Quick guide: Shipping decarbonisation and the EU

The European Union is playing an important role in shipping decarbonisation. Here’s a quick guide that fills you in on the most important plans and actions.
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Quick guide: Shipping decarbonisation and the EU

July 22, 2022

The European Union is playing an important role in shipping decarbonisation. Here’s a quick guide that fills you in on the most important plans and actions.

The fit for 55 package

The European Union has set binding targets to achieve climate neutrality by 2050. As an intermediate step towards net zero greenhouse gas emissions, the EU has committed to cut at least 55 % by 2030. The Fit for 55 package presents the initiatives needed to align current climate, energy and transport related legislation with the 55 % reduction target. Below you can find short descriptions of the measures that will be most consequential to ship and cargo owners.

EU Emissions Trading System (ETS)

The EU ETS is a key tool for EU policy makers to combat climate change and for reducing greenhouse gas emissions cost-effectively.

The system today:  

  • Operates in all EU countries plus Iceland, Liechtenstein and Norway,
  • Limits emissions from around 10 000 installations in the power sector and manufacturing industry, as well as airlines operating between these countries,  
  • Covers around 50% of the EU’s greenhouse gas emissions.

The EU ETS works on a cap-and-trade principle. A cap is set on the total amount of certain greenhouse gases that can be emitted in the system. The cap is reduced over time so that total emissions fall. Within the cap, installations buy or receive emissions, which they can trade with one another as needed. An EU allowance, or an EUA, is a permit to emit 1 tonne of carbon dioxide or its equivalent (CO2e). The European Energy Exchange (EEX) lists the EUA spot market price.

Emissions from shipping are to be in incorporated into the EU’s Emissions Trading System (ETS) from 2024. The phase-in of requirements for the shipping industry is scheduled as follows:

  • 40 % of emissions reported in 2024 to be paid for in 2025
  • 70 % of emissions reported in 2025 to be paid for in 2026
  • 100 % of emissions reported in 2026 to be paid for in 2027

Shipping companies will have to purchase EU Allowances (EUAs) for each tonne of CO2 emitted from ships operating between EU ports and at berth in EU ports, and 50% of CO2 emissions from both incoming and outgoing global EU voyages. According to this suggestion approximately 90 million tonnes of CO2 will be included in the ETS as the maritime sector enters the system. There will be no free allowances for the maritime industry.

The EU is racing to reach an agreement on the revision of the EU ETS directive in time for 2023 and after hard debates both the Parliament and the Council have now adopted their positions and the trilogue negotiations have begun. We expect that an agreement could be reached by the end of 2022.

The EU ETS - what, when, who (prior to trilougue negtiations) 

Suggestions made by the Parliament’s environmental committee in May 2022

Suggestions made by rapporteur Peter Liese in January 2022

Shipping's carbon cost could increase fivefold if phase-in priod is deleted

The Fuel EU Maritime Initiative

The initiative aims to increase the use of sustainable alternative fuels in European shipping and ports by addressing 

  • market barriers that hamper their use
  • uncertainty about which technical options are market-ready  

This measure should ensure that the penetration of renewable low-carbon fuels in the marine fuels market takes place under the conditions of fair competition.

To stimulate the uptake of sustainable maritime fuels and zero-emission technologies the Fuel EU Maritime proposal sets a maximum limit on the greenhouse gas intensity of energy used on-board by a ship arriving at, staying within or departing from ports within the European Economic Area (EEA). Shipping companies will have to improve the GHG intensity of the fuels they use by  

  • 2% from January 1, 2025,
  • 6% from 2030,
  • 13% from 2035,
  • 26% from 2040,
  • 59% from 2045, and
  • 75% from 2050

The GHG intensity means the amount of CO2, CH4 and N2O emissions per MJ of energy used. It is expressed grams of CO2 equivalents and established on a well-to-wake basis. The well-to-wake method includes not only emissions from the combustion of fuel on board the ship, but also upstream emissions from production, transport and distribution of fuels.

The energy taxation directive (ETD)

The main objectives of the revision of the ETD are to

  • align taxation of the energy products and electricity with the EU energy and climate policies to contribute to the EU 2030 energy targets and climate neutrality by 2050,
  • preserving the single market by updating the scope and the structure of tax rates
  • and to rationalise the use of optional tax exemptions and reductions.

Heavy oil used in the maritime industry will no longer be fully exempt from energy taxation for voyages in the EU. The revised Energy Taxation Directive proposes a minimum tax on heavy fuel oil starting at 0.9 EUR per gigajoule in 2023.

In more shipping relevant terms, the 0.9 EUR/Gj tax means an additional cost of approximately 45 USD/tonne heavy fuel oil.

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