Decarbonising Shipping in the EU (2/2)

As discussed in article one of this series, shipping accounts for 2-3% of global greenhouse gas (GHG) emissions. It is, therefore, important to tackle these emissions especially given the projected rise of 50-250% above current levels. To recap, the European Commission proposed the ‘Fit for 55 package’ on the 14th of July 2021. It involves concrete measures to achieve the ambitious targets set in the European Green Deal of achieving a reduction in GHG emissions of 55% by 2030 and making Europe a climate-neutral continent by 2050. The four particularly noteworthy measures are: The inclusion of shipping in the European Trading System Directive (EU ETS), a new regulation called the FuelEU Maritime Regulation, a revision of the Alternative Fuels Infrastructure Regulation, and the Energy Taxation Directive.

The maritime sector is one of the hardest sectors to abate with complete decarbonisation remaining challenging, for instance, due to the high cost involved in decreasing CO2 emissions and adopting low-carbon technology on ships. Other issues, as well as a summary of the new proposed EU regulations, were discussed in greater depth in part one of this article series.

Therefore, in continuation with our second part of the series on Decarbonising shipping in the EU, given the problems already mentioned, it is important to scrutinise whether the EU proposals are enough to enable the ambitious goal set in the European Green Deal. This article summarises the problems of the proposed regulations to abate shipping emissions - unfortunately, they have some shortcomings.

1. Shipping and the EU ETS

The inclusion of shipping in the EU ETS is seen as a positive step to ensure that the maritime sector pays a price for its carbon emissions. Its inclusion demonstrates that the EU is committed to reducing emissions and is unwilling to wait for the International Maritime Organisation to adopt regulations, given their slowness. However, there are several flaws that hinder the EU ETS’s effectiveness in reducing emissions and incentivising actors to invest in zero-emission fuels (for example, green ammonia, hydrogen or methanol). Zero-emission fuels are generated via renewable energy: for instance, ammonia, hydrogen or methanol can also be produced with fossil fuels. These fuels play a very important role in decarbonising shipping.

The first flaw is that the current EU ETS price of €67.75 per tonne of CO2 is insufficient to make a significant impact on lowering the reliance on fossil fuels and substituting it with zero-emission fuels. The low carbon price does not incentivise companies to lower their emissions as it is not cost-effective for them. A higher carbon price would incentivise improvements in energy efficiency, as it would make zero-emission fuels more appealing.

A study of UMAS (a maritime consultancy company) found that to enable full decarbonisation of the shipping sector by 2050, the carbon price must be set under US$200/tonne CO2. A low carbon price is projected to lead to insufficient outcomes, including incentives for purchasing allowances in the ETS market. It is projected that it might lead to some ships reducing their speeds in the European Economic Area (EEA), which would, however, not be enough to achieve major reductions in emissions.

A low carbon price is even associated with harmful consequences such as the increase in Liquefied Natural Gas (LNG), regarded as a sustainable alternative fuel by the EU due to the low carbon prices of using LNG and no inclusion of methane emissions in the EU ETS. This is seen as leading to environmental problems as LNG emits methane emissions and has modest GHG reduction potential. Studies have shown that methane emissions have increased over the years due to many ship owners implementing LNG. As the usage of LNG is projected to rise, methane emissions will follow suit. Moreover, there are geopolitical problems with relying on LNG as an alternative fuel (more on that below).

The EU ETS should further consider a sector-specific cap rather than a hard cap for all sectors together included in the EU ETS. This is expected to encourage a direct emissions reduction within the shipping sector.

Moreover, an expanded geographical scope is needed. The current proposal of the EU ETS includes emissions from maritime voyages within the European Economic Area (EEA) and 50% emissions from journeys both in and out of the EEA. An extended scope from 50% to 100% of extra-EEA journeys could potentially result in an increase in emissions coverage of 70%.

2. The FuelEU Maritime Regulation

The regulation sets a limit on the amount of GHG emissions that ships can generate in European ports. More specifically, it outlines that carbon intensity must be decreased by 2% in 2025, and 6% in 2030. In 2050, carbon intensity should be 75% lower than it was in 2020.

The FuelEU Maritime Regulation has the potential to improve the use of sustainable fuel. There are, however, problems with the regulations’ technical design and overall ambition. This is because it allows ships to not only use zero-emission fuels but also LNG to meet their emissions reduction targets under the FuelEU Regulation. Given the fact that zero-emission fuels are more expensive, many shipping companies might opt for LNG. As LNG still emits CO2 emissions, even though it is less than the conventional fossil fuels used, the reliance on LNG is incompatible with achieving the objectives of the EU Green Deal.

Moreover, the targets set in the FuelEU Regulation until 2030 are very low with a lowered carbon intensity of 6% compared to 2020, which means a lower uptake of sustainable fuels in the next decade. The targets should be revised in the first years and should be higher to be consistent with the Paris agreement.

Another problem is the focus on carbon intensity. The regulation includes merely the reduction of CO2 emissions, thereby leaving out other GHG emissions (methane, water vapour, nitrous oxide, ozone, fluorinated gasses). On the one hand, CO2 is the largest component of GHG emissions in shipping (around 98%). On the other hand, the carbon intensity focus is especially a problem given the future projected rise in methane due to an increase in the utilisation of LNG. Further problems are the exclusion of smaller ships below 5000 gross tonnages and a limited geographical scope as outlined by the study of Transport & Environment (a non-profit organisation that advocates for cleaner mobility in Europe.

3. The Alternative Fuels Infrastructure Regulation (AFIR)

The goal of the AFIR is to make EU Member States increase the availability of LNG by 2025 and to improve the onshore electric power supply in the primary EU ports by 2030. The AFIR has been in place since 2014, but the new proposal aims to convert it from a directive to a regulation.

The upsides of the AFIR are that it requires the EU Member States to enhance the supply of hydrogen and onshore electricity for vessels at ports. It does not directly affect the demands of shipping companies. However, it ensures that the infrastructure is in place to facilitate the transition to alternative sustainable fuels and the provision of shore power during port stays, as required by the FuelEU Maritime Regulation.

One big downside of AFIR is its focus on enhancing the supply of LNG. The AFIR risks locking in fossil LNG in the following decades, still being a fossil fuel that emits GHG emissions. This is seen as delaying important investment in zero-emissions fuels, fuels that are actually able to achieve the goals set forth in the Paris agreement.

In general, for an energy source to fit the purpose, it must be available for anticipated consumption and at a reasonable cost. This is not the case with LNG as outlined by this article. During the last nine months, gas/ LNG “has neither been affordable nor available”. It has high price volatility, and any gas or other energy commodity that has such high volatility should not be regarded as a viable fuel.

Now with the invasion of Ukraine by Russia, LNG is becoming an even riskier and unaffordable energy source. As a result of Russia’s invasion of Ukraine, numerous gas and oil companies have raised their LNG prices.

4. The Energy Taxation Directive (ETD)

At the moment, the ETD is very outdated. As it is not being revised since 2003, the ETD allows fossil fuel industries to enjoy tax exemptions, making Europe favour fossil fuels. However, under the new proposal, Heavy Fuel Oil and other shipping fossil fuel will no longer be tax-exempt for shipping voyages inside the EU. This is good news as it represents a significant opportunity to kickstart a fair and environmentally friendly tax reform across the EU.

Concluding Remarks

The EU took big steps with their proposals for decarbonising shipping set forth in the Fit for 55 package. However, in their current state, the proposals are not enough to achieve the ambitious goals of the EU’s Green Deal and fight the climate crisis holistically.

The EU ETS’ inclusion of shipping is a good first step, but it should be reformed in a way that it has a higher carbon price, an extended scope and a sector-specific cap. The FuelEU Maritime Regulation requires increased initial targets to be able to achieve the 75% carbon intensity reduction by 2050. Moreover, the EU needs to focus on promoting zero-emission fuels and decreasing its reliance on LNG. In general, the EU needs to put more emphasis on including, adopting and advertising sustainable fuels that do not emit GHG emissions such as green ammonia, methanol or hydrogen.