EU ETS and FuelEU explained: everything you need to know

The Isle of Man Ship Registry on 26 June 2023 issued two technical advisory notices (TANs) explaining the EU ‘Fit for 55’.

EU ‘Fit for 55’ – EU Emissions Trading Scheme Directive & Monitoring, Reporting and Verification

Introduction

EU 'Fit for 55' is an EU target to reduce emissions 55% by 2030 when compared against 1990.

As part of 'Fit for 55', a package of regulations aimed at the maritime sector have been introduced. This TAN provides operators with advice on the EU Emissions Trading Scheme Directive (ETS), which expands the EU Monitoring, Reporting and Verification Regulations (EU MRV) already in force.

Under ETS, ships are required to buy and surrender emissions allowances on an exchange market to offset emissions reported under the EU MRV Scheme.

Each emission allowance gives the holder the right to emit one tonne of carbon dioxide (CO2), or the equivalent amount of other greenhouse gases such as nitrous oxide (N2O) and Methane (CH4) in the EU.

This TAN is to be taken as a brief summary of the requirements, it is strongly recommended that operators consult the further information at the end of this notice to familiarise themselves with the requirements in full. Key compliance dates for operators are detailed in Section 7 of this notice.

The Directive is expected to enter into force on 1st January 2024 following final sign-off from EU member states.

Application & Timeline

The ETS will apply to all companies trading in the EU/EEA with Manx Ships that meet the following criteria:

From 1st January 2024 - Cargo and passenger ships ≥5,000 gross tonnage (GT)
From 1st January 2027 - Large offshore service ships over 5,000 GT

By 2026, the European Commission will commission a report to review whether offshore ships and general cargo ships above 400 GT are to be included in the Directive from 2027.

Allowances are required for emissions from vessels on the following voyages:

100% of the emissions from ships travelling between EU ports
100% of the emissions at berth in EU ports
50% of the emissions for ships travelling between an EU port and a non-EU port

Dry-docks and other maintenance, as well as emissions from emergency situations, are exempted from the requirements.

The ETS requirements will be phased-in on top of the verified emissions reported under the existing MRV scheme. The phase-in period will begin 1st January 2024 and require allowances to be surrendered from 2025 for the previous reporting year as follows:

2025 - 40% of verified emissions for the 2024 MRV reporting period
2026 - 70% of verified emissions for the 2025 MRV reporting period
2027 - 100% of verified emissions for the 2026 MRV reporting period

Considered Emissions

Initially, the ETS will only consider emissions from CO2, however, the MRV reporting requirements will be expanded beginning 2024 to include Methane (CH4) and Nitrous Oxide (N2O). Allowances for these gases must be surrendered under ETS from 2026.

Exclusions

There are some limited exclusions under the ETS until 31st December 2030:

Ships with ice-class IA or IA super, or equivalent, may surrender 5% fewer allowances;
Passenger and RoRo-Pax Vessel's on voyages -
- to or from an EU port on an island with fewer than 200,000 permanent residents where there is no road or rail link with the mainland and a port of the same State, including activities within that port;
- performed as part of a transnational public service contract or obligation between two EU ports, including activities within those ports;
- between an EU port located in an outermost region and a port of the same State, including activities within those ports

Emissions not directly released into the atmosphere (including on board carbon capture and storage) still require surrendering of allowances.

There are two exceptions to this:

Emissions stored in a storage site in accordance with Directive 2009/31/EC of the European Parliament and of the Council;
Emissions that are permanently chemically bound in a product in accordance with EU requirements.

The EU has not yet specified the conditions that allow emissions to be considered permanently chemically bound.

Emissions Trading

The EU ETS system is framed around the Shipping Company and not the individual ship, emission allowances are purchased for the company's fleet as a whole and not per individual ship. MRV reporting remains at the ship level, however, the shipping company is required to appoint an accredited verifier at the fleet level.

Each company must be registered with an EU administrating authority. For companies registered in the EU, the administrating authority will be the member state where it is registered.

For companies registered outside the EU, the authority will be the EU member state with the highest number of port calls from voyages performed by the shipping company over the previous two monitoring years. If the company has not traded in the EU for more than two years (or ever), it will be the member state of the first port of call in the EU.

The list of shipping companies and respective administering authorities will be set in February 2024 and then updated every two years.

Cap and Trade

The EU ETS system is a 'Cap and Trade' system. A limited amount of emission allowances (the Cap) is placed onto the ETS market each year and these can then be traded. A single ETS market has been established to cover power plants, industrial factories, aviation, and shipping.

78.4 million allowances will be added to the market in 2024 for shipping.

The European Energy Exchange is in charge of allocating allowances for EU emissions and has been appointed by the European Commission as a common auction platform. Initial release of the Cap is in the form of an auction on the platform.

A secondary market has also been established that facilitates the trading of allowances bilaterally or through derivatives offered via financial institutions.

To allow the EU to meet its climate targets, the Cap will be reduced on an annual basis according to a linear reduction factor. This will be -4.3% from 2024 to 2027 and -4.4% thereafter.

Companies can only produce emissions up to the amount covered by their allowances.

Where the allowances are not enough to cover a company's needs, then they must purchase additional allowances on the market.

Inversely, where a company has emitted less than their total allowances, then they may sell remaining allowances on the market or roll these over into the following year.

Non-Compliance

Companies that produce emissions in excess of permitted allowances will be subject to a financial penalty of €100 per metric ton equivalent emitted.

In addition, the operator will remain under obligation to purchase allowances for the excess emissions.

In the case of non-compliance for two or more reporting periods, expulsion orders may be issued at the EU port of entry.

As the ETS is applied at the company level, then this expulsion order would apply to all ships in a company's fleet.

Key Reporting Dates for Compliance

To comply with the Directive, within 3 months of 1st January 2024, an updated EU MRV plan (including Methane and Nitrous Oxide) must be verified by an accredited verifier and submitted to the shipping company's administrative authority.

Beginning in 2025, the company must submit a verified emission report to the administrating authority each year by 31st March.

The company emission report must aggregate all emissions within the scope of the ETS reported and verified for each ship under the responsibility of the company during the reporting period. In practice, this will require the company to submit the individual ship-level MRV emission reports for verification earlier than under the current MRV system.

By September 30th each year, the company will have to surrender the required allowances to cover emissions generated over the reporting period, beginning with 40% of CO2 emissions generated in 2024 for 2025.

It is important for operators to familiarize themselves with the specific requirements outlined in this notice and consult the further information provided at the end of the notice.

Key compliance dates for operators are detailed in Section 7 of this notice, and it is crucial to adhere to these dates to ensure compliance with the EU Emissions Trading Scheme Directive.

The Directive is expected to enter into force on 1st January 2024, pending final sign-off from EU member states.

It is advisable to stay updated with any developments or changes related to the implementation of the Directive.

EU ‘Fit for 55’ – FuelEU Maritime Regulation

This TAN provides operators with advice on the FuelEU Directive, a new directive developed to reduce the Greenhouse Gas Intensity of the maritime industry over time.

FuelEU will require ships to calculate their GHG emissions from a well-to-wake perspective and then reduce these emissions on an annual basis according to a linear reduction factor.

This TAN is to be taken as a brief summary of the requirements; it is strongly recommended that operators consult the further information at the end of this notice to familiarize themselves with the requirements in full.

Key compliance dates for operators are detailed in Section 5 of this notice.

The directive is currently a provisional agreement; it is expected to be formally adopted during the EU parliament plenary vote in July.

Once adopted, the EU council is expected to adopt parliament's position.

Once formally approved, the Regulation will enter into force on the twentieth day following publication in the EU official journal. However, it will only apply as of 1 January 2025.

As a provisional agreement, the Ship Registry will update this notice should there be any significant changes to the requirements.

Application

FuelEU will apply to all Manx Ships >5000GT transporting cargo or passengers for commercial purposes when traveling to, from, and at berth in the EU. GHG intensity will be calculated based on energy used as follows:

100% of the energy used while at port in an EU State
100% of the energy used on voyages between EU States*
50% of the energy used on a voyage between an EU state and a country not part of the EU
For container ships only – To avoid voyages intended to skirt the Regulations, stops in transshipment ports outside the EU or EEA that are less than 300 nautical miles from an EU or EEA port must consider 50% of the energy used for the voyage to that port in addition to the voyage between the transshipment port and EU. The EU will publish a list of considered ports no later than 31 December 2025.

*Only 50% of the energy used is to be considered on voyages departing from or arriving at a port of call located in an outermost region under the jurisdiction of a member state.

From 1 January 2030, Passenger ships and container ships will be required to connect to an onshore power supply when at berth in a Trans-European Transport Network Port.

From 2035, this requirement applies to all ports where shore power is available. Use of zero-emission technology at berth is an accepted alternative to this requirement.

FuelEU

From 2025, the yearly average GHG intensity of energy used on board a ship must be reduced every 5 years in line with intensity targets set by the EU, compared against a reference value of 91.16 gCO2e/MJ (grams of carbon dioxide equivalent per Megajoule) that corresponds to the 2020 fleet average GHG intensity of energy used on board ships.

The GHG intensity of a vessel is calculated from a well-to-wake perspective and includes emissions related to the extraction, cultivation, production, and transportation of the fuel.

The GHG intensity reduction targets compared against 2020 have been defined as follows:

-2% from 2025
-6% from 2030
-14.5% from 2035
-31% from 2040
-62% from 2045
-80% from 2050

The regulation defines emission factors for various fuel types and production methods that are to be used in the calculation of GHG intensity of a ship.

For fossil fuels, CO2 emissions must be calculated using default factors for well-to-tank and tank-to-wake emissions.

However, actual values certified through laboratory testing or emission measurement may be used to calculate tank-to-wake emissions of Methane (CH4) and Nitrous Oxide (N2O).

Biofuels, Renewable Fuels of Non-Biological Origin (RFNBO's), and Recycled Carbon Fuels (RCF's) can use certified actual values for both well-to-tank and tank-to-wake emissions.

However, it should be noted that fuels that do not meet the GHG emissions-saving criteria under the EU's Renewable Energy Directive and biofuels from food/feed crops or non-sustainable sources are considered fossil fuels under the Regulation.

RFNBO's are synthetic fuels produced from electricity and carbon captured directly from the air, such as e-hydrogen and e-methanol.

To encourage the use of these fuels, an additional reward factor has been provided for in the calculation of the GHG intensity of a ship that compensates for the higher purchase price of such fuels.

If this reward factor does not encourage the use of RFNBO's as intended, then the EU may mandate the use of such fuels (or equivalent) from 2034.

The company will be responsible for monitoring and reporting the data for the energy used on board each of its vessels at sea and at berth on an annual basis to an accredited verifier.

It should be noted that this reporting scheme is distinct from the EU MRV scheme, although elements from the MRV scheme may be reused for the purpose of the FuelEU reporting scheme; this will be at the discretion of the Vessel's verifier.

The verifier will use this data to calculate the GHG intensity of fuel used for the year and the Vessel's balance in comparison to the applicable limit for that year.

If no deficit is identified, the verifier will issue the vessel with a FuelEU Document of Compliance. Ships entering an EEA port must carry a valid Document of Compliance.

Where a deficit is found compared to the annual reference value, the company may borrow an advance compliance surplus from the following reporting period; however, this will be subtracted from that reporting period at a rate of 1.1 times the borrowed surplus.

Any compliance surplus can be rolled over into the following reporting period. Once the FuelEU Compliance Document is issued, then a surplus may no longer be banked or borrowed for the subsequent reporting period.

The compliance balance may be pooled for two or more ships; in these cases, the FuelEU requirements will apply to the total GHG intensity of all ships in the pool. The pool is not limited to ships of the same company.

Enforcement

There will be financial penalties for each ship with a compliance deficit, as well as each non-compliant zero emissions port call.

A vessel with an active compliance deficit or non-compliant port calls for which the financial penalty has not been paid cannot be issued with a compliance document.

Where a compliance document has failed to be presented for two or more consecutive reporting periods, the ship may be banned from the EU.

Compliance Dates

By 31 August 2024 - Companies must submit a monitoring plan to their verifier detailing their chosen method to monitor and report the amount, type, and emission factor of the energy used on board by their ships, at sea and at berth. For any ships that fall under the scope of the Regulation for the first time after 31 August 2024, the monitoring plan must be submitted to the verifier no later than two months after each ship's first call in an EU port within the scope of the Regulation.
From 1 January 2025 – Companies must record the information detailed in their monitoring plan on an annual basis for each of their ships, as well as all information pertaining to arrival and departure for EEA ports, including time spent at berth and the connection to and use of on-shore power supplies for container and passenger ships.
By 31 January 2026 (and in each subsequent year) – The company must submit a ship-specific FuelEU report to their verifier containing the information detailed above for the previous reporting period.
By 31 March 2026 (and in each subsequent year) – The verifier will provide a report to the company on the yearly average GHG intensity of the energy used on-board by the ship, the ship's compliance balance, and the number of any non-compliant port calls. The verifier will record the compliant FuelEU report and associated information in the FuelEU database.
By 30 April 2026 (and in each subsequent year) – The company must record the use of any advance compliance surplus, following approval by its verifier, in the FuelEU database.
By 30 June 2026 (and in each subsequent year) – The company must pay any remedial penalties relating to any compliance deficits recorded in the FuelEU database.
By 30 June 2026 (and in each subsequent year) – Provided the ship does not have any outstanding penalties relating to compliance deficits, the verifier will issue the vessel a FuelEU Document of Compliance valid until 30 June in the subsequent year. Where remedial penalties are due, the competent authority of the administering State will issue the Document of Compliance, providing the penalties have been paid.

For more information, please see the documents below (available only to subscribers):