How the Fit For 55 legislation will affect the shipping industry – and how you can prepare
What is ‘Fit For 55’?
In July 2021, the EU Commission published an extensive legislative proposal package called ‘Fit For 55’ as part of its larger European Green Deal, which aims to make the EU carbon-neutral by 2050. The Fit For 55 package contains 12 items that, in conjunction, aim to reduce EU greenhouse gas (GHG) emissions by 55% by 2030 (compared with 1990 levels).
By contrast, the previous legislation required the EU to reduce carbon emissions by 40% by 2030. The package is currently being discussed and debated by EU ministers and will be assessed first in the EU Parliament, and then by member states.
The ambitious goal of 55% is leading to broad and relatively fast changes in regulations. But since there are still a few legislative steps to go before Fit For 55 is ratified, we at NAPA have reviewed the legislation and the effects it will have for the maritime industry so that you can learn how to be compliant before changes come into effect.
The five relevant items for the maritime industry
Of the 12 items in Fit For 55, five are relevant to the maritime industry. In rough order of importance, these are:
1. The revised EU Emissions Trading System (EU ETS)
2. The new FuelEU Maritime regulation
3. A revision to the energy taxation directive (ETD)
4. A revision to the alternative fuels infrastructure regulation (AFIR)
5. A revision to the renewable energy directive (RED II)
Below, you can find out what each item means, how it works, and when it is due to come into effect.
The revised EU Emissions Trading System (EU ETS)
The EU Emissions Trading System (ETS) has technically been in force since 2005, but a new, updated version proposes to extend its remit to include emissions from shipping.
Due to come into effect in 2023, the new ETS will require all vessels navigating to and from European ports to purchase allowances for each ton of carbon dioxide they emit. The ETS is a market-based decarbonization measure that functions according to a ‘polluter pays’ principle, which means that costs will eventually be defined by market pricing for carbon emissions.
The ETS will affect both intra-EU and extra-EU voyages. A ship travelling strictly within the EU will pay for all of the carbon dioxide it emits, whereas a ship that crosses into or out of the EU will pay for 50% of the carbon dioxide it emits (regardless of how much of that journey lies inside or outside the EU). All emissions from port stays at EU ports are included, but ships under 5,000 GT will be excluded from the scheme.
At the same time, the EU is prepared to adjust the scope of the ETS to align with any global market-based measures by the International Maritime Organization (IMO). The ETS can either be extended to cover 100% of the voyages to and from EU ports if the IMO measures are seen as insufficient for reaching the Paris Agreement goals or reduced to avoid a double burden.
The ‘polluter pays’ principle will mean that for any ship, the entity responsible for presenting the ETS allowances will be the shipping company, the shipowner, or whoever operates the ship. However, the shipping company will not always be responsible for purchasing fuel or making operational decisions regarding carried cargo, speed, or route of the vessel. In cases like this, it has been proposed that a binding clause should be included into the agreements so that the costs of emissions can be passed to the charterers.
There will be a gradual phase-in to this new approach so that stakeholders in the industry can adjust to it over time. Changes will start as early as 2023, and the system will be fully in place by 2025, according to the latest discussions. Before 2025 arrives, shipping companies will have to record their emissions correctly starting from 2023 so that they can get familiar with the system but will only be required to hand over a proportion of their reported emissions, and that proportion will grow each year.
The new FuelEU Maritime regulation
The FuelEU Maritime initiative is a new regulation proposal due to come into effect in 2025. The initiative will require all vessels of 5,000 GT and above to start reducing the GHG intensity of the energy they use onboard. At the same time, all ships must start increasing their use of renewable and low-carbon fuels.
The initiative makes use of a lifecycle analysis when evaluating the GHG intensity of fuels, taking into consideration all emissions ‘from well to wake’, or from when the fuel is produced to when it is burned. This regulation has the same scope as the EU ETS, so it will apply to all of the energy used at EU ports, on voyages between EU ports, and 50% of the energy used on voyages between EU ports and third countries.
Maritime transport is essential for the EU’s internal and external connectivity. The EU cannot reduce its carbon footprint sufficiently without the maritime sector’s contribution. So, in a similar way to the ETS, the FuelEU Maritime initiative will ramp up restrictions each year to allow shipowners to adjust to the new system to support its success.
Effectively, ships will need to become cleaner by an increasing percentage with each passing year. In 2025, ships must decrease the annual average GHG intensity of the energy they use onboard by 2%. In 2030, this amount must increase to 6%. The overall amount will increase in five-year increments until 2050, at which point the carbon intensity of all ships must be 75% of the 2020 base year. Additionally, from 2030, ships staying at EU ports should connect to shore electricity supply.
Shipping companies are responsible for compliance with the FuelEU Maritime regulation. With increasingly strict demands, this is likely to keep shipping companies on their toes and constantly searching for the best solutions to stay on top of things. Retrofitting cleantech such as wind propulsion could be an option for shipping companies to reduce overall GHG intensity. However, it is expected that between 2030 and 2050 shipping must undergo a global transition to alternative fuels and energy sources.
A revision to the energy taxation directive (ETD)
The current energy taxation directive (ETD) has technically been in force since 2003 and is therefore outdated and not in line with the EU’s climate targets. As part of the Fit For 55 package, a revision to the ETD has been proposed that includes fuels from the maritime industry. To date, maritime bunker fuel has enjoyed tax-free status within the EU, but starting in January 2023, all bunker fuel sold in the EU and used on voyages within the EU will be taxed.
The revised energy taxation directive aims to bring the taxation of energy products and electricity in line with the EU’s energy, environment and climate objectives. One way to better align with the climate targets is to remove outdated exemptions, such as the exclusion of maritime fuels. Another revision amounts to a tax structure that ensures the fuels that pollute the most are taxed the highest.
The directive sets a minimum tax rate for different fuel categories, which is highest for fossil fuels (€10.75/GJ), and the lowest minimum rate (€0.15/GJ) applies for electricity, advanced sustainable biofuels and biogas and renewable fuels. Sustainable and alternative fuels in the maritime sector will have a zero minimum tax rate over a 10-year transition period.
A revision to the alternative fuels infrastructure regulation (AFIR)
The Alternative Fuels Infrastructure directive (AFID) is a scheme designed to increase the availability of both alternative fuels within the EU and more climate-friendly electrical power supplies at ports.
The AFID has technically been in force since 2014, and has been designed to foster a sufficient infrastructure network for the recharging and refueling of vessels at berth with alternative fuels, provide alternatives to engines currently powered by fossil fuels, and to do so in a user-friendly and intuitive way. The Fit For 55 package proposal turns this from a directive into a regulation, which makes it binding.
There is currently a chicken-and-egg situation with greener fuels, in that few want to be the first mover. Limited infrastructure doesn’t incentivize the use of alternative fuels, but infrastructure hasn’t been updated sufficiently because of a fear of stranded investments. The AFIR will bring legal certainty to this problem and increase consumer confidence.
The maritime-related revision proposals to AFIR require EU member states to increase the availability of liquified natural gas (LNG) and hydrogen, and onshore power supply for ships at ports. So, these demands are not directly for shipping companies, but this ensures that the infrastructure will be there to support transition to alternative fuels and shore power supply during port stays, which are demanded by the FuelEU Maritime regulation.
A revision to the renewable energy directive (RED II)
The original Renewable Energy Directive (RED I) came into effect in 2009, which was then updated with RED II in 2018. RED II is designed to increase the use of energy from renewables, foster better energy system integration and contribute to climate and environmental objectives associated with global warming and biodiversity loss. The Fit For 55 package includes a slight revision to this directive that aligns with the EU’s significantly raised climate ambition.
In order for the EU to meet the goals of the European Green Deal, it must implement significantly higher shares of renewable energy sources within an integrated energy system. RED II suggests an EU-wide target of 40% for the share of energy that must come from renewable sources by 2030, to replace the previous target of 32% (the old version of RED II also defined a target of 14% of energy from renewable sources in the transport sector).
This new revision implements a GHG intensity reduction target of at least 13% by 2030 in the transport sector, as well as sub-targets for advanced biofuels, and renewable fuels of non-biological origin (RFNBO).
Shipping companies don’t need to worry about RED II per se. RED II sets the goals that the more specific measures such as taxation, the EU ETS and fuel GHG intensity limitations are aiming at fulfilling.
In 2020, 22.1% of the energy consumed in the EU was from renewable sources, as were 10.2% of the energy consumed in transport activities.
NAPA’s solutions can help you to prepare for these changes
With about a year left to go until the first initiatives begin to kick in, there’s still time to familiarize yourself with the coming changes. Some will think that the new regulations are good, some will think that they are bad – in either case, they bring a level of certainty to compliance that has been lacking for some time, and that (in our view) is a good thing.
Of the five initiatives listed here, the ETS, the FuelEU Maritime initiative and the ETD will have the largest effect on ship operations, and the principle underpinning all of them is that the polluter will pay. This will vastly increase the need for making operations more efficient, and that’s what NAPA’s tools – voyage optimization and ship performance monitoring – are here to help you with.
The bottom line is this: the shipping companies that embrace these technologies, who adjust to these measures in the most cost-effective way, and therefore who emit the fewest emissions, will have the greatest chance of being successful in a new era of shipping.