Demir writes*
The EU Emissions Trading System (EU ETS) is a key policy tool designed to combat climate change by capping greenhouse gas (GHG) emissions and creating a market for trading emission allowances. Established in 2005, the system sets a limit on emissions that decreases annually in line with the EU’s climate targets.
The EU ETS operates on a “cap and trade” principle. Companies are allocated or purchase allowances, each representing the right to emit one tonne of CO₂ equivalent. These allowances can be traded, creating financial incentives for emissions reductions. Companies must monitor their emissions annually and surrender allowances equal to their output or face heavy fines. Over its four phases, the EU ETS has expanded its scope, tightened regulations, and lowered emission caps (European Commission).
In January 2024, the EU ETS expanded to include shipping, i.e., large ships (5,000 gross tons or more) entering EU ports, regardless of their flag (European Commission). Although shipping is often seen as an energy-efficient mode of transport when measured per ton-kilometer, it accounts for 2.9% of global emissions and 3–4% of Europe’s CO₂ emissions.
An IMO GHG Study projects shipping emissions could rise by 130% by 2050 compared to 2008 levels. To address this, the EU ETS includes a phased approach for shipping. By 2025, it will cover 40% of emissions reported in 2024, rising to 70% in 2026 and 100% in 2027. Initially, only CO₂ emissions will be regulated, but methane (CH₄) and nitrous oxide (N₂O) will be added in 2026 (European Commission).
Shipping’s inclusion in the EU ETS presents opportunities to decarbonize the sector. It is expected to encourage investments in carbon-neutral technologies, improve fleet energy efficiency, and promote the adoption of alternative fuels (Adamantidis, 2023). Companies that have already reduced their emissions will gain a competitive edge as early adopters of sustainable practices (Christodoulou & Cullinane).
However, challenges remain. One major concern is the potential for cost pass-through, where shipping companies transfer added costs to customers. This could lead to a modal shift from maritime to land-based transport, particularly in short-sea shipping (Christodoulou & Cullinane). Such a shift might conflict with EU climate goals and undermine transport policy.
The industry is also sensitive to volatile market conditions. High fuel prices, low charter rates, or expensive emission allowances could disrupt maritime services and reduce demand (Christodoulou & Cullinane). Another significant risk is carbon leakage, where companies avoid compliance by using ports outside the EU ETS’s jurisdiction or shifting operations to other regions.
Bottom Line: The EU ETS has expanded to decarbonize shipping. While this move might drive innovation and sustainability, policymakers must address risks like cost pass-through, market conditions, and carbon leakage. A balanced approach will be crucial to ensuring the EU ETS reduces emissions meaningfully without unintended consequences.
* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).
Thank you Demir for your blogpost, the EU Emissions Trading System seems to be a fascinating but complex topic to study, especially because it has all sorts of political implications.
Multiple times the EU claim to “cover” the emissions of GHG from shipping boats, from 40% all the way to 100% in 2027, what does it mean ? Are they referring to projects that have a negative carbon sum, such as planting trees or innovating in greener boats ? Is the money collected from this cap and trade actually going to be allocated to finance activities that would actually counter balance the amount of carbon emitted by these international ships, or are they referring to the loss in activities from such policies ?
I think that the meaning of “covering” the emissions of GHG can influence significantly the public opinion and would change the results of a potential Cost Benefit Analysis made on this topic.