As the global shipping industry strives toward the net-zero 2050 target, multiple emissions trading systems (ETS) or schemes govern maritime emissions. The emissions trading system or scheme is a market-based, cost-effective approach to reducing greenhouse gas (GHG) emissions. Also known as a ‘cap and trade’, the system motivates companies and other entities to cut emissions is profit.
United Nations Climate Change (UNCC) stated that emissions trading, as set out in Article 17 of the Kyoto Protocol, allows countries that have emission units to spare – emissions permitted them but not ‘used’ – to sell this excess capacity to countries that are over their targets. A new commodity was created in the form of emission reductions or removals. UNCC highlighted that since carbon dioxide is the principal GHG, people speak simply of trading in carbon. Carbon is now tracked and traded like any other commodity – this is known as the ‘carbon market’.
The European Union emissions trading system was the first large GHG emissions trading scheme, which was launched in 2005. According to WEC Lines whitepaper, the EU ETS has seen significant changes, including the inclusion of the maritime industry in 2024. Ships over 5,000 GT face carbon pricing on 100 percent of intra-EU voyages and 50 percent of international routes to and from EU ports. The EU ETS is a cap-and-trade system, whereby the European Union auctions (EUAs) a decreasing number of allowances.
As such, companies must monitor and report their emissions and surrender enough EUAs to cover their annual emissions. Each EUA represents 1 ton of CO2. Allowances can be traded on the open market, thus setting a market price on CO2 emitted within the European Union. So is ETS effective? The system works effectively because of the hard limits. It lets the market decide how best to reduce emissions at the best lowest cost. ETS sets a price on carbon, a clear and agreed-upon price for carbon. This means that much of the costs incurred by GHG emissions (such as impact on public human health and wildlife extinction), are taken into account when pricing other goods and services.
There’s a strict reduction quota. The system allots a stringent requirement for reduction through the setting of a maximum. And there’s flexibility too. ETS can be adapted to a range of different socioeconomic settings.
The EU ETS only permits the shipping company to be responsible for compliance with the scheme. This can only be one of two entities – either the registered owner of the vessel or the document of compliance holder (DOC Holder). And this can cause challenges in a bareboat chartering arrangement where the DOC Holder is not the bareboat charterer.
Other Global ETS
Besides the EU ETS, there are other global systems. China has its National ETS, which was launched in 2021. It aims to contribute to the effective control and gradual reduction of carbon dioxide emissions. China’s National ETS is the world’s largest in terms of covered emissions, estimated to cover around 8 billion CO2 or more than 60 percent of the country’s carbon emissions.
South Korea’s ETS was launched in 2015 as East Asia’s first nationwide, mandatory ETS. It covered 79 percent of Korea’s GHG emissions in 2022. The system aims to help South Korea to become carbon neutral by 2050, a target embedded in the 2021 ‘Carbon Neutral Framework Act’.
New Zealand also has ETS for meeting domestic and international climate change targets. It requires businesses to measure and report on GHG emissions, and surrender one emission unit (called New Zealand Unit (NZU) to the Government for each tonne of emissions they emit. The Government of New Zealand sets and reduces the number of units supplied into the scheme over time.
Proven Policy Tool
Governments around the world have adopted ETS as part of their policy response to climate change. Stefano De Clara, head of the ICAP Secretariat, highlighted emissions trading as a proven policy too. It can cut emissions faster and at a lower cost than other options. The number of ETS in operation around the world continues to grow, expected to reach 38 in 2025.
Emerging economies, including Brazil, India, Indonesia, Turkey, and Vietnam, are adopting ETS as an innovative system. De Clara said its encouraging to see the growth and spread of emissions trading systems around the world as a response to the climate crisis. “The issue of public acceptability and just transition remains central to the success of carbon pricing policies. Reinvesting auction revenues into decarbonization efforts and social measures is key to addressing these concerns.
FuelEU Complements EU ETS
The ETS for maritime transport includes 100 percent of emissions from ships on voyages within the European Economic Area (EEA), 50 percent of emissions from voyages beginning or ending outside the EEA, and 100 percent of emissions produced when shippers are within EEA ports. FuelEU complements EU ETS, requiring carriers to adopt sustainable fuels. The ultimate goal is to reduce the GHG intensity of ships operating in the European Union and EEA by 2 percent in 2025 compared to 2020 levels, and 80 percent reduction by 2050.
Shippers can reduce emissions and manage costs by exploring sustainable freight options, and collaborate with forward-thinking logistics providers to ensure access to sustainable fuel solutions and innovative technologies, like Green Check (enables logistics teams to calculate, heat map, and mitigate Scope 3 transportation and (T&L) emissions effectively).
Challenges
The EU ETS only permits the shipping company to be responsible for compliance with the scheme. This can only be one of two entities – either the registered owner of the vessel or the document of compliance holder (DOC Holder). And this can cause challenges in a bareboat chartering arrangement where the DOC Holder is not the bareboat charterer. These challenges, as per a report, were compounded by the uneven approach of national administering authorities. It stated that Malta suspended applications after being inundate with owners wanting to register there and another authority had teething problems which led to a wholescale revision of the required forms part way through the year.
It should be noted that the UK will implement its maritime ETS from 2026. It will initially cover domestic voyages with 100 percent emissions coverage for ships more than 5,000 GT. The United Kingdom is likely to cover emissions at berth for all vessels and to UK – EEA routes with 50 percent coverage. A particular challenge is the disparity in pricing of routes between Northern Ireland and Great Britain, and Republic of Ireland and Great Britain. Ships traveling between the Republic of Ireland and Great Britain would be subject to 50 percent emissions coverage under EU ETS, while ships traveling between Northern Ireland and Great Britain would be subject to 100 percent emissions coverage under EU ETS.
According to a report, this might lead to re-routing of cargo to reduce exposure to ETS obligations. The government is looking at covering the scope of UK ETS to 50 percent of emissions from ships traveling between the UK and the EEA. This is an example of overlapping regulations that shipowners face. It creates significant administrative burden and potential for double taxation.
