” through mandatory requirements for the pass-through of the Emissions Trading System costs to the commercial operators of the vessels. It said the phase-in period and gradual inclusion of emissions from shipping over a three-year period is also “crucial” to ensure a smooth transition for the sector.

Air Travel Emissions Are Next

The deal shows that Europe can price pollution beyond its borders, says T&E, which has set its sights on the aviation sector. Currently, only flights within Europe are included in the Emissions Trading System (ETS), which means 60% of emissions are exempt. Add in a host of free allowances and airline polluters pay hardly anything. T&E has called on EU negotiators to apply an equally ambitious carbon market to the aviation industry when negotiators come together next week. “With shipping no longer off the hook, there are no excuses for the aviation sector,” concluded Jacob Armstrong.

The Takeaway

Including shipping in its Emissions Trading System is a big deal for the EU. The current price of carbon credits under the system has surged this year, as Europeans are burning more coal thanks to Russia’s brutal assault on Ukraine. At the present time, the price of credits is around 90 euros per ton. To put that in perspective, the price in the California carbon credit market is about a third of that.

While the new rules are good for the EU, they are perhaps even more important for showing other nations what is possible. It will be difficult going forward to say nations like the US and China can’t afford to put a price on emissions from shipping if the EU can do it. This will force those other nations to step up their game if they want to be taken seriously when they boast about their own emissions reduction achievements.