EU
Fit for 55

ETS

In July 2021, the RBSA welcomed the increased climate ambition of the ‘Fit for 55’ climate package, recognising that the climate crisis is one of the greatest humanitarian, economic and environmental challenges our societies are facing.

To combat climate change, Belgian Shipowners have frequently called upon legislators to support urgent progress at the IMO, as the international level is the preferred and most sustainable long-term way forward to regulate an international industry. In absence of this progress, the EU is trying to take meaningful initiatives within its powers to reduce the industry’s impact on climate change and to transform the Union into the world first net zero emissions economy.

For the maritime industry, the package puts forward several proposals and ideas, among which:

Emission Trading System (ETS)

The proposal published by the European Commission in July 2021 sets out an ETS for all ships above 5000 GT performing a maritime transport activity. Maintaining a threshold at 5000 GT could however create a market distortion between smaller and larger ships. Lowering the threshold, would include many more shipowners into the ETS, and a tremendous administrative burden for the many smaller vessel owners. In addition it could create a modal shift to road, which will or will not have its own separate ETS. A move away from the more environmental friendly short sea shipping segment to road would increase emissions in general and needs to be avoided and not facilitated by EU legislation.

How the final ETS will look like will remain to be seen and will depend on the outcome of the trilogue negotiations in 2022 between stakeholders in the EU Commission, the EU parliament and the EU Council of Member States.

Fuel EU maritime proposal

The FuelEU Maritime proposal is a critical piece of the puzzle, that the whole Fit for 55 package could crumble for the shipping industry if the EU does not get it right. From the point of view of Belgian shipowners, FuelEU Maritime should fully align with the rest of the package, and it should go further to directly address longstanding issues such as the transparency of the fuel supply chain, in order to help shipping advance towards decarbonisation.

At first glance, the proposed regulation looks like the maritime version of the ReFuel EU Aviation proposal. Both introduce targets for alternative fuels and like ReFuel EU, FuelEU Maritime promotes fuel blends that are progressively carbon-neutral starting from 2025 to 2050. The legislation applies to all fuels used by ships at EU ports of call, on voyages between two EU ports of call, and on 50% of the fuels used between an EU port and a third country. But the similarity stops there. A more careful reading of the FuelEU Maritime reveals a high level of inconsistency with the rest of the package, which in some instances are counter productive. The RBSA found three main issues that make the proposed regulation unfit for purpose:

1. Is it really necessary to introduce another Monitoring system?
2. The reliance on compliance certificates from non-EU fuel suppliers is a gaping enforcement loophole.
3. An independent body should decide to exempt on shore power supply, or not, , not port authorities.

Additionally, the proposed regulation should address the following shortcomings:

1. Enhance the transparency of current fuel supply chains.
2. Ensure consistency with the other proposals such as EU ETS and the renewabel Energy Directive to avoid leaving shipping behind.
3. Work with the IMO.

The course of the negotiations between all EU legislators in parliament, Council and Commission over the year 2022 will in the end determine how the instrument will look like.

Alternative Fuels Infrastructure Regulation (AFIR)

The AFIR proposes to set national / regional targets for the deployment of alt fuels infrastructure and rules. In practice it only relates to requirements regarding on shore power supply and LNG.

The RBSA finds the package as whole and the AFIR in particular, rather weak on the requirements for the production and supply of green hydrogen-based e-fuels. This while on the other hand, the FuelEU Mar introduces penalties for ship owners (and not fuel suppliers) who do not meet the requirements on carbon intensity as set out in that proposal. It is estimated that by 2035, the new hydrogen-based e-fuels will be needed for ships to meet the targets in the FuelEU Mar proposal. If those fuels are not available to the owner by then, ship owners will not be able to comply and be penalised for it, even facing expulsion.

Negotiations over the year 2022 will hopefully bring further improvements and more ambitious requirements on the production and supply of Renewable Fuels of non-Biologic origin.

The need for a dedicated maritime Innovation Fund

The introduction of a fund under the EU ETS has been another essential element of the position of the RBSA. Auction revenues from the existing ETS go mainly to Member States’ budgets. Based on the Commission’s proposal, Member States will be required to spend all of their auction revenues from emissions trading on climate- and energy-related projects. The proposal did not specify which part of the revenues will finance the general EU budget except for the revenues which will finance the Innovation Fund, the Modernisation Fund and the Social Fund. Among the ETS funds, the Innovation Fund is more relevant for the energy transition of shipping. The new Directive makes a specific reference to the support for innovative projects aimed at accelerating the development and deployment of renewable and low carbon fuels in the maritime sector under the Innovation Fund. The rules on the operation of the Innovation Fund, including the selection procedure and criteria will be determined via a delegated act by the Commission at a later stage. Importantly, the Innovation Fund will support the Carbon Contracts for Difference (CCDs). CCDs will aim to guarantee investors in innovative climate-friendly technologies a price that rewards CO₂ emission reductions above those induced by the current price levels in the EU ETS.

Carbon Border Adjustment Mechanism (CBAM)

The Commission has also put forward a proposal for a Carbon Border Adjustment Mechanism (CBAM), which addresses the risk of carbon leakage for products in a targeted number of sectors, by pricing the carbon content of products imported to the EU. The CBAM is an alternative to free allocation. To ensure a smooth transition from one system to the other, the Commission will phase out free allocation under the EU ETS as the Carbon Border Adjustment Mechanism is phased in for products from these sectors

Work with the IMO

Apart from the need for consistency with the rest of the Fit for 55 package, as well as placing the responsibility on the right parties in order to encourage real changes, the shipping industry requires a clear commitment from the EU for full alignment with the international level when the IMO delivers.

For the EU to be a true frontrunner, we must ensure that more will be able to follow our Climate ambitions. So even more than being a frontrunner, we should be enablers as well. Without doubt shipping should contribute its share to address the climate crisis, at EU level as well. Therefore, we not only urge for more consistency but also for a clear commitment to full alignment with the international level when the IMO delivers.