EU regulators have brought greenhouse gas (GHG) emissions from shipping within the scope of its legally binding carbon market, in one of the most significant upgrades since its inception.
So how did we get here? Maritime transport provides an essential facilitator of the global economy, allowing an estimated 11 billion tonnes of goods to be distributed around the world each year in an energy-efficient way.
However, carbon dioxide emissions from global shipping stand at well over 1 billion tonnes of CO2 per year, or approximately 3% of global emissions, and the international nature and governance of shipping means those emissions fall outside the scope of national emissions accounting processes under the Paris Agreement.
With this in mind, countries agreed under the United Nations Framework Convention on Climate Change (UNFCCC) to address shipping emissions through the UN’s International Maritime Organization (IMO).
While the IMO has undertaken work including mandatory measures to improve ships’ efficiency and to track and report GHG emissions, the agency has not so far been successful in reducing total emissions from the maritime sector.
In addition, as the global population expands and economies grow, further boosting demand for the transportation of goods, emissions from shipping would be expected to increase without environmental regulation. Projections show that these emissions could grow by up to 130% from 2008 levels by 2050, undermining the objectives of the Paris Agreement, according to the European Commission.
Action needed on shipping emissions
In light of this threat, European regulators felt that the urgency of climate change meant more concrete measures were needed to reduce emissions from shipping, and they wanted to use regulatory tools that have already demonstrated a successful track record.
With this in mind, EU legislators brought CO2 emissions from the shipping sector into the EU Emissions Trading System in January 2024, in one of the most significant upgrades to the system since it began in 2005 (view this visual to see How the EU ETS Works).
The inclusion of maritime emissions follows an expansion of the EU ETS to cover aviation emissions in 2012 – a measure that was controversial at the time. The move prompted an international spat, with some countries warning they would not participate, and a group of countries took further measures including legal challenges at the European Court of Justice, as well as other retaliatory actions.
What is the EU legislation covering shipping emissions?
The move to bring shipping emissions into the EU ETS was essentially done through two pieces of legislation: the EU Monitoring, Reporting and Verification Regulation for maritime transport (MRV Maritime Regulation), which was revised in 2023, and an expansion of the EU ETS Directive to include the maritime sector. The MRV regulation was developed as a first step before the inclusion of shipping emissions in the EU ETS.
Under this revised legislation, emissions from ships are included in the overall EU ETS ‘cap’ which shrinks progressively over time to deliver a predetermined reduction in overall emissions.
The cap represents the total allowable volume of CO2 that can be emitted by covered entities, and this annual cap is translated into allowances – each worth 1 tonne of CO2 equivalent – that companies must surrender every year to match their annual verified emissions. The system is designed as a market-based approach to reducing emissions. Companies can trade the allowances, and this helps to encourage CO2 emissions reductions to take place where the cost is lowest.
In addition to the two main pieces of legislation covering shipping emissions, several implementing and delegated acts have also been agreed that clarify the rules and allow for an efficient inclusion of maritime emissions in the EU ETS. These include elements such as the rules for monitoring GHGs, the submission of aggregated emissions data at company level, the administration of shipping companies by EU member states and verification and accreditation procedures.
What does shipping’s inclusion involve?
The EU ETS requirements will apply to ships of 5,000 gross tonnes deadweight and above entering EU ports, irrespective of the country in which they are registered. Ships above this size have been required to monitor and report their CO2 emissions since January 1, 2018, and nitrous oxide and methane emissions from January 1, 2024.
For the compliance phase, which requires ships to surrender allowances each year, the EU ETS covers CO2 emissions from ships from January 1, 2024 and methane and nitrous oxide emissions from January 1, 2026.
The EU ETS covers 100% of emissions that occur in voyages between two EU ports, as well as CO2 emitted when ships are within EU ports, and 50% of emissions from voyages starting or ending outside the EU.
In terms of geographical scope, the system covers the 27 EU member states as well as non-EU member states Norway and Iceland, which already participate in the EU ETS.
A phased-in approach to compliance
To ensure a smooth transition, a phased-in approach is being used to include shipping emissions in the EU ETS. Under this approach, companies are only required to surrender allowances for a portion of their verified emissions in the first year, with that proportion increasing over three years. During an initial phase-in period, in 2025, ships must surrender allowances covering 40% of their reported emissions. This will increase to 70% in 2026 and 100% from 2027 onwards.
As with the other sectors regulated by the EU ETS, shipping companies that fail to comply with the system must pay a fine of more than Eur100 for every tonne of CO2 emissions for which they have not surrendered an allowance. Moreover, any non-compliant company must also make up the shortfall of allowances in the following year.
Supply of allowances for shipping
There will not be separate carbon allowances for the maritime sector, and therefore shipping companies will need to surrender regular carbon allowances known as “EU Allowances” along with most of the other sectors involved in the EU ETS.
Under the EU ETS rules, shipping companies will not receive any free allocation of EUAs. This is a similar position to electricity generators, most of which must buy enough allowances to ensure they are compliant each year.
Shipping companies will therefore need to understand their CO2 exposure and buy sufficient allowances to meet the annual requirements from 2024 onwards. They can do this by buying EU Allowances in the primary market, consisting of daily auctions providing allowances on a spot delivery basis, or in the secondary market via brokered trades or using derivatives on exchanges, such as futures and options contracts linked to underlying EUAs.
Verification
Just like the other sectors in the EU ETS, shipping companies must employ the services of accredited inspection and certification companies to verify their annual emissions. This means that companies’ assessment of their emissions has been checked and verified by independent third parties before submission to EU authorities. Most of the companies providing these verification services have decades of experience of inspection and certification procedures across multiple sectors.
Compliance and trading strategies
Some of the major shipping companies are likely to develop sophisticated carbon trading desks, adding capabilities to their existing fuel purchasing strategies already in use. This can involve actively participating in the carbon market, developing complex hedging strategies, and taking advantage of attractive pricing developments and arbitrage opportunities that may emerge.
Smaller shipping companies may lack the resources to develop these more advanced trading capabilities and may decide to buy their carbon allowances through third party aggregators or specialist carbon advisory or trading companies.
Outcomes and future developments
The inclusion of shipping emissions in the EU ETS represents a major expansion of the EU’s carbon market and brings in a raft of challenges, not least of which is the complexity of accurately tracking and verifying emissions from non-stationary sources.
The requirement to surrender allowances for 50% of voyages starting or ending in non-EU ports also represents a geographic expansion of the EU carbon market’s coverage that arguably has even greater implications than the inclusion of the aviation sector in 2012.
The phased-in approach also means that demand for EUAs from shipping companies is expected to become more significant in the period from 2024 to 2027.
The full decarbonisation of the shipping industry will involve a long and gradual process, supported by a combination of effective regulation and technological innovation by the private sector.
Industry group, the European Community Shipowners’ Associations (ECSA) has underlined this point.
“At the moment, international shipping is fossil-fuel-captive. Full decarbonisation requires alternative, low-carbon or zero-carbon marine fuels and/or breakthrough propulsion technologies, to become widely available. Close cooperation with our partners in the maritime cluster and supply chain is necessary to ultimately reach this goal,” the ECSA said in a report on climate and sustainability.
The inclusion of maritime emissions in the EU ETS is also complex for other reasons. For example, some shipping companies are concerned that the need to comply with the EU ETS will lead to a significant increase in regulatory oversight of their business operations, potentially increasing transparency over their financial and tax operations that may not be welcome by all participants.
In the long run, the pricing of carbon emissions from ships will increase operational costs for most shipping companies, and in particular those using the most carbon-intensive fuels. This is also likely to send a long-term investment signal for companies to invest in cleaner ships, including more efficient engines, cleaner fuels or even zero-carbon maritime technologies. The move also creates business opportunities for companies providing these cleaner technologies and fuels.
Some studies have calculated that at a carbon price of €90-100/tonne, biofuels can be competitive for up to 5% of all ships. But at a carbon price of above €150/tonne, this share would increase to as high as 75% of all ships. EU carbon prices have traded in a range of roughly €50-100/tonne from 2022 to early 2025.
FuelEU Maritime Regulation
The roll-out of the MRV Maritime Regulation and expansion of the EU ETS to shipping does not exist in a vacuum and EU regulators are also eyeing the development of cleaner fuels through other regulatory frameworks.
For example, the FuelEU Maritime Regulation FuelEU Maritime is a framework which aims to support the decarbonisation of the shipping sector. The regulation entered into force on January 1, 2025 (barring certain articles in the legislation) and will increase the share of renewable and low-carbon fuels in the fuel mix for the shipping industry in the EU.Taken together, these EU rules and regulations are expected to facilitate a long-term shift in the shipping industry toward sustainability. They will achieve this by applying a robust carbon price to maritime CO2 emissions, and this price signal is likely to help drive a shift away from carbon-intensive fuels to cleaner and more sustainable alternatives.
