EU ETS: The Basics
The European Emission Trading System (ETS) has established itself as the foundation of the EU’s climate change panoply and, particularly in the last two years, as a key weapon for decarbonization. The cap-and-trade system charges for carbon while making sure that GHG emissions are reduced thanks to its cap. In other words, emissions permits are viewed as a good or service that may be exchanged on the European carbon market. Market players might sell emission permits to make up for the CO2 they emit. The goal of the EU ETS strategy for decarbonization is to promote decarbonization affordably.
A cap (or limit), established at the EU level, governs the total amount of greenhouse gases that can be produced by all the enterprises covered by the ETS. The amount and rate at which the overall emissions should decline are also determined by the EU. To achieve this emissions reduction goal, the cap or limit is lowered each year. Thus, it contributes to the fight toward climate neutrality!
What about companies and compliance with the EU ETS decarbonization strategy?
Companies subject to EU ETS regulation are required to buy carbon allowances. They can purchase these through the EU ETS auctions or the carbon market. Some businesses subject to EU ETS regulation are given a certain number of allowances at no cost.
Then the businesses subject to the EU ETS decarbonization strategy are required to surrender enough carbon credits from their Union Registry accounts each year to cover their greenhouse gas emissions. These firms, therefore, use carbon allowances to account for their emissions, just like paying a bill with cash. Heavy fines are enforced on these companies, should they not comply.
A company’s annual requirement to surrender carbon allowances is decreased if it cuts its emissions. The extra carbon credits might then be kept by the firm for future usage. As an alternative, it may sell the extra carbon credits to a business in need.
This type of trading between businesses establishes a market price for carbon allowances. The market price rises each year as the limit or cap drops. The “cap and trade” strategy encourages businesses to invest in emissions-reduction technologies, thereby lowering their greenhouse gas emissions.
EU ETS Strategy For Decarbonization: The Latest
The International Maritime Organization (IMO) and the European Union (EU) are looking into necessary measures to hasten decarbonization to minimize greenhouse gas emissions from international shipping. Nonetheless, the EU restrictions are likely to be the first to go into action. Other countries are also considering similar measures.
Furthermore, it is important to keep in mind that the EU’s actions have a high degree of extra-territoriality that could have an impact on cargo going beyond the EU’s boundaries. Nearly a year has passed since the European Commission unveiled its proposal for a shipping carbon price. The European Commission revealed the Fit for 55 programs on July 14, 2021. The Commission, also, proposed incorporating ships in the EU Emissions Trading System as one of the diverse legislative initiatives.
The idea of voyages is important in shipping. The ETS proposal from the Commission prioritizes vessels over cargo. As a result, it’s necessary for shipping companies to obtain allowances for:
I. 50% of emissions from trips leaving from EU ports and traveling to non-EU ports
II. 50% of emissions from trips leaving from non-EU ports and arriving at EU ports
III. 100% of emissions from intra-EU travel
IV. 100% of emissions from ships docked in EU ports
The number of allowances the shipping firm must submit at the end of the year is then determined by this. Keep in mind that the 50% figure for trips between EU and non-EU ports means that these trips will cost less carbon under the ETS than those between two EU ports.
The case for the shipping industry
In the past, new sectors that joined the ETS benefited from progressive inclusion through a number of free permits in the initial years. Unfortunately, the free allowances have turned out to be ineffective, and the European Commission has concluded that shipping should not receive any. The EC, however, suggests a phase-in period during which maritime companies would be compelled to submit allowances equal to a certain proportion of their emissions. With this phase-in, shipping companies would be obliged to provide allowances in accordance with the timetable listed below:
i. 20 % of verified emissions reported for 2023
ii. 45 % of verified emissions reported for 2024
iii. 70 % of verified emissions reported for 2025
iv. 100 % of verified emissions reported for 2026 and each year thereafter
Hence, the next step of the legislative procedure can now begin, as the European Parliament and the Council of the European Union have taken positions on the ETS proposal. In fact, the two institutions and the European Commission shall agree on this phase before the proposal becomes EU legislation. Finally, the political consensus is to be expected toward the end of 2022.
Written by our Energy Analyst
Katerina has a Bachelor in Law from the National and Kapodistrian University of Athens and just completed her traineeship at a boutique law firm in Kolonaki, Athens. She is a postgraduate student of the MSc in Energy: Strategy, Law, and Economics at the University of Piraeus in the faculty of International and European Studies. Katerina would like to be a legal and policy advisor regarding energy transition and climate change. She speaks Greek, English, French, and Russian. She is keen on English literature and indie films.