Europe’s emission trading system (ETS) is “a cornerstone of the EU’s policy to combat climate change” according to the European Commission (EC). Full details are available on the commission’s website, where it recalls that it was “the world’s first major carbon market and remains the biggest one.”
It operates in all EU countries plus Iceland, Liechtenstein and Norway and is intended to limit emissions from heavy energy-using installations (mostly power stations and industrial plants) and airlines operating between these countries.
On 1 January, ETS Phase 4 came into effect based on revisions made in early 2018 “to enable [the scheme] to achieve the EU’s 2030 emission reduction targets and as part of the EU’s contribution to the Paris Agreement,” the EC website says.
To achieve a climate-neutral EU by 2050 and the intermediate target of an at least 55% net reduction in greenhouse gas emissions by 2030, the EC is proposing to revise and possibly expand ETS’s scope. Public consultations were opened online during October; one – relating to aviation – is still open at the time of writing and will close on 14 January.
Further consultations were opened on 13 November 2020, including one inviting views about updating the ETS, and comments relating to shipping can be submitted via this process. This consultation will end on 5 February.
How does the ETS work?
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 installations covered by the system and this cap is reduced over time so that total emissions fall.
As the EC’s website explains, “within the cap, companies receive or buy emission allowances, which they can trade with one another as needed. They can also buy limited amounts of international credits from emission-saving projects around the world. The limit on the total number of allowances available ensures that they have a value.
“After each year a company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company 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 clean, low-carbon technologies.”
The EC believes the ETS “has proven to be an effective tool in driving emissions reductions cost-effectively. Emissions from installations covered by the ETS declined by about 35% between 2005 and 2019.” It is now aiming to link the EU ETS with other compatible systems.
Aviation and shipping
At present, aviation is the only transport mode covered by the ETS. It was brought into the system in 2012, originally covering all flights to and from EU airports. Environmental NGO Transport & Environment recalls that, “following significant international and industry pressure, the scope was reduced to cover intra-EU flights only. … This was ostensibly to give time for the UN agency which regulates aviation, ICAO, to agree a global measure.” A second extension was agreed in 2014 and is due to end in 2024.
In September 2020, the European Parliament voted in favour of bringing shipping into the ETS and the European Parliament said in a statement at the time that “parliament is now ready to start negotiations with member states on the final shape of the legislation.”
Various industry bodies have spoken out against this proposal, as ShipInsight has reported. The Liberian Registry, for example, said that it agrees with “the recent World Shipping Council (WSC) position that a unilateral EU ETS scheme would undermine efforts to reduce global greenhouse gas emissions currently underway.” Japan and South Korea have also expressed concern.
The European shipowners’ body ECSA and the International Chamber of Shipping published a joint study on the implications of applying the EU ETS to international shipping. As ShipInsight reported, the study suggested that it “would derail the international negotiations at the IMO and revert progress already made.”
Industry and regulators meet
It was against this background that two government ministries in Cyprus, with the support of the country’s European Parliament Office, organised an online seminar on 7 December titled ‘ETS in Shipping: Elixir or Threat to Sustainability?’
It brought together representatives of the European Parliament, the EC, NGOs and shipowners “to provide insights that can best serve EU objectives,” the invitation explained. Those objectives, it went on, are “to enable maritime transport to make a meaningful contribution to climate change whilst safeguarding its competitiveness.”
Clara de la Torre, deputy director-general of the EC’s Directorate General for Climate Action, said there were two motivations behind the proposals: first, it will boost the demand for sustainable alternative fuels but a second “important dimension” is for “raising revenues that can be used to finance climate action”.
She referred to the consultations mentioned above, saying that extending the ETS to shipping will be considered “as part of the general review of the ETS system” which she said was on the EC’s agenda for next June. Once the EC has finalised its proposal and an impact assessment, they will go to the parliament for consideration.
Magdalena Adamowicz – a member of that parliament and of its Committee on Transport and Tourism – told the seminar that if the EU is to achieve the goal set out in the European Green Deal to become the first climate neutral continent by 2050, “we need contributions from all sectors of the European economy.” But she made it clear that there is no settled view among MEPs about where shipping should fit into that goal, saying that “various European Parliament committees and political groups have quite diverse positions on what is necessary and what is realistic when it comes to greening European shipping.”
For her part, she believes that “the possible” inclusion of maritime transport in the ETS should first “take into account [the] global context and IMO initiatives to reduce emission, then competitiveness and employment in European shipping and, third, alternative market-based measures for European maritime transport.”
ShipInsight readers might view her remarks as reflecting a softening of the parliament’s previous views, which were summarised during the seminar by Andreas Kettis, head of the European Parliament’s office in Cyprus. He reminded participants that in 2015 the parliament had called on parties to the COP 21 Climate Change Conference “to work within IMO towards an effective response … before the end of 2016.”
On that basis, the parliament welcomed IMO’s initial GHG strategy but in November 2019, “in a parallel resolution of [COP 25] in Madrid [and] underlining the slow and insufficient IMO action, the parliament called for further EU measures to reduce maritime greenhouse gas emissions,” Mr Kettis said.
As a result, the parliament urged the EC to propose including the maritime sector in the EU ETS and “in a resolution on 15 January 2020 on the European Green Deal, the European Parliament endorsed the Commission’s intentions,” he said. These included not only extending the ETS but also ending fuel tax exemptions and regulating pollution in ports.
Shipowners taking part in the seminar expressed misgivings about the plan. Capt Alfred Hartmann, whose Hartmann Group owns or operates almost 120 ships, stressed the importance of international, rather than regional, initiatives for tackling decarbonisation. He also referred to aviation’s inclusion in ETS, saying that its emissions have not reduced as a result.
And he pointed out that all EU member states had taken part in discussions at IMO that led to its GHG strategy so “if [European] regulators now believe that existing IMO regulations don’t go far enough, … [they] should produce such measures via IMO on an international stage.”
He also had doubts that the funds raised through the ETS would support shipping’s decarbonisation efforts. There is no mechanism to do that, he said, so “nothing is to be gained … except that EU member states generate revenues for their own national budgets.”
As for the idea of taking a ship’s entire voyage into account in the ETS scheme, he wondered what would happen if other regions followed suit: a ship would become liable for ETS payments for its entire voyage in every region it passed through. “Shipping would be almost impossible,” he said. To the list of countries mentioned above, he added China as one that has expressed concern about including shipping in the European ETS, yet China is one of the EU’s most important trading partners of the EU and for European shipowners so it would not be helpful to risk that relationship, he suggested.
Philippos Philis, chairman and CEO of the manager and operator Lemissoler Navigation made a similar point. “Such a measure will contribute towards destruction of worldwide trades and possibly create the fundamentals for political tension with non-EU countries,” he warned in his remarks to the seminar.
He called instead for a carbon pricing system. This would have global political acceptance; it would be credible and it would keep shipping viable, he said, describing those benefits as essential ‘pillars’ of any such scheme. But Europe’s ETS offers none of them, he said. “Decarbonisation of the shipping industry is a global challenge … and should be regulated at that level.”
Responding to the seminar’s contributors, Ms de la Torre confirmed that no decision has been taken about whether shipping will be included in the ETS. A tax on emissions is another option, she said, or a combination of measures, “which I think is the way we’re going.”
She also floated the idea of a ‘closed’ – ie, an industry-specific – ETS for shipping. An ‘open’ scheme, she believes, would give the maritime industry “access to cheaper abatement opportunities in other sectors” and thus may not result in emissions reductions in shipping itself.
What appeared certain, however, is that there will be European measures of some sort to incentivise decarbonisation. How these will mesh with IMO’s GHG strategy was not made clear, although Ms de la Torre said that any ETS proposal “will not prevent measures to be taken as well at the global level.”
- The seminar can be viewed on the Cyprus Deputy Ministry of Shipping website.