Shipping | The European Green Deal – “Fit for 55 Package”: Maritime Sector

On 14 July 2021 the European Commission presented the “Fit for 55 Package” – the legislative proposals to reach the emission targets of reducing greenhouse gas emissions in 2030 to at least 55% compared to 1990 levels.

The proposals will have a direct impact on the maritime sector. This includes:

• The EU Emissions Trading System (ETS): Extended to include maritime transport
• The FuelEU Maritime Initiative: A maximum limit on the greenhouse gas intensity of energy used on-board and certain obligations to use on-shore power supply or zero-emission technology
• The Energy Taxation Directive (ETD): Introduction of a minimum tax rate on certain fuels / vessels

The European Green Deal and “Fit for 55 Package”

The EU has set an ambition to be climate-neutral by 2050 – an economy with net-zero greenhouse gas emissions. This objective is at the heart of the “European Green Deal” and in line with the EU’s commitment to global climate action under the Paris Agreement. The European Green Deal was presented by the European Commission December 2019.

As part of the European Green Deal, the European Commission has set a target of greenhouse gas emissions in 2030 to 55% compared to 1990 – hence the name “Fit for 55”. The European Climate Law sets out in binding legislation the EU’s commitment to climate neutrality and the intermediate target of reducing net greenhouse gas emissions by 2030.

In order to reach such target – the European Commission has considered actions required across all sectors – which has led to the legislative proposals presented on 14 July 2021. The proposals include revisions to existing legislation as well as a number of new instruments.

The proposals combine: application of emissions trading to new sectors and a tightening of the existing EU Emissions Trading System; increased use of renewable energy; greater energy efficiency; a faster roll-out of low emission transport modes and the infrastructure and fuels to support them; an alignment of taxation policies with the European Green Deal objectives; measures to prevent carbon leakage; and tools to preserve and grow our natural carbon sinks.

EU Emissions Trading System (ETS) – Maritime Sector

The EU Emissions Trading System (ETS) sets an absolute limit or ‘cap’ on the total amount of certain greenhouse gases that can be emitted each year by the entities covered by the system. This cap is reduced over time resulting in a reduction of total emissions.

Entities buy or receive emissions allowances within the limit. The limit on the total number of allowances available ensures that they have a value. The trading is intended to bring flexibility to ensure emissions are cut where the cost is lowest.

The European Commission is proposing to extend the scope of the ETS to cover the maritime sector.

Pursuant to the proposal, the ETS will be extended to include emissions from all ships above a gross tonnage of 5000 regardless of their flag.

The extension is proposed to apply in respect of 50% of the emissions from ships performing voyages departing from a port under the jurisdiction of a Member State and arriving at a port outside the jurisdiction of a Member State, 50% of the emissions from ships performing voyage departing from a port outside the jurisdiction of a Member State and arriving at a port under the jurisdiction of a Member State, 100% of emissions from ships performing voyages departing from a port under the jurisdiction of a Member State and arriving at a port under the jurisdiction of a Member State and 100% of emissions from ships at berth in a port under the jurisdiction of a Member State.

It is proposed that the ETS is gradually extended to include the maritime sector over the period 2023 to 2025. Shipping companies will have to surrender allowances for a portion of their emissions during an initial phase-in period, reaching 100% after three years.

The proposed phase-in of requirements to surrender allowances are as follows:

– 20 % of verified emissions reported for 2023

– 45 % of verified emissions reported for 2024

– 70 % of verified emissions reported for 2025

– 100 % of verified emissions reported for 2026 and each year thereafter

The entity responsible for the compliance with the ETS is the “shipping company”, defined as the shipowner or any other organisation or person, such as the manager or the bareboat charterer, that has assumed the responsibility for the operation of the ship from the shipowner and that, on assuming such responsibility, has agreed to take over all the duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention.

Shipping companies will have to purchase and surrender ETS emission allowances for each tonne of reported CO2 emissions.

Shipping companies will be subject to an administering authority of a Member State that will ensure compliance using the same rules as for the other sectors under the ETS. There are regulations on penalties and ships can also be denied entry to EU ports where the responsible shipping company has failed to surrender the necessary allowances for two or more consecutive years.

A reporting and review clause has been proposed to monitor the implementation of the rules applicable to the maritime sector and to take account of relevant developments at the level of the International Maritime Organization.

FuelEU Maritime Initiative

The FuelEU Maritime proposal (i) 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 in the EU and (ii) certain obligations to use on-shore power supply or zero-emission technology in ports in the EU. This is proposed to stimulate the uptake of sustainable maritime fuels and zero-emission technologies.

This proposed regulation will apply to all ships above a gross tonnage of 5000 regardless of their flag.

Under the proposal, targets are determined against a reference value reflecting the fleet average greenhouse gas intensity of energy used on-board by ships in 2020, and reduced by the following percentages:

–  2% by 2025

–  6% by 2030

–  13% by 2035

–  26% by 2040

–  59% by 2045

–  75% by 2050

In addition, passenger ships and container ships are as a main rule required to use onshore power supply from 2030 unless they can demonstrate use of another zero-emission technology.

The proposal accommodates renewable and low-carbon fuels in maritime transport, such as liquid biofuels, e-liquids, decarbonised gas (including bio-LNG and e-gas), decarbonised hydrogen and decarbonised hydrogen-derived fuels (including methanol, and ammonia), as well as electricity.

It is proposed that the regulation applies to 50% of the energy used by a ship performing voyages arriving at a port under the jurisdiction of a Member State from a port outside the jurisdiction of a Member State, 50% of the of the energy used by a ship performing voyages departing from a port under the jurisdiction of a Member State and arriving at a port outside the jurisdiction of a Member State, 100% of the energy used by a ship performing voyages arriving at a port under the jurisdiction of a Member State from a port under the jurisdiction of a Member State, and 100% of the energy used at berth in a port under the jurisdiction of a Member State.

There is further a proposal for an Alternative Fuels Infrastructure Regulation to ensure that the greening of the transport fleet is supported by adequate recharging and refueling infrastructure. Trans-European Transport Network (TEN-T) maritime ports will be required to install electricity supply to serve the demand of at least 90% of container and passenger ships calling at that port. On-shore side electricity installation must be provided at every TEN-T inland waterway port. This will ensure that ships have access to electricity supply in major ports.

The Energy Taxation Directive (ETD) – Maritime Sector

The current Energy Taxation Directive (ETD) sets out structural rules and minimum excise duty rates for the taxation of energy products used as motor fuel and heating fuel, and electricity. Individual Member States are free to set their own rates as long as those minimum rates are complied with.

The prosed updates focus on two main areas. Firstly, the proposal introduces a new structure of tax rates based on the energy content and environmental performance of the fuels and electricity. Secondly, the proposal broadens the taxable base by including more products in the scope and by removing some of the current exemptions and reductions.

Fuel supplied for use in shipping is currently exempt from taxation under the ETD. The proposal set forth on 14 July 2021 introduces a minimum tax rate on the relevant fuels used for intra-EU ferry, fishing and freight vessels.

Sustainable and alternative fuels will be subject to a minimum zero tax rate for a transitional period of 10 years when used for waterborne navigation.

BAHR’s View

The proposals presented by the European Commission are intended to ensure that the maritime sector contributes its share to the EU climate targets.

The legislation as proposed will have a direct and important impact on the maritime sector.

The “Fit for 55 Package” are proposals presented by the European Commission. The proposals will be subject to discussions and negotiations before adopted by the European Parliament and Member States. It therefore remains to be seen what will be the final terms of the proposed legislation.

Although the final legislation has not yet been adopted – there is no doubt that the introduction of regulations required to reach the climate targets will be important and have a high focus in the coming years. Maritime sector will be subject to such regulations and requirements.

Further details on the “Fit for 55 Package” is available here

Do not hesitate to contact any of BAHR’s shipping team members for further information.