EU Emissions Trading System for Maritime Transport Explained - Part 4 of 6

The EU Emissions Trading System (EU ETS), the world’s largest carbon market introduced in 2005 by the EU to combat climate change through the reduction of greenhouse gas emissions, was recently expanded in June 2023 to include the maritime transport sector.

In the fourth article of our six-part series reviewing the changes introduced by the new EU rules set to apply from 1 January 2024, we look at the exclusions to the EU ETS, the penalties for non-compliance, and how the EU plans to address any attempts to avoid the new measures. 

Do any exclusions apply to the EU ETS?

Under the amendment to Directive 2003/87/EC¹ (establishing the EU emissions allowance trading system), certain calls at EU ports are excluded from the scope of application of the Directive, as are the corresponding emissions. 

The following stops at EU ports are excluded:

(i) stops for the sole purposes of refuelling. 

(ii) stops for the sole purposes of obtaining supplies.  

(iii) stops for the sole purposes of relieving the crew of a ship other than an offshore ship.

There is no definition within the proposal of what is meant or caught by an “offshore ship”, whereas a “cruise passenger ship” is clearly defined.  

Offshore vessels would typically include vessels which serve operational purposes in connection with, for example, oil and gas exploration and production, wind farms, etc. We would expect it to cover the below categories:
                
a. Oil Exploration and Drilling Vessels (including drill ships, offshore barges, floating platforms, etc.) 

b. Offshore Support Vessels (such as Anchor Handling and Supply Vessels, Platform Supply Vessels (PSVs), seismic vessels, etc.) 

c. Offshore Production Vessels (such as Floating Production Storage and Offloading (FPSO), Single Point Anchor Reservoir (SPAR) platforms, etc.)

d. Construction/Special Purpose Vessels (including Diving Support Vessels, Crane Vessels, Pipe Laying Vessels, etc.) 

(iv) stops for the sole purposes of going into dry-dock or making repairs to the ship and/or its equipment. 

(v) Stops in port because the ship is in need of assistance or in distress. 

(vi) Ship-to-ship transfers carried out outside ports. (As the use of ship-to-ship transfers has been the subject of sanctions evasion, we expect that this exclusion will be watched closely to ensure that it does not become a way of evading the Directive.) 

(vii) Stops for the sole purpose of taking shelter from adverse weather or rendered necessary by search and rescue activities. 

(viii) Stops of containerships in a neighbouring container transhipment port listed in the implementing Act adopted pursuant to Article 3ga(2). This provides that by 31 December 2023, the Commission will establish a list of the neighbouring container transhipment ports, and that the list will be updated before 31 December every two years thereafter. 

In many of the listed exemptions, whether the port call or operation would be exempt will turn on the specific facts, on a case-by-case basis.  

The main purpose of the definition of “ports of call” is to ensure that emissions associated with transport such as emissions from vessels loading/unloading cargo and embarking/disembarking passengers are caught.   

Are there penalties for non-compliance?

Penalties will be imposed on Shipping Companies that fail to comply with their EU ETS obligations in order to encourage them to prioritise emission reductions. 

Shipping Companies that fail to surrender their allowances when due, to cover emissions made during the preceding year, will incur an excess emissions penalty of EUR 100 per tonne of CO2 equivalent emitted that has not been surrendered. 

Payment of the penalty will not negate the surrender obligation, meaning that the missing emission allowances must still be surrendered by the Shipping Company in the following reporting period. 

Importantly, if a Shipping Company fails to comply with the EU allowance surrender requirements for two or more consecutive reporting periods, and where other enforcement measures have failed, the competent authority of the Member State of the port of entry may issue an expulsion order such that: 

• all other Member States, except the flag state, shall refuse entry to all ships operating under that Shipping Company’s control, and 
• where a ship is flagged in a Member State and it enters one of its ports, the flag state may detain the ship.  

An expulsion order will remain until the Shipping Company fulfils its emission allowance surrender obligations.

The names of Shipping Companies which are non-compliant with the regulations may also be published. This will expose their failure to meet emissions obligations and could lead to reputational damage. 

The company-wide applicability of the EU ETS could have significant consequences for sister ships.  

Given that in many cases the “Shipping Company” is likely to be the technical manager rather than the actual owner, this could also be of potential concern to owners: theoretically, non-compliance by the technical manager, or potentially other owners using the same manager (if the reliance is on owners transferring EUAs to the manager), could have adverse consequences for the ships of an unrelated owner.  

It is likely that parties may seek to deal with this risk contractually, for example by making the issuance of an expulsion order or the failure to timeously surrender EUAs, a termination event in the management agreement.

How will the EU address any avoidance attempts?

As the application of the EU ETS to the maritime sector will have a significant impact on the costs of shipping, the EU recognises that, as there is no global measure or global system, there is a risk of circumvention.  

The EU have identified the possibility that there may be evasive calls to ports outside of the EU and a relocation of transhipment activities also to ports outside of the EU.  

Not only would this reduce the estimated income to the EU as a result of the extension of the EU ETS to the maritime transport industry, but it would also diminish the hoped-for environmental benefits of this. It could even lead to higher emissions as vessels travel additional distances to evade the application of the measures. 

Therefore, ports in the vicinity of the EU, but which are not actually within the EU, could now attract more vessels as a means of evading the costs and the administrative burden associated with the EU ETS.    

For this reason, setting a limit of 300 nautical miles from a port under the jurisdiction of a Member State has been proposed by the EU as a proportionate response to evasive behaviour.   

The exclusion of a port of call should only target stops by containerships at non-EU ports where the transhipment of containers accounts for most container traffic.   

The EU has added that measures should be implemented in third countries to have an effect similar to Directive 2003/87/EC.   

The EU will monitor the application of Directive 2003/87/EC in the hope that evasive behaviour can be detected early on, and then further measures can be proposed to ensure the effectiveness of the regime.  

This could include increased surrender requirements for voyages where the risk of evasion is higher, such as voyages to and from a port that is located in the EU’s vicinity, in a third country that has not adopted measures similar to Directive 2003/87/EC.   

Evasive behaviour could include revising routes, adding intermediary ports of calls to schedules so that there are calls to ports outside the EU.

The European Sea Ports Organisation, and the Federation of European Private Port Companies and Terminals have called on the EU to take action to prevent evasive behaviour and to penalise such behaviour before it happens rather than only identifying evasive behaviour after it has happened.   

[1] Directive 2003/87/EC

You may access the other articles in the series here: 

Part I

Part II

Part III

Part V

Part VI