ADVANT Nctm’s Senior Partner, Paolo Montironi, and Berlingieri Law Firm’s Senior Partner, Giorgio Berlingieri, are pleased to announce the integration of their respective firms to strengthen and consolidat…
For years, the European Union has been a leader in protecting the environment and fighting the climate change. In addition to the rules laid down by the IMO[1], the European maritime transport sector has long since been provided with a regulatory framework aimed at reducing its own environmental impact[2].
During 2019, the European Commission (the “Commission”) submitted to the European Parliament the so-called “European Green Deal”, i.e. a set of initiatives and proposals aimed to make Europe climate neutral by 2050[3]. So, on 14 July 2021, in the context of the Green Deal, the Commission, adopted the so-called “Fit for 55 climate Package” (“Fit for 55”)[4], i.e. a set of proposals guiding EU policies on climate, energy, transport and taxation so as to reduce net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels. It is a package of proposals covering all sectors of economy and aiming to change and accelerate Europe’s decarbonisation trajectory, mainly through economic and fiscal leverage.
In particular, four of the above proposals directly concern shipping (both at international and intra-European level).
a. Inclusion of maritime transport in the so-called “Emissions Trading System” (“EU-ETS” or “ETS System”), the EU emissions trading system
The ETS System or EU emissions trading system was introduced by Directive 2003/87/EC[5] and is governed by the so-called “cap&trade” principle, whereby the EU sets a limit on the emission of certain greenhouse gases that installations can release into the atmosphere - for example, CO2. In this respect, Fit for 55 proposes to extend the application of the EU-ETS to maritime transport and, in particular, to ships with a gross tonnage of 5,000 gt or more, of any flag.
Hence, according to this proposal, shipping companies should buy from the EU emission allowances in order to use them to cover their own share of emissions for the year in question (with the possibility of selling them to other interested parties) or to use them in the following year. Essentially, said allowances should be purchased by shipowners (i) in respect of all their emissions generated during voyages between ports of the European Economic Area (“EEA”) and stops in the ports of the EEA and (ii) for half of the emissions generated during international voyages starting from or ending in ports of the EEA.
So, the flag authority will monitor the shipping companies for which it is responsible, and non-compliant companies should receive a fine for each tonne of CO2 equivalent for which they fail to submit coverage allowances, to be added to the cost of the allowances purchased.
Finally, the proposal provides that ships should purchase the above-mentioned allowances in accordance with a specific time frame for 20% of their emissions starting from 2023, increasing annually until full coverage in 2026.
b. Imposition of greenhouse gases intensity requirements on marine fuels through the so-called “FuelEu Maritime” initiative
The FuelEU Maritime proposal on sustainable fuels for maritime transport aims, instead, at introducing new obligations for ships[6] arriving in or departing from EU ports - irrespective of their flag state - by limiting the greenhouse gases content of the energy they use and progressively revising such limits downwards.
Moreover, the proposal, takes as a reference 100 % of the GHG intensity of the energy used in voyages between ports in the EEA and 50 % of the GHG intensity of the energy used in international voyages starting from or ending in ports in the EEA and specifies that fuels used by ships must decrease their greenhouse gases intensity by a certain percentage compared to 2020 (taken as a reference) as from 2025, increasing every five years until 2050.
c. Revision of the so-called “Energy Taxation Directive” (“ETD”) proposing the removal of tax exemptions provided for fossil fuels used in maritime transport sector
It is a proposed revision of the ETD[7] that would result in the elimination of the exemption from the payment of excise duties on marine fuels currently provided for by Article 14 of the ETD, an exemption which, at present, reflects the international practice of allowing ships to refuel in ports on a duty-free basis, in order to facilitate as much as possible the free movement of goods. The proposal under examination will, therefore, concern all fuels sold in the EEA, including fuels used for voyages within the EEA and electricity supplied to ships in port.
In practical terms, this proposal foresees that - albeit with a transitional period of 10 years - heavy fuel, marine gas oil, LNG and LPG will be taxed from 1 January 2023 (the latter two with reduced rates until 2033). Member States will then have the possibility to extend taxes to bunkers sold for international journeys.
d. Adoption of a new regulation for the deployment of alternative fuels infrastructure (the so-called “Alternative Fuels Infrastructure Deployment” or “AFID”).
It is the proposal for a regulation on alternative fuels infrastructure[8], which aims to ensure the deployment in the EU of infrastructures that are essential for recharging and refuelling greener means of transport, including ships, in order to provide the long-term security necessary for investments in alternative fuels technology and land and sea transportation means that use such fuels.
The proposal includes the infrastructure for LNG distribution in ports and the infrastructure for the onshore power supply to ships while at berth (the so called “cold-ironing”). Moreover, it specifies that ports shall supply container ships and passenger ships with power from the shore-side electrical system and the so-called “Core” ports will have to equip themselves of adequate points of LNG refuelling for ships. All according to a time-line that sees 1 January 2025 as the date by which a sufficient number of LNG refuelling points shall be available, and 1 January 2030 as the date from which an established minimum supply of electricity from the shore-side system shall be available.
According to the initial estimates of specific industry studies, both the ETS proposal and the FuelEU Maritime initiative would impact slightly less than 70% of the annual CO2 emissions due to EEA-related maritime transport, including the portions of international voyages to and from the ports of the EEA itself.
With regard to the inclusion of the maritime transport sector in the EU-ETS, if, on the one hand, the allowances regime aims at a reduction of emissions through the economic leverage - according to “the polluter pays” principle - combined with a progressive decrease of available allowances (which will consequently increase in price), on the other hand, there is the issue that shipping companies, due to a technological and infrastructural framework beyond their control[9], might be unable to change their own energy plan and instead be subject to the mere payment of allowances. This would lead to a significant increase in transport costs, without any real benefit in terms of reducing emissions - at least in the short term. Therefore, it would be very difficult for shipowners to afford the investments needed for a real energy transition, with a negative impact on the competitiveness of said companies and other European maritime and port operators, such as port terminals.
On the contrary, the FuelEU Maritime initiative could, in theory, be favourable to the maritime transport sector, insofar as it aims to encourage the adoption of alternative fuels to those derived from oil by imposing that fleets use gradually increasing percentages of low or zero carbon energy.
Yet, the Commission’s proposed timetable, which assumes that the development of low-carbon fuels is currently unforeseeable, gives rise to some concern[10]. Indeed, if on the one hand incentives can be a valid support to speed up the process, on the other hand, the obligation to reach pre-established quotas of “alternative fuels” in the absence of technological and supply certainty would once again be “punitive” towards a sector that would be basically penalised for “faults” that at times are not its own, with further economic burdens to the detriment of the development and renewal of fleets.
With regard to the last two proposals, first of all, it should be noted that the envisaged revision of the ETD would lead to the elimination of the exemption from payment of excise duties on marine fuels (which is still provided for), thus opening the way to the introduction of excise duties on marine fuels, with potentially serious repercussions on the costs of shipping companies and therefore of maritime transport as a whole. Instead, it would be appropriate to extend the exemption to include LNG, in line with the objectives of the EU Fuel Maritime initiative and AFID.
Lastly, the initiative aimed at adopting the AFID Regulation could have positive implications for the shipping sector, given that the availability of an adequate distribution network for alternative fuels is a precursor to the effective - albeit progressive - de-carbonization of shipping.
In this respect - even assuming that such a distribution network is closely linked to the choice of alternative fuels that will become available on the market and that therefore a careful reflection and planning will be required - it would be crucial that the implementation of the LNG distribution network, despite being a transitional fuel, be accelerated as much as possible. This would allow ships to use such fuel on a large scale as soon as possible. All this would be possible through an appropriate and efficient interface between shore-side electricity supply facilities for ships at berth in ports and the installation of “cold ironing” facilities on board. Likewise, it should be possible to compare the cost of shore-side electricity with that of self-generated electricity on board the ship, which is currently significantly lower.
The framework described above basically refers to possible solutions which, before being adopted, will have to be discussed with the European Parliament and the Member States, but which, in any case, could mark the start of more “aggressive” policies on emissions and the de-carbonization of the maritime transports sector. This, as we have seen, also through the imposition of unilateral measures on international shipping that are in potential conflict with the measures adopted by the IMO, which is the regulatory body responsible for international maritime traffic.
There is no doubt that the real “battle” will be played out in Brussels, where the competent authorities at national level, as well as the stakeholders concerned, will most likely try to explain to Europe that initiatives such as those outlined here, which are more than worthy of support in their aims, must in any case also take into account the interests and needs of our sector. This, in order to avoid the adoption of solutions that entail the risk of triggering a process that is extremely detrimental to the maritime-port sector in our country. All the above, with the possible consequent alteration of the level of competition between transport companies operating in and with Europe and the other global companies which, by not calling European ports, would escape the new and more restrictive rules, thereby risking a significant reduction in traffic flows and port activities on the European continent and, in particular, in our Country.
This article is for information purposes only and is not, and cannot be intended as, a professional opinion on the topics dealt with. For further information please contact Simone Gaggero, partner ADVANT Nctm, and Luca Brandimarte, Assarmatori.
[1] First of all, one should consider, the adoption of the International Convention for the Prevention of Pollution from Ships (MARPOL) of 1973 which: (i) in 1997, was supplemented by Annex VI dedicated to the prevention of air pollution from ships; (ii) in 2011, introduced a chapter concerning mandatory technical and operational measures to improve energy efficiency, aimed at reducing greenhouse gases emissions from ships. Further measures, just as an example, were subsequently introduced by the IMO - starting from 2013 – in the so-called “Energy Efficiency Design Index” (EEDI) for all new ships and the so-called “Ship Energy Efficiency Management Plan” (SEEMP) for all ships in operation. Starting in 2023, new measures will be introduced that: (a) will require all existing ships to calculate their energy efficiency index (EEXI - “Energy Efficiency Existing Ship Index”), which shall comply with a specific baseline identified by IMO itself according to the type of ship, so that if the ship does not meet the requirements, specific technical solutions shall be adopted to improve its energy efficiency and bring the EEXI back to the expected value; (b) will require ships to provide their Carbon Intensity Indicator (CII) and CII rating on an annual basis. All this in order to achieve, by 2030, a reduction of at least 40% in carbon intensity and, by 2050, a reduction of at least 70% in carbon intensity and 50% in the absolute value of greenhouse gas emissions, with the stated aim of “zero emissions as soon as possible, by the end of this century”.
[2] Other examples include, by way of example, action in the fuel and ships dismantling sectors. Indeed, since 1 January 2010, all ships, of all flags, docked in European Union ports must use fuels with a sulphur content not exceeding 0.1% and, since 31 December 2014, Regulation (EU) 1257/2013 on ship recycling has been in force, which applies to all ships of 500 gross tonnage or more, flying the flag of an EU Member State and to ships flying the flag of third-party countries calling at an European Union port.
[3] See European Commission Communication of 11.12.2019, COM(2019) 640 final.
[4] See European Commission Communication of 14.07.2021, COM(2021) 550 final, entitled: “Fit for 55: delivering the EU’s 2030 Climate Target on the way to climate neutrality”.
[5] Subsequently amended by Directive (EU) 2018/410.
[6] Still with a gross tonnage of 5,000 gt or more.
[7] See Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity.
[8] All with a view to improving the provisions already laid down in Directive (EU) 2014/94 on the deployment of alternative fuels infrastructure.
[9] Indeed, the ship is only the user of an alternative fuel that must first of all exist and be produced and distributed.
[10] This is based on the assumption that the least carbon-intensive energy sources would currently consist of LNG only, which allows a drastic reduction in sulphur and nitrogen oxides and particulates emissions, but has also a significant effect, albeit more limited - until 20%, if particular conditions are observed - on the CO2 emissions. Indeed, in practice, there are currently no “zero carbon” energy sources available for ships and industry studies predict that there will not be any for several years.
