EU weighs “extra-jurisdictional grab” with proposed shipping regulations, emissions price

The EU is planning to curb growing emissions from ships by adding two more low-sulfur emissions zones in the southern part of the bloc, on the Mediterranean and Black seas, and possibly extend its carbon price regime into international waters.

Global shipping emissions are expected to increase 90-130% from 2008 levels by 2050, according to the fourth GHG study by the International Maritime Organization (IMO).

Attempting to achieve "zero pollution" in shipping, the European Commission (EC) sent EU governing bodies a communication outlining environmental policies for so-called "blue economy" sectors. The term captures not just the shipping sector but also fisheries, aquaculture, coastal tourism, port activities, and shipbuilding.

The communication aims to align these waterborne sectors with the EU's pledges to get on track for net-zero GHGs by 2050 under the European Green Deal and the 2015 Paris Agreement. In it, the EC promised to slash maritime emissions by 90% by 2050, but it didn't define the geographic area targeted by the cuts.

The EC plans to reduce shipping sulfur emissions in the Mediterranean and Black seas by imposing controls similar to those in Sulfur Emission Control Areas (SECAs) in the North and Baltic seas (0.1% sulfur). This is stricter than the current global limit set by the IMO of 0.5% sulfur.

If the Mediterranean were to be designated as a SECA, sulfur and nitrous oxide emissions produced by international shipping could be cut by 80% and 20%, respectively, by 2030, the EC said in the communication.

But according to IHS Markit Executive Director and Head of Europe/CIS Refining Research Hédi Grati, the EU must secure agreements for areas beyond EU states' Exclusive Economic Zones, for example with non-EU states with a Mediterranean or Black Sea coast, or else it will wind up with partial SECAs. Whether it can do this remains to be seen.

Targeting shipping emissions, the EC might also extend fuel excise duties and requirements for shipping operators to buy allowances under the EU Emission Trading System (ETS) covering the fuel used by international ships. Proposals for revisions of the ETS are expected to be announced on 14 July.

The EC has long mulled including shipping emissions in the ETS. The EC commissioned a 2009 study and a 2013 impact assessment weighing up the option, but the studies convinced it to wait for an IMO-led system.

The current EU executive has dusted off the proposal. "The new Von Der Leyen Commission committed in 2019 through the European Green Deal to include shipping in the ETS. The EC in fact said in 2002 that it would regulate shipping emissions if no action was taken in the IMO by 2003, so action through the ETS is welcome, if a little overdue," Delphine Gozillon, policy officer for sustainable shipping with European NGO group Transport & Environment (T&E), told IHS Markit.

Hazel Brasington, a consultant for London-headquartered law firm Ashurst, sees the EU move as a bold step. "I think the policy driver in the EU is the very strong environmental policy that they are producing, which is very ambitious and far-reaching in some ways. The EU has tried consciously to get ahead of the international bodies that so far have been entrusted with these issues because they perceive that the progress is not fast enough," she said.

Reach into international waters

Globally, shipping emissions regulations in international waters, the EU's waters, and the national waters of states like China target the sulfur levels of fuel, and there are slight differences between limits in national and international waters. Emissions in international waters are less restricted.

About 30% of total shipping emissions fall directly within national waters, and can thus be regulated by states, while the emissions that occur when ships voyage between two countries are usually the responsibility of the IMO.

For these ships, the IMO is working to finalize a Market-Based-Measure (MBM), a global financial incentive such as an emissions trading system to drive uptake of low-emissions technologies. Existing IMO rules under the International Convention for the Prevention of Pollution from Ships (MARPOL) imposed a 0.5% limit on sulfur in fuel for all ships starting January 2020.

If the EU goes ahead with a sulfur price for ships this year, it could conflict with the IMO's international regime, for example where both IMO and EU rules apply to ships in international waters. "The EU will have jurisdiction within its waters, that's not objectionable, but when it comes to the EU ETS, there have been many questions raised as to whether it's an extra-jurisdictional grab. The EU will regard any voyage from, for example, a French territory in the Pacific to the EU as an EU domestic equivalent voyage because it's from a French protectorate," said Brasington.

Such a regime may mean higher costs for European shipping companies and consumers. "It is a very invasive way to approach the regulation of an international industry, and that's certainly caused some disquiet. While the frustration with the IMO has been very apparent from the EU, it is a global industry, and the shipping industry has to move in a global way or we end up with a very broken-up compliance world where there's a whole lot of extra compliance costs within the EU, which probably get passed back to the freight user," said Brasington.

A T&E study, however, found that EU shipping companies can absorb compliance costs because of their ability to pass on costs to consumers.

A further issue for expanding the ETS that the EC noted during a public consultation in 2012 is that applying a carbon price to voyages outside the EU could lead to a breakdown in negotiations over the global IMO MBM. "Extension of Europe's ETS to shipping has been on the cards for a while, but is highly contested as many market participants claim that shipping governance should remain under the IMO, rather than have different regions move at different speeds," according to Grati.

And an EU ETS expansion to shipping risks failing at the first hurdle. "It is not entirely clear whether all European state leaders are aligned on this matter, and at what level of IMO ambition the EU will be satisfied in order not to include shipping in its ETS," said Grati.

Gozillon agreed that the ETS expansion raises difficult questions. "The biggest issue at the moment is geographical scope: whether the maritime ETS will include all shipping emissions related to European ports or just emissions between European ports. From the environmental point of view, the largest scope is clearly preferable. No sector linked to the European economy should be allowed to pollute for free, and a limited, intra-EU scope would exempt 60% of shipping emissions to and from European ports," she said.

If the EU chooses to price carbon for ships traveling between EU ports, then poorer ship operators will "carry the burden of decarbonization for transcontinental shipping," she added.

Not just the EU, but certain European shipping operators want an MBM for levelling the playing field and spurring fuel infrastructure investments. Some have argued for the EU to move to an expanded ETS in the absence of a global MBM by 2025, suggesting the ETS applies to intra-EU voyages in the meantime.

Racing ahead of the EU, the Marshall Islands and the Solomon Islands have already proposed tax of $100 per mt of carbon dioxide emissions from ships, and plan to use the revenue to fund climate adaptation measures.

Challenges for zero-pollution ship fuel

The EU also faces a challenge to its "zero-pollution" goal in the lack of technologies available.

The port state control (PSC) regime, put in place through international conventions brokered by the IMO, can detain ships carrying non-compliant fuels under the 2020 MARPOL sulfur limit.

IMO rules have proven effective at preventing the use of high-sulfur fuel, said Brasington, but they depend on ships using scrubbers on emissions stacks, and then dumping acidic washwater into the ocean.

The nonprofit International Council on Clean Transportation (ICCT) has recommended that scrubbers be banned on new ships in favor of low-sulfur fuels that can achieve similar emissions goals.

Tackling this problem, the EC announced it would set a deadline of 2030 for the bloc to build zero-emissions ships that are engineered to use new fuels under its December 2020 communication on a sustainable and smart mobility strategy. "The right technologies do not exist to make net-zero vessels, or do not exist in a commercially or safety proven example. There are many, many technical and risk hurdles to accomplish," Brasington noted.

Ensuring zero-emissions ships are on the market by 2030 is a must if the EU as a whole is to reach net-zero, said Grati. "Besides net-zero vessels, the fuels will have to be available of course, and the FuelEU Maritime publication has been delayed on a few occasions, [which is] now understood to be finalized in July," said Grati.

The EU communication promotes dockside electrification, and use of biofuel and hydrogen blends solutions. To encourage the supply of low-carbon fuels, the EU's FuelEU Maritime initiative would boost the production of such fuels, and the TEN-T Regulation and the Alternative Fuels Infrastructure Directives would be revised to fund and spur the construction of refueling infrastructure.

Likewise, the World Bank and the International Energy Agency have highlighted the potential to use zero-emissions hydrogen and ammonia fuels in shipping. "Green hydrogen and green ammonia produced from hydrogen count among the happy few sustainable and scalable fuels for maritime" transportation, Gozillon said.

Hydrogen as a ship fuel has been demonstrated using small passenger ships, for example powered by fuel cells using compressed hydrogen, since about 2003. Currently, an EU-funded research project is aiming to create two small hydrogen vessels: a hydrogen cargo transport vessel in France and a car ferry in Norway. Operations for the cargo vessel are slated for 2021.

But with any new technology, unforeseen issues are likely to arise. The global switch to low-sulfur fuel under IMO regulations in 2020 resulted in the use of fuel blends that brought a wave of legal claims over fuel quality, damaged ship engines, and lost time, according to maritime insurer UKDC. Brasington cites "quite a lot of private disputes" in the shipping industry going to arbitration as a result of performance issues with blended fuels.

Fuel markets in their early days do not always fulfill high expectations set out for them. A recent T&E study found that biofuels made from certain crops have higher emissions than marine fuel oil over their whole lifecycle and can lead to polluting imports, and the World Bank has raised a similar questions about the lifecycle emissions of LNG as a fuel. "FuelEU Maritime can either give the right impulse for green [shipping] fuels or risk letting the market decide on cheap fossil LNG and scarce biofuels," said Gozillon.

Posted 25 May 2021 by Cristina Brooks, Senior Journalist, Climate and Sustainability