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EU proposes tax on all shipping emissions and to limit polluting fuels

EU regulator's legislative package aims to transform the bloc's emissions trajectory as it seeks to rapidly decarbonise

The European Commission has unveiled its plan to tax almost 70% of emissions from voyages to the European Economic Area. It also wants ships to burn less greenhouse gas-intensive fuels, some bunkers to be taxed for the first time and ports to provide more LNG and onshore power supply

THE European Union should tax international shipping emissions and domestic bunkers and require owners to buy cleaner fuels and ports to ramp up supply of shore power and liquefied natural gas as fuel, according to new proposals.

The European Commission has published a set of legislative proposals to enable the EU to attain its 2030 target of reducing its greenhouse gas emissions by at least 55% by 2030 compared with 1990 levels.

The “Fit for 55” package includes 10 proposals, four of which are directly related to maritime and will have wide-ranging international repercussions for both shipping emissions and costs.

Among the most consequential ones are the expansion of the EU Emissions Trading System, the bloc’s carbon market, to include shipping and the imposition of the first greenhouse gas intensity requirements on shipping fuels, through the FuelEU Maritime.

Each of these two proposals would cover just under 70% of annual shipping carbon dioxide emissions related to the European Economic Area, including parts of international voyages to and from EEA ports.

The proposals would mark the most aggressive policies on shipping emissions and decarbonisation as well as the official launch of an attempt to impose unilateral measures on shipping, including international shipping, ahead of the International Maritime Organization, the global maritime regulator, which has repeatedly denounced efforts by the EU to regulate international shipping emissions.

All of these proposals have to be negotiated with the European Parliament and EU member states before they can be adopted.

Both the ETS extension and the FuelEU Maritime concern ships of at least 5,000 gross tonnes regardless of flag. Both proposals also put the responsibility on shipowners to comply, in line with existing requirements.

However, in a first, the ETS and FuelEU Maritime recognise the “polluter pays” principle and state that a shipping company could hold the entity responsible for the vessels emissions or the GHG intensity of the fuels, respectively, accountable for the compliance costs “by means of a contractual arrangement”.

“This entity would normally be the entity that is responsible for the choice of fuel, route and speed of the ship,” the proposals said.

This part was not included in leaked versions and Lloyd’s List understands it was added over the past few days due to pressure from industry to recognise the role that charterers have in emissions.

 

 

The ETS works as a cap and trade scheme, in which companies buy emissions allowances from a limited pool, where one allowance equals 1 tonne of emitted CO2. After the end of the year they need to surrender enough allowances to cover their ships’ emissions for that year.

If they have more allowances than they need, they can sell them to other companies which require them or can keep them for next year.

While the commission wants shipowners to begin complying with the ETS from 2023, it is also proposing a gradual introduction of the measure; an owner would have to pay just for 20% of a ship’s emissions in 2023. That share then increases annually to reach 100% coverage in 2026.

However, shipping companies will not be getting free allowances from the EU.

If shipping was in the ETS in 2020 under this geographical scope and with 100% coverage of the relevant emissions, 81.2m tonnes of CO2 of the total 119.9m tonnes of CO2 emitted in EEA-related voyages would have been covered, according to a recent Lloyd’s List analysis.

Each shipping company will be assigned to a specific EU member state authority that will oversee their compliance.

If a company does not surrender the right amount of allowances by April 30 of the following year, it must pay an extra €100 ($118) fine per tonne of CO2 equivalent it did not have allowances for.

Companies that have not complied for two consecutive years could be denied entry from EU ports, if the member state that is responsible chooses that option.

“As a result of the issuing of such an expulsion order, every Member State shall refuse entry of the ships under the responsibility of the shipping company concerned into any of its ports until the company fulfils its surrender obligation,” the commission’s proposal said.

The proposal also suggests that there be a review clause that will also take account progress made at the IMO.

“While the recent progress achieved in IMO is welcome, these measures are insufficient to decarbonise international shipping in line with international climate objectives,” the commission said in its proposal.

 

First-ever GHG intensity rule for fuels 

FuelEU, the proposal from the commission’s transport division, DG Move, will force vessels to call at EEA ports to improve the GHG intensity of the fuels they use for those voyages.

These requirements begin with a 2% improvement in 2025 and grow every five year to reach 75% in 2050.

The requirements would take into account the GHG emissions a fuel generates throughout its lifecycle, from its production to its final consumption by the ship, not just its use by the ship.

Shipowners have protested at the FuelEU because it puts the onus of sourcing these alternative fuels on them rather than on their producers. With the rules extending beyond just domestic voyages, they will be responsible for finding these fuels abroad.

Both industry and environmentalists have criticised the commission for in effect promoting the consumption of biofuels, which can have questionable sustainability credentials especially when sourced from regions the EU has no jurisdiction over.

The commission has also been criticised for in effect pushing the development and use of LNG, which has lower CO2 emissions than heavy fuel oil, but is still a fossil fuel and suffers the slip of unburned methane, a GHG that is over 80 times more warming than CO2 on a 20-year horizon.

The proposal also allows owners of different ships to pool ships together to help each other with compliance, provided those ships in the pool are verified by the same verifier.

If in a pool one ship is over-compliant with the requirements of the previous year, while another is not, the first can transfer its excess credits to the second.

The regulation does not specify how exactly that happens, but the implication is that in cases where two ships are owned by different companies, one company could sell its credits to the other in need.

Companies that are not compliant with the rules by May 1 of the following year will have to pay a penalty. The money would go into a green fuel fund and they can get a certificate of compliance once they pay.

From January 2030, containerships and passengerships at EEA ports will also have to connect to onshore power supply and “use it for all energy needs while at berth”.

The commission has estimated that the estimated cost of the proposal would be €89.7bn. That includes €25.8bn from increased capital costs and €63.9bn in fuel costs, while ports would require an extra €5.9bn in extra infrastructure.

 

Development of LNG refuelling hubs

With requirements on shipping fuels, the commission also wants ports to act to complement these new rules.

In a revision of the directive for alternative fuel infrastructure deployment, it tells governments that ports should develop “adequate” refuelling points for LNG as a fuel from January 1, 2025.

Like the FuelEU Maritime, this proposal also focuses on onshore power supply for containerships and passenger ships of at least 5,000 gt at key EEA ports.

It says that by January 1, 2030 ports with over 50 average annual containership calls over the past three years need to be able to have shore-side power output to cover at least 90% of that energy demand.

Likewise, ports with more than 40 average annual calls of ro-ro passengerships and high-speed passenger crafts over the past three years, and over 25 calls of other passengerships, will need to be able to supply the same amount of onshore power by 2030.

 

Taxes on bunkers

The revised Energy Taxation Directive proposes a minimum €0.90 per gigajoule tax on bunker fuels used for intra-European maritime voyages from January 1, 2023.

The tax is just 12% of what other sectors that use fossil fuels such as gasoline and diesel will be charged because of the risk that shipowners and operators would otherwise source bunkers outside the EU, the directive said.

Petrol and gasoil for land transport would be charged at €10.75 per gigajoule, with kerosene used for jet fuel exempt.

The tax rate for liquefied natural gas used as bunkers is set at €0.60 per gigajoule, compared with €7.17 per gigajoule for other uses. The lesser tax for LNG used as bunkers is based on a structure that rates fossil-based energy products based on their energy content and environmental performance.

Bunkers are normally exempt from taxes but the EU is introducing the charges over a 10-year transitional period from 2023.

Countries have an option to impose their own tax for extra-European voyages provided that it is no less than this minimal rate.

“For extra-EU waterborne navigation, Member States may exempt or apply the same levels of taxation mentioned before, according to the type of activity,” the directive said.

Ammonia and advanced biofuels used in shipping would be exempt to encourage sustainable alternative fuels, according to the revised directive.

Along with a “well-calibrated” emissions trading scheme for the maritime sector, the favoured option of taxes set at these levels would achieve goals to reduce emissions by 55% by 2030, based on 1990 levels, the report said.

The impact assessment found the taxes would not place any undue burden on the economy.

They amount to a 6.8%-7.7% rise in the cost of using heavy fuel oil as bunkers and a 6.4%-7% rise in the price of LNG as bunkers, said Jacob Armstrong, shipping policy officer for non-governmental organisation Transport and Environment.

He said the emissions trading scheme which places a price on carbon used on shipping “was where all the heavy lifting would be done”, in cutting shipping emissions.

Unlike other environment proposals, the tax directive would need to approved unanimously by all countries, rather than by a majority, Mr Armstrong said.

“Marine fuels are not going to be significantly higher and hopefully member states like Greece, Cyprus and Malta will let it through,” he said.

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