EU shipping faces ETS, forced efficiency targets and a carbon border tax

While shipping is worried about the European Parliament forcing shipping into the emissions trading scheme in 2022, there are also proposals for a mandatory energy efficiency improvement as well as a carbon border tax to help shore up any loop holes.

Over the next few days ship operators will find out if the European Parliament agrees with its Environment Committee that shipping should join other industries in the region’s emission trading scheme. This scheme is up for its fourth periodical review and discussions are starting on how it can be used to strengthen Europe’s greenhouse gas reduction efforts.

But there is more to it than that. The proposal being dicussed by the Parliament is also for ships to improve enery intensity by 40% by 2030. And elsewhere, linked with proposals being pushed byt he current German presidency Brussel’s is also considering a carbon border adjustment mechanism (tax) that could also have a huge impact on trade and shipping.

These issues are part of the latest Aronnax Podcast which you can find for free on Spotify, Apple Podcast and Acast. For this episode Fathom World editorial director Craig Eason  spoke to Jutta Paulus, the MEP driving Parliamentary proposal to have shipping join the EU ETS and to be forced to become more efficient. He also spoke to Adam Berman, EU Policy Head at the International Emissions Trading Association to explain what this all means, including the proposed EU carbon border tax which could be used a loophole closer such as is the UK’s argets for shipping are weaker than Europe’s post Brexit. Fathom World newsletter subscribers can access both interviews in full by following links in the recent emailed newsletter.

The European Parliament is set to meet this week in plenary, possibly with some MEPS there and others remotely,  to discuss various issues, including the Covid recovery package, proposals for strengthened the greening of Europe and the proposals for shipping to join the emissions trading scheme.

MEP Jutta Paulus is the rapporteur, that’s the MEP who directs new rules through the blocs bureaucracy. This one is a proposal that could force all operators or owners of ships covered under the European emissions monitoring, reporting and verification system  to buy and trade emissions allowances, or if a small company just pay into the fund Paulus is proposing.

The proposal not only calls for the inclusion of all ships calling at European ports into the emission trading scheme, but for these vessels to be subject to a mandatory 40% of efficiency – based on the data submitted to the European monitoring and reporting scheme.

In the lengthy interview with Fathom World, Paulus, a German MEP and member of the Green party coalition,  told about how she believes the time is right and there is growing political support for this renewed attempt o create binding regional rules for shipping. The push to bring shipping under definitive emission controls has a long history, but now Europe has a commission president who thinks the same way leading experts to believe it will happen by 2022

“The last time this issue was debated in 2015 the Commission more or less promised they would not introduce shipping into the ETS back then, but they would do it as soon as possible next time. I think the time is now as we do have the shipping file on our desk right now.” Paulus told Fathom World.“The second reason is the Friday’s For Future, the whole climate movement which really took up speed in 2019 and there was a lot of support from normal people, so to speak, not just the activists, saying we have to do something about it”

Paulus’s proposed regulation is in fact an almost reverse amendment of a European Commission request for the Parliament to see if the European requirement for ship’s to report emissions data can in any way be aligned with that of the IMO. The European system (MRV) is in its third year, with data for 2018 having been collated and published and that for 2019 being assessed. The IMO’s data collection system started on January 1 2019, and all ships under the scheme should by now have submitted that year’s data to flag states who should have submitted it into the IMO system by June 30th this year.

Fathom World has learned that despite this system supposedly being automated, some flag authorities still have not done so, citing covid-19 as a reason. This is unlikely to sit well with IMO critics who believe the UN body works too slowly.

Instead of trying to align the EU with the IMO system, the Parliament Environment committee has instead seen how shipping can be brought into the European Trading Scheme which is about to enter its fourth phase  at the end of 2021.  While Paulus wanted shipping to be part of the ETS next year, she recognises that she will likely have to wait another year as the Brussels mechanism calls for the proposal to not only to have a vote in Parliament, but to go through what are known as trilogue talks. The trilogue talks are the talks between Commission, Parliament and Council of Ministers to align agendas, but may not happen this year.

Adam Berman, EU Policy Officer at the International Emissions Trading Association believes Brussels will also likely take a holistic approach to the ETS revision ahead of its next phase, and not want to look at shipping’s inclusion in isolation. He is of the opinion that shipping will be drawn into the scheme, and that it could happen quickly, saying it is likely a done deal politically and it is just the detail that needs to be agreed.

No free allowance for shipping

Paulus is also pushing for shipping to be included in the ETS without any free emission allowances, something that some sectors have benefited from. There should be no free carbon dioxide emissions, she says, adding that she wants half of the revenues from shipping dedicated to a fund for research, development, innovative shipping solutions, as well as for marine bio-diversity. The rest of the fund, she says, should go the European Union  for part of the Covid-recovery fund. Berman pointed out though that the need the EU has for input for its recovery fund it is unikely much of this revenue would find its way directly into shipping R&D

DG Clima would be expected to come up with the details of how the mechanism would work, but Paulus says that even smaller shipowners and operators would be expected to take part. “Those companies that are small….for those that are reluctant…. we have found an easy solution,” said Paulus. “If you do not want to take part, then you just have to count your emissions and at the end of the year you will have to pay the respective amount of the highest price of the auction into the fund.”

Shipowner groups have been swift in condemning the proposal to include shipping in the ETS, with the World Shipping Council recently putting forward a paper explaining why it is a bad idea, and the European Community Shipowners’ Association also criticising the proposal as potentially harming the progress at the IMO.

ECSA were approached for fresh comment about the latest proposals and the risk of the 40% reduction in a decade, but have yet to respond.

The devil in the detail

In her interview with Fathom World, Jutta Paulus also explained why the inclusion of shipping into the ETS will still not do enough to decarbonise the existing fleet of ships.  She thinks the current price of carbon will not be an incentive, but if it could be traded at a few hundred Euros a tonne of CO2 it may do so. Therefore there is the additional proposal included to force ships to improve their emissions intensity by 40% by 2013.   “We want to get existing and new ships to cut their carbon intensity by 40% by 2030,” said Paulus who said the proposal is, again, to use the data that is annually uploaded into the Shipping MRV system.

The proposal has some similarities to others that have been swirling around the shipping sector for a while. Ships are categorized by type and size, and benchmark intensity levels are allocated based on existing data. The EU proposal is to use MRV data reported for 2018 and 2019. This way, said Paulus, vessels that are already efficient in their class are not unduly penalised. 

Paulus is also critical of slow progress at the IMO; and the Organisation’s data collection, as well as  current ideas revolving around it which are focused on using a benchmark year of 2008.That was a particularly high emissions year for shipping, she said, making it easier for all owners to make gains without actually doing much to actually improve efficiency.

IETA’s Berman thinks that while the introduction of shipping into the ETS is going to happen, he pointed to another proposal in Europe that will also have the potential to influence shipping, a carbon border mechanism.

He cited the Paris Agreement and a clause which some countries have found hard to adopt as it calls for alignment of GHG reduction goals. The mechanism, of which there are few details available yet, is already being called a border tax is aimed at evening out the discrepancies of goods imported from countries that have higher emissions in production. This he says would include a mechanism that will help prevent shippers from bringing goods into a port close to the European Union, such as Tangiers and Southampton once the UK leaves the Union, should those countries have less stringent targets or emissions reduction mechanisms.

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