EU ETS

Shipping Companies -what do you need to know about ETS?

The EU ETS is an emissions cap-and-trade system that aims to reduce greenhouse gas (GHG) emissions by setting a limit, or cap, on GHG emissions for certain sectors of the economy.

The EU Emissions Trading System (EU ETS), established in 2005, was expanded to include maritime transport in 2023 with the new rules taking effect from 1 January 2024.   For every ton of reported CO2 emissions, shipping companies operating in the EU must purchase and submit one European Union Allowance (EUA) annually.

Operating in the EU is taken to include not only voyages between two EU ports and time spent in an EU port, but also voyages starting or ending at an EU port. Shipping companies must purchase EUAs to cover:

•         100% of emissions from voyages starting and ending in EU ports.

•         100% of emissions from vessels at berth in EU ports.

•         50% of emissions from voyages which start or end in EU ports.

EUAs can be bought and sold on exchanges like ICE, EEX, and Nasdaq, or through over-the-counter markets.  The required number of EUAs must be bought before a vessel starts a qualifying voyage.  Purchased EUAs are recorded for each owner on the EU registry account (a special account for EU ETS participants).

t the end of each year shipping companies must surrender the appropriate number of EUAs (based on qualifying emissions in the year) to the appropriate authorities i.e. these are deducted from their registry account.

Which vessels are covered under the EU ETS? 

1.       Commercial Ships of 5,000 gross tonnes or more, transporting cargo or passengers, that call at EU ports, regardless of flag or of the owner’s jurisdiction of incorporation. Offshore ships will be included from 1 January 2027.

2.       Ice-Class Ships with ice-class IA, IA Super or equivalent, are granted a dispensation until 31 December 2030 that requires their owners to only surrender a reduced quantity of allowances (5% fewer than their verified emissions).

How to account for EUA?

·            Acquired rights to emit harmful substances (including EUAs) are considered intangible assets.

·             EUAs should be recorded in the accounting books on the date of acquisition at cost price.

·             The acquisition date is when emission rights are recorded on the owner’s EU registry account

·             Subsequentially a shipping company can use either the cost or fair value method to revalue EUA (assets)

·             In financial statements (balance sheet), EUAs are listed separately under intangible assets, regardless of whether they were acquired for internal use or resale.

·             Emissions obligations (liability) are recognised when the liability is incurred (i.e. at the time of the voyage/port call giving rise to the liability). 

·             The liability should be revalued at each accounting reference date and/or at the date of settlement

Other issues to consider

·             Exchange and verification of emissions data

·             Purchasing and recording EUAs for vessels on time charter and settlements in respect of this between the charterer and the owner