As of January 2024, a European Union (“EU”) decision has assigned administering authorities to shipping companies, marking one of the final stages in the implementation of the Emissions Trading System (“ETS”) within the Union. This decision establishes a system for trading greenhouse gas emission allowances.

In a collaborative effort to enhance environmental sustainability and mitigate carbon emissions within the maritime sector, the EU has taken a significant stride by issuing a comprehensive list of shipping companies, thereby designating specific administering authorities in accordance with Directive 2003/87/EC of the European Parliament and of the Council. This pivotal decision marks a critical juncture in the implementation of the EU ETS within the Union’s regulatory framework.

Under this directive, each shipping entity has been allocated a specific country wherein they are mandated to establish a Maritime Operator Holding Account (“MOHA”) and ultimately submit their allocated EU emission allowances (“EUAs”).

Such detailed allocation aims to streamline regulatory procedures, ensuring compliance and accountability among maritime operators while fostering transparency and efficiency in emissions management.

The effective functioning of the EU ETS market is crucial for achieving the EU’s ambitious climate goals, especially amid changing energy trends and the need for significant new investments. By enabling the trade of EUAs and derivatives, the EU aims to create a strong market system that encourages cutting emissions and shifting to a greener economy.

EUAs serve as a fundamental component of the emissions trading scheme, providing companies covered by the EU ETS with a tangible mechanism to regulate their carbon footprint. It permits companies under the EU ETS to emit a specific amount of CO2e. These allowances are tradable commodities, with their market price fluctuating based on the expense of emission reduction efforts.

According to industry estimates, the introduction of the EU ETS for shipping in 2024 is anticipated to inject approximately 80 million additional EUAs into the market. Notably, revenues generated from the auctioning of around 20 million allowances will be channeled into the Innovation Fund, assigned for financing shipping-specific projects aimed at advancing sustainability initiatives.

The remainder of the revenues will be allocated to EU and European Economic Area (“EEA”) member states to further bolster environmental protection efforts and drive sustainable development agendas.

As indicated above mentioned starting January 1st, 2024, the EU ETS mandates that all commercial vessels above 5,000 GT, except for some exemptions, must report CO2 emissions when sailing to or from an EU port.

They are required to surrender one carbon credit, known as EUAs, for each tonne emitted, with the surrender deadline set for September 2025.

The registered owner of the ship is considered responsible for reporting and surrendering EUAs, but they can delegate this responsibility to their manager if they hold the Document of Compliance (“DOC”).

The full extent of this liability remains uncertain until fully understanding the risks and implementing mitigation measures, as non-compliance could lead to fines, detention, or even the blacklisting of the entire managed fleet from EU waters.

Non-compliance may lead to penalties of EUR 100 per tonne, vessel detention, or in the worst-case scenario, the blacklisting of your entire managed fleet from EU waters.

In essence, the implementation of the EU ETS for shipping companies underscores the EU’s unwavering commitment to combatting climate change, fostering innovation, and spearheading the transition towards a greener, more sustainable future for generations to come.

When Must Shipping Companies Start Using Allowances to Cover Emissions?

Shipping companies must 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

To Which Ships Does the EU ETS Directive Apply?

From 2024, cargo and passenger ships of or above 5000 gross tonnage (GT), and from 2027, offshore ships of or above 5000 GT, will be subject to the regulations.

A Step-By-Step Approach for Shipping Companies

Step 1 – Relevant stakeholders will have the flexibility to draft clauses with regards to the transfer of costs arising from the surrendering of EU ETS allowances, subject to applicable laws.

Step 2- Find out which administering authority is responsible for your company. Each shipping company covered by the ETS has to be associated with the administering authority of one Member State according to the attribution list published by the Commission on 31 January 2024.

Step 3- Open an account in the Union Registry. According to the draft revised Registry Regulation, under scrutiny by the European Parliament and the Council until 25 December 2023, a shipping company shall submit to the relevant national administrator the information to request the opening of a Maritime Operator Holding Account:

  • within 40 working days of the publication of the attribution list (to be published by the Commission by 1 February 2024);
  • for shipping companies not included in that list, within 65 working days of the first port of call falling within the scope of the ETS Directive.

Step 4- Update the ship’s monitoring plan and submit it to the verifier and the administering authority. Shipping companies will need to submit a monitoring plan for each of their ships falling within the scope of the Monitoring, Reporting and Verification (MRV) Maritime Regulation and the ETS Directive to their administering authority by 1 April 2024. By that date, the monitoring plan must have already been assessed as being in conformity with the MRV Maritime Regulation by an independent accredited verifier.

Step 5- Monitor your greenhouse gas emissions. As of 1 January 2024, shipping companies should monitor their emissions in accordance with the revised monitoring plan that should be assessed by verifiers and approved by the administering authority.

Step 6- Prepare an emissions report and the report at company level and get them verified. Once per year, companies must submit an emissions report for each of the ships under their responsibility, as well an emissions report at the company level. All ship-level and company-level emissions reports must be verified by an accredited verifier by 31 March of the following year.

Step 7- Surrender EU allowances. After verifying and submitting aggregated emissions data at the company level to the administering authority, companies are required to surrender the corresponding number of allowances in the Union Registry by September 30th of the same year.