EU vs IMO: The regulatory race to net zero


As global temperatures increase, and the effects of climate change become more apparent, prominent organizations take steps to limit emissions in order to build a more sustainable shipping industry.

The maritime sector may only account for about 3% of overall greenhouse gas (GHG) emissions, but regulations such as those of the International marine Organization and the EU Emissions Trading System (EU ETS), are attempting to mitigate its impact.

The EU ETS

The EU’s Emissions Trading System (ETS) aims to reduce the industry’s carbon emissions by obliging companies to hold a permit for each ton of CO2 they emit. The EU ETS works on the ‘cap and trade’ principle.

A cap is set on the total amount of certain greenhouse gases that can be emitted by the operators covered by the system. The cap is reduced over time so that total emissions fall.

Within the cap, operators 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. The price signal incentivizes emission reductions and promotes investment in innovative, low-carbon technologies, whilst trading brings flexibility that ensures emissions are cut where it costs least to do so.

This European directive does have a large impact on the sector and as with any sector we assume there will be a process to figure out the exact structure of this market and how compliance and participation will look like.

… said Ellen De Vocht, EEX Policy Advisor, in a talk organized by EEX Group which discussed the impact of EU ETS on the shipping industry.

After each year, an operator 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 operator that is short of allowances.

Revenues from the sale of allowances in the EU ETS mostly feed into Member States’ budgets. Allowances are also auctioned to supply the funds supporting innovation in low-carbon technologies and the energy transition.

The fewer emissions you blow out into the world, the higher competitive advantage you have because it’s directly linked to these common credits that you have to buy, so you one emission equals a carbon credit, and you can then level out how much that is going to cost you.

… commented Tjard Jürgens, Senior Vice President – Business Development at Zeaborn during the same talk as Ellen De Vocht.

The EU ETS will concern all ships operating within the EU, regardless of flag state.

Tjard Jürgens also proposed three measures that industry parties can implement in order to comply with the EU ETS. These are as follows:

  1. Getting data reporting right is crucial as wrong calculations can result in major loss.
  2. Examine whether the company is ready to enter into the scheme as the process takes time
  3. Find trading partners such as brokers and discuss the decision

International Maritime Organization’s take

The highest level of ambition of the 2023 IMO GHG Strategy, adopted during MEPC 80, is to limit GHG emissions from international shipping as soon as possible and to reach net-zero GHG emissions by or around 2050, taking into account different national circumstances.

Indicative checkpoints to reach net-zero GHG emissions from international shipping:

  • To reduce the total annual GHG emissions from international shipping by at least 20%, striving for 30%, by 2030, compared to 2008; and
  • To reduce the total annual GHG emissions from international shipping by at least 70%, striving for 80%, by 2040, compared to 2008

IMO uses two metrics to calculate GHG emissions:

  1. The Carbon Intensity Indicator (CII): A continuous indicator of how environmentally friendly a ship’s operations are. CII varies depending on factors such as speed, length of journeys, and kind and volume of cargo.
  2. The Energy Efficiency eXisting ship Index (EEXI): A one-time certification analyzing the technical aspects of the ship.

Requirements for EEXI and CII certification came into effect on 1 January 2023. This means that the first annual reporting will be completed in 2023, with initial ratings given in 2024. IMO’s Data Collection System (DCS) data is used to calculate ship’s operational carbon intensity (CII).

Carbon pricing

One major distinction in the EU’s and IMO’s approaches to decarbonization is the issue of price. During the most recent Marine Environment Protection Committee (MEPC 80), industry stakeholders were eager to learn if the IMO would proceed with the implementation of a carbon fee.

Many groups and governments express the idea that a carbon levy is the only solution for the shipping industry to meet the IMO’s GHG reduction targets. For example, the EU’s proposal to the IMO contained a levy, the amount of which would be proportional to the quantity of GHG released by the ship in question.

There is a broad support for a global market-based measure by the IMO that should be decided in an international context. In an ideal world, one carbon price is applied to a global sector and everyone in this global sector.

… noted Ellen De Vocht

For more information, watch the video below:

 



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