MASTER DISSERTATION - Ghent...
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MASTER OF SCIENCE IN MARITIME SCIENCE MASTER DISSERTATION Academic year 2016 – 2017 GREENHOUSE GAS EMISSIONS FROM SHIPPING: TOWARDS AN EMISSIONS TRADING SYSTEM (ETS) IN THE EU Laura Soulliaert Supervisor: Prof. Dr. Frank Maes Assessor: Anemoon Soete Submitted in partial fulfillment of the requirements for the degree of: Master of Science in Maritime Science
Transcript of MASTER DISSERTATION - Ghent...
MASTER OF SCIENCE IN MARITIME SCIENCE
MASTER DISSERTATION
Academic year 2016 – 2017
GREENHOUSE GAS EMISSIONS FROM SHIPPING:
TOWARDS AN EMISSIONS TRADING SYSTEM
(ETS) IN THE EU
Laura Soulliaert
Supervisor: Prof. Dr. Frank Maes
Assessor: Anemoon Soete
Submitted in partial fulfillment of the requirements
for the degree of:
Master of Science in Maritime Science
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Acknowledgements
The opportunity to follow the 'Master of Science in Maritime Science' program at the University of Ghent
made it possible to engage myself into a topic I personally feel connected to. Environmentally-conscious
and sustainable life is a value my parents taught me since I was a kid and supported my choice to write
about the shipping industry as major source of greenhouse gas (GHG) emissions. In this way, I hope, either
directly or indirectly, to find a solution for this current issue and support the global discussion in the area of
climate change.
My dissertation, and by extension my entire education, could not have been completed without the
contribution of certain people. Therefore, I would like to say a few words to express my gratitude.
First of all, I would like to thank my supervisor, Prof. Dr. Frank Maes, and assessor, Anemoon Soete for the
careful supervision, remarks and advice during the writing of my Master's dissertation.
I would also like to express my gratitude to Steve for providing me the linguistic feedback necessary to
perform this work.
My special thanks also go to my girlfriend, Charline Smet, who advised me on my writing style and revised
my paper. Her continuous faith in my ability to write this dissertation encouraged me to never give up.
Last but not least, my sincere and foremost gratitude goes to my parents for giving me the opportunity to
study and their continuous encouragement. During moments of extensive stress, they supported me
wherever they could.
Ghent, August 2017
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Table of Contents
ACKNOWLEDGEMENTS ..........................................................................................................................................I
TABLE OF CONTENTS .......................................................................................................................................... III
LIST OF FIGURES ................................................................................................................................................... VI
LIST OF TABLES ................................................................................................................................................... VII
LIST OF ABBREVIATIONS AND ACRONYMS ............................................................................................... VIII
INTRODUCTION ........................................................................................................................................................ 1
PART I. GOVERNANCE ARCHITECTURE REGULATING GHG EMISSIONS FROM
INTERNATIONAL SHIPPING ................................................................................................................................. 3
1. CLIMATE CHANGE CONTEXT ................................................................................................................................... 3
2. INTERNATIONAL POLICY FRAMEWORK .................................................................................................................. 6
2.1. United Nations Framework Convention on Climate Change ........................................................................ 6
2.1.1. Kyoto Protocol .......................................................................................................................................................... 7
2.1.2. Paris Agreement ....................................................................................................................................................... 8
2.2. International Maritime Organization ............................................................................................................ 8
2.2.1. Reduction of GHG emissions from ships ............................................................................................................... 10
2.2.1.1. Ship Energy Efficiency Measures .................................................................................................................. 10
2.2.1.2. Mandatory Data Collection System for Fuel Oil Consumption of Ships ........................................................ 12
2.2.1.3. Roadmap for reducing GHG emissions from ships ........................................................................................ 13
2.2.2. Prevention of other air pollutants ............................................................................................................................ 14
2.2.2.1. Global sulphur cap.......................................................................................................................................... 15
2.2.2.2. Control of diesel engine NOx emissions ........................................................................................................ 16
3. REGIONAL POLICY FRAMEWORK – THE EU ......................................................................................................... 17
4. MARKET BASED MEASURES FOR GLOBAL AND REGIONAL POLICY ACTIONS .......................................................... 20
4.1. IMO policy options ...................................................................................................................................... 21
4.2. EU policy options ........................................................................................................................................ 26
5. EVALUATION ........................................................................................................................................................ 29
PART II. THE EUROPEAN UNION EMISSIONS TRADING SYSTEM (EU ETS) ......................................... 30
1. CONTEXT .............................................................................................................................................................. 30
1.1. EU climate policy ........................................................................................................................................ 30
1.2. History ......................................................................................................................................................... 31
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2. THE CONCEPT OF A CAP-AND-TRADE MECHANISM ................................................................................................ 32
3. GENERAL UNDERSTANDING OF THE EU ETS ........................................................................................................ 34
3.1. Purpose and scope ....................................................................................................................................... 34
3.2. Development in phases ................................................................................................................................ 35
3.3. Why cap-and-trade ...................................................................................................................................... 37
3.4. Cap setting ................................................................................................................................................... 38
3.4.1. Fixed installation cap .............................................................................................................................................. 39
3.4.2. Aviation cap............................................................................................................................................................ 40
3.5. Allocation .................................................................................................................................................... 41
3.5.1. Auctioning .............................................................................................................................................................. 42
3.5.2. Free allocation ........................................................................................................................................................ 44
3.5.3. Allocation to aviation ............................................................................................................................................. 46
3.6. Compliance and enforcement ...................................................................................................................... 46
3.6.1. Compliance cycle ................................................................................................................................................... 46
3.6.2. Surrendering allowances ......................................................................................................................................... 48
3.6.2.1. Use of international credits ............................................................................................................................. 49
3.6.3. Non-compliance...................................................................................................................................................... 51
4. EVALUATION OF EU ETS ..................................................................................................................................... 52
4.1. Achievements and shortcomings .................................................................................................................. 52
4.2. Global trends in emissions trading .............................................................................................................. 54
5. AVIATION ............................................................................................................................................................. 57
5.1. Context ......................................................................................................................................................... 57
5.2. Aviation within the EU ETS ......................................................................................................................... 58
5.2.1. CJEU’s ruling in Case C-366/10 ............................................................................................................................ 58
5.2.1.1. Unilateral action outside the ICAO ................................................................................................................ 60
5.2.1.2. Extraterritorial scope of the EU ETS .............................................................................................................. 61
5.2.1.3. Concluding remarks ....................................................................................................................................... 63
5.2.2. Current scope of application ................................................................................................................................... 64
5.3. Conclusion ................................................................................................................................................... 65
PART III. SHIPPING WITHIN THE EU ETS ....................................................................................................... 67
1. POLICY CHALLENGES ........................................................................................................................................... 67
2. COMPATIBILITY OF AN EU METS WITH INTERNATIONAL LAW ............................................................................ 71
2.1. Division of jurisdiction ................................................................................................................................ 72
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2.1.1. Coastal State Jurisdiction ........................................................................................................................................ 74
2.1.2. Port Sate Jurisdiction .............................................................................................................................................. 76
2.1.3. Flag State Jurisdiction............................................................................................................................................. 77
2.2. Design options of an EU METS and legal constraints ................................................................................ 78
2.2.1. Jurisdiction for emissions in the territorial sea of EU Member States .................................................................... 78
2.2.2. Jurisdiction for emissions from EU ships ............................................................................................................... 79
2.2.3. Jurisdiction for extra-territorial emissions from all ships ....................................................................................... 79
3. FINDINGS .............................................................................................................................................................. 82
CONCLUSION........................................................................................................................................................... 84
BIBLIOGRAPHY ...................................................................................................................................................... 87
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List of Figures
Figure 1 Evolution of cap setting ................................................................................................................ 41
Figure 2 Compliance cycle .......................................................................................................................... 47
Figure 3 Global Trends in Emissions Trading ............................................................................................ 55
Figure 4 Maritime zones .............................................................................................................................. 73
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List of Tables
Table 1 Summary of MBM proposals ......................................................................................................... 23
Table 2 Summary assessment of market-based policy options ................................................................... 26
Table 3 Greenhouse gases and sectors covered by the EU ETS ................................................................. 34
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List of Abbreviations and Acronyms
ATA Air Transport Association of America
BAU Business-as-usual
CBDR Common but differentiated responsibilities
CDM Clean Development Mechanism
CH4 Methane
CJEU Court of Justice of the European Union
CO2 Carbon dioxide
CO2e CO2 or equivalent
COP Conference of the Parties
ECA Emission Control Area
EEDI Ship Energy Efficiency Design Index
EEZ Exclusive Economic Zone
ENVI Committee on the Environment, Public Health and Food Safety
EU European Union
EUA European Union Allowance
EUAA EU aviation allowance
GHG Greenhouse gas
GT Gross tonnage
HFC Hydrofluorocarbon
ICAP International Carbon Action Partnership
IMCO Inter-Governmental Maritime Consultative Organization
IMO International Maritime Organization
IPCC Intergovernmental Panel on Climate Change
JI Joint Implementation
LRF Linear Reduction Factor
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MARPOL International Convention for the prevention of Pollution from Ships
MEPC Marine Environment Protection Committee
METS Maritime Emissions Trading System
MRV Monitoring, Reporting and Verification
NAP National Allocation Plan
nm nautical mile
NMFT No more favourable treatment
NOx Nitrogen oxide
N2O Nitrous oxide
PFC Perfluorocarbon
PM Particulate Matter
SBSTA Subsidiary Body for Scientific and Technological Advice
SEEMP Ship Energy Efficiency Management Plan
SF6 Sulphur hexafluoride
SOx Sulphur oxide
UN United Nations
UNCLOS United Nations Convention on the Law of the Sea
UNFCCC United Nations Framework Convention on Climate Change
VOC volatile organic compound
% m/m Mass Percent
x
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Introduction
The international shipping industry carries around 90% of world trade and is, according to the United
Nations (UN), the most cost-effective way to move goods and raw materials en masse around the world.1
However, with growing trade volumes, the maritime transport sector has become a major source of
greenhouse gas (GHG) emissions that cause global climate change. According to the third greenhouse gas
study by the International Maritime Organization (IMO), total GHG emissions from shipping reached 961
million tons in 2012, accounting for about 2.5% of the global emissions volume.2
GHG emissions are the largest contributors to climate change and have therefore received considerable
attention from the international community aiming to find solutions to effectively reduce these emissions
on a global scale.3 However, it is only recently that the issue concerning the reduction of GHG emissions
from international shipping has received increased attention. Attempts have been made to reduce these
emissions on the international level, but it is expected that despite the measures that have been taken, GHG
emissions will continue to increase by 50-250% during the period to 2050.4
The European Union has also contributed towards the search for solutions to reduce GHG emissions from
this sector. The EU is one of the most important players in the efforts to combat global warming. It has its
own climate policy which acknowledges that emissions from shipping require more regulation. One of the
EU's most important tools in combating global warming is the European Union Emissions Trading System
(EU ETS). The EU ETS is a market-based mechanism to reduce greenhouse gases, but the maritime sector
is not (yet) covered by the EU ETS. At the beginning of this year, however, the European Parliament
proposed to implement the sector in the EU ETS, particularly since the IMO is not doing more to regulate
emissions from shipping.
1UN-Business Action Hub, “IMO”. https://business.un.org/en/entities/13. (accessed 07/07/17); International shipping
is defined as shipping between ports of different countries, as opposed to domestic shipping. International shipping
excludes military and fishing vessels. (SMITH, T. W. P. et al., Third IMO GHG Study 2014. 2014, International
Maritime Organization (IMO), London, UK) 2 SMITH, T. W. P. et al., Third IMO GHG Study 2014. 2014, International Maritime Organization (IMO), London,
UK, 1. (Hereinafter: Third IMO GHG Study 2014)
3 Y. SHI, “Reducing greenhouse gas emissions from international shipping: Is it time to consider market-based
measures?”, Marine Policy 2016, vol. 64, (123)123. 4 Third IMO GHG Study 2014, Supra note 2, 20.
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In this master’s dissertation, I will investigate the extent to which the EU ETS could contribute towards
reducing emissions from shipping. My research question is therefore: ‘is the EU ETS a just solution to
reduce GHG emissions from international shipping?’
In view of the proposal from the European Parliament and the fact that the EU ETS is one of the largest and
most widely discussed of all policy tools used to take action in the area of the climate, I have decided to
investigate the EU ETS as a possible tool for reducing emissions from shipping, and other possible (regional)
tools will be left outside the scope of this dissertation.
This thesis consists of three parts. In Part I, I will discuss the already existing regulations at international
and European level concerning greenhouse gases from ships, and whether these are effective in the light of
climate change.
This is followed in part II by an extensive explanation of the functioning of the EU ETS, together with a
brief evaluation of the system. The EU has included the aviation sector in the EU ETS since 2012, and in
view of a number of similarities with shipping, this sector will therefore be considered in more detail.
Finally, in part III, using the aviation sector as a starting point, I will consider whether it is possible from a
legal point of view to include shipping in the EU ETS. For this analysis, I will focus on the reconcilability
with international law. Thereby I will provide an overview of some of the sticking points and detrimental
aspects associated with a regional system. This will be followed by conclusions on how a global system
could overcome the challenges faced by a regional ETS.
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PART I. Governance architecture regulating GHG emissions from
international shipping
This chapter looks at the governance architecture that is currently in place to regulate GHG emissions from
international shipping. The international policy framework and the policy framework of the EU will be
discussed. In the first section, a short explanation will be given about the problem of greenhouse gases and
how these gases contribute to climate change.
1. Climate change context
In order to fully understand the issue concerning GHGs from shipping, it is important to know how these
gases contribute to global warming and climate change.
Solar energy (heat from the sun), arrives in the earth’s atmosphere as short wavelength radiation. About
30% is reflected out to space by the earth’s surface (from snow, ice covered areas and other reflective
surfaces) and atmosphere (clouds). However, about 70% of the incoming solar radiation is absorbed by the
oceans, the land and the atmosphere, warming the planet. As the earth’s surface heats up, it starts to emit
long wavelength, infra-red radiation back into the atmosphere. Greenhouse gases act like a blanket,
absorbing this infra-red radiation and preventing it from escaping back into space. The net effect is the
gradual heating of the Earth's atmosphere and surface, a process known as global warming.5
The concentration of greenhouse gases has significantly increased due to human activities and this appears
to be disturbing the natural balance between incoming and outgoing radiative energy. According to scientific
research results provided by the Intergovernmental Panel on Climate Change (IPCC), limiting global
warming to less than 2°C above pre-industrial temperatures should considerably reduce the risk of triggering
accelerated or irreversible changes in the climate system as well as large-scale adverse impacts.6 This
scientific evidence is widely accepted and measures are being taken on a global scale aiming, among other
things, to reduce GHG emissions to prevent this 2°C increase.
5 Eurostat, “Greenhouse gas emission statistics”. http://ec.europa.eu/eurostat/statistics-
explained/index.php/Greenhouse_gas_emission_statistics. (accessed 31/07/17); M. LALLANILA, “What is the
Greenhouse Effect?”, Livescience 12 April 2016. https://www.livescience.com/37743-greenhouse-effect.html. 6 See: R.K. PACHAURI and L.A. MEYER (eds.), Climate Change 2014: Synthesis Report. Contribution of Working
Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change, IPCC, 2014,
151 p. https://www.ipcc.ch/pdf/assessment-report/ar5/syr/SYR_AR5_FINAL_full_wcover.pdf; M. CAMES et al.,
Emission Reduction Targets for International Aviation and Shipping, Study for the ENVI Committee, European
Parliament, November 2015, 10, as available on http://www.europarl.europa.eu/committees/en/supporting-analyses-
search.html.
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The largest source of anthropogenic (man-made) GHG emissions is from burning fossil fuels for electricity,
heat, and transportation.
There are seven main types of greenhouse gases, which are listed in Annex A of the Kyoto Protocol to the
United Nations Framework Convention on Climate Change (UNFCCC) (referred to below as the Kyoto
Protocol). They are: Carbon dioxide (CO2), Methane (CH4), Nitrous oxide (N2O), Hydrofluorocarbons
(HFCs), Perfluorocarbons (PFCs), Sulphur hexafluoride (SF6) and Nitrogen trifluoride (NF3).7 GHGs from
shipping mainly comprise CH4, N2O and CO2, which is formed from the combustion of the carbon in the
fuel used for propulsion and from energy and heat production on ships.8 Of all GHGs, Carbon dioxide is the
most significant, because of its abundance, its atmospheric lifetime and its associated warming ability that
changes the amount of heat energy trapped within the atmosphere. In addition, ships emit other gases with
climate impacts, such as black carbon, which has a warming potential and sulphur oxide (SOx), which has
a cooling effect.9
Several business-as-usual (BAU) scenarios project that, depending on future economic and energy
efficiency developments, maritime CO2 emissions will continue to grow by 50% to 250% during the period
to 2050.10 This is mainly due to the rising demand for shipping and the falling emissions from other sectors.11
Other harmful emissions, such as NO2 and SO2, have increased to 13% and 12% of global emission levels,
respectively.12
Discussion of the environmental impacts from international shipping has traditionally not focused on
climate change. According to Gilbert and Bows (2012), the reasons are: more obvious local pollutants such
as NOx and SOx, its omission from national inventories under the Kyoto Protocol, its importance in
globalization and its reputation as the most energy-efficient mode of freight transport.13
7 Annex A, Kyoto Protocol to the United Nations Framework Convention on Climate Change, Kyoto, 11 December
1997, United Nations Treaty Series no. 2303, entered into force on 16 February 2005; The Doha amendment of 2012
to the Kyoto Protocol, which adds Nitrogen trifluoride (NF3) to the list didn’t enter into force yet. (Doha
Amendment to the Kyoto Protocol, Doha, 8 December 2012, C.N.718.2012.TREATIES-XXVII.7.c (Depositary
Notification), as available on https://treaties.un.org/Pages/CNs.aspx?cnTab=tab1. (accessed 07/07/17)) 8 K. SALO et al., “Emissions to the Air” in K. ANDERSSON et al. (eds.), Shipping and the Environment: Improving
Environmental Performance in Marine Transportation, Springer-Verlag Berlin Heidelberg, 2016, DOI 10.1007/978-
3-662-49045-7_1, (169)180. (eBook) 9 L. STYHRE et al., “Greenhouse gas emissions from ships in ports – case studies in four continents”,
Transportation Research Part D 2017, vol. 54, (212)213. 10 Third IMO GHG Study 2014, Supra note 2, 20. 11 N. REHMATULLA, J. CALLEYA & T. SMITH, “The implementation of technical energy efficiency and CO2
emission reduction measures in shipping”, Ocean Engineering 2017, Vol. 139, (184)184. 12 D. SHENG et al., “Modeling the effects of unilateral and uniform emission regulations under shipping company
and port competition”, Transportation Research Part E 2017, Vol. 1010, (99)99. 13 P. GILBERT, A. BOWS, “Exploring the scope for complementary sub-global policy to mitigate CO2 from
shipping”, Energy Policy 2012, vol. 50, (613)613.
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Despite the substantial and increasing contribution of GHG emissions from international shipping and the
related adverse impacts on global climate change, the sector was left out of the Paris Climate Agreement.14
This Agreement is a legally binding global climate deal within the framework of UNFCCC, which sets out
a global action plan to avoid dangerous climate change by limiting global warming to well below 2°C above
pre-industrial levels.15 The Kyoto Protocol also does not regulate emissions from international shipping.
Instead, the control of emissions from international shipping is left to the designated UN body, namely the
IMO.16
An increase of no more than 2°C in the global average temperature, as agreed in the Paris Agreement, is
becoming more and more difficult to achieve, because global action is slow and all GHG emitting sectors
need to decarbonize to a very large extent within only a few decades.17 If the shipping sector wants to
contribute on a par with other sectors towards achieving the below 2°C objective, it must reduce its
emissions by at least 63% in 2050 compared to its 2005 emissions.18
According to Gilbert and Bows (2012), the rate of CO2 reduction required to achieve the 2°C reduction
target, together with the complex nature of the shipping sector, suggest the need to review the existing policy
strategies and consider alternative policies that could be urgently implemented.19 In the following section I
will be examining the existing policy strategies.
14 Paris Agreement, Paris, 12 December 2015, United Nations Treaty Collection, entered into force 4 November
2016; N. REHMATULLA, J. CALLEYA & T. SMITH, “The implementation of technical energy efficiency and
CO2 emission reduction measures in shipping”, Ocean Engineering, 2017, Vol. 139, (184)184. 15 European Commission, “Paris Agreement”. https://ec.europa.eu/clima/policies/international/negotiations/paris_en.
(accessed 07/07/17) 16 S. KOESLER, et al., “Course set for a cap? A case study among ship operators on a maritime ETS”, Transport
Policy 2015, vol. 37, (20)20. 17 L. STYHRE et al., “Greenhouse gas emissions from ships in ports – case studies in four continents”,
Transportation Research Part D 2017, vol. 54, (212)212. 18 M. CAMES et al., Emission Reduction Targets for International Aviation and Shipping, Study for the ENVI
Committee, European Parliament, November 2015, 40, as available on
http://www.europarl.europa.eu/committees/en/supporting-analyses-search.html. 19 P. GILBERT, A. BOWS, “Exploring the scope for complementary sub-global policy to mitigate CO2 from
shipping”, Energy Policy 2012, vol. 50, (613)614.
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2. International Policy Framework
2.1. United Nations Framework Convention on Climate Change
The challenge of global climate change and the mitigation of global GHG emissions is a cross-border
problem and goes beyond the capacity of a single country. Coordination of climate action on a global
level is therefore necessary.20 The UNFCCC was established to coordinate and regulate global action to
mitigate climate change.21 Its ultimate objective is to avoid dangerous anthropogenic (man-made)
interference with the climate system by GHG concentrations in the atmosphere.22
The UNFCCC entered into force on 21 March 1994 and 197 members have ratified the Convention. The
UNFCCC is a “Rio Convention”, one of three Conventions adopted at the “Rio Earth Summit” in 1992. The
other Rio Conventions are the UN Convention on Biological Diversity and the Convention to Combat
Desertification.23
Although emissions from shipping are not regulated under the UNFCCC, Parties to the UNFCCC
acknowledge the role of the international climate strategy in regulating GHG emissions from international
shipping.24 The main problem with international shipping is the difficulty of allocating GHG emissions to
different States as a ship emits all the time during a voyage. The same problem exists with international
aviation. As early as 1995, at the first meeting, the Conference of the Parties (COP 1) asked its Subsidiary
Body for Scientific and Technological Advice (SBSTA) to address this problem. The SBSTA worked on
this emission allocation issue from 1995 to 1996, but failed to reach a consensus among the different
States.25
20 European Commission, COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT
Accompanying the document Proposal for a Directive of the European Parliament and of the Council amending
Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, SWD(2015) 135
final, 15 July 2015, 14, as available on: http://eur-lex.europa.eu/legal-
content/EN/ALL/?uri=CELEX:52015SC0135&qid=1501324948890. 21 B. HACKMANN, “analysis of the governance architecture to regulate GHG emissions from international
shipping”, Int Environ Agreements 2012, vol. 12, (85)89. 22 Article 2 United Nations Framework Convention on Climate Change, New York, 9 May 1992, United Nations
Treaty Series no. 1771, entered into force on 21 March 1994 (Hereinafter UNFCCC); Y. SHI, “Reducing greenhouse
gas emissions from international shipping: Is it time to consider market-based measures?”, Marine Policy 2016, vol.
64, (123)124. 23 UNFCCC, “First steps to a safer future: Introducing The United Nations Framework Convention on Climate
Change”. https://unfccc.int/essential_background/convention/items/6036.php. (accessed 12/07/17) 24 B. HACKMANN, “analysis of the governance architecture to regulate GHG emissions from international
shipping”, Int Environ Agreements 2012, vol. 12, (85)90. 25 Y. SHI, “Reducing greenhouse gas emissions from international shipping: Is it time to consider market-based
measures?”, Marine Policy 2016, vol. 64, (123)123.
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The discussions on allocation mainly focussed on how to implement the core principle of the UNFCCC of
“common but differentiated responsibilities” (CBDR).26 This principle recognizes the special circumstances
of developing states (non-Annex I Parties) and places the heaviest burden in fighting climate change on
industrialized countries (Annex I Parties).27 The discussions presumed that emissions from Annex I parties
would be regulated and emissions from non-Annex I Parties would not be regulated. However, Parties found
themselves disadvantaged in their mitigation efforts, which caused a political deadlock on the allocation
issue.28
Since no agreement on allocation could be reached under the UNFCCC, Parties agreed as part of the Kyoto
Protocol to pursue the reduction of emissions from international aviation and shipping through the
International Civil Aviation Organization (ICAO) and the IMO, respectively.29
The UNFCCC itself contains no legally binding targets for the mitigation of GHG emissions. Instead,
binding commitments are incorporated in the Kyoto Protocol and in the Paris Agreement linked to the
UNFCCC.30 They will be briefly discussed below.
2.1.1. KYOTO PROTOCOL
The Kyoto Protocol was adopted on 11 December 1997 under the UNFCCC and entered into force on 16
February 2005. Currently there are 192 Parties, including the EU and its Member States.31 The Kyoto
protocol commits its Parties by setting internationally binding reduction targets up to 2020. The CBDR
principle is also incorporated in the Kyoto Protocol, which thus also requires developed States (Annex I
Parties) to bear greater responsibility in addressing environmental problems.32
However, the maritime transport sector is not covered by the Kyoto Protocol. Article 2(2) stipulates that
“The Parties included in Annex I shall pursue limitation or reduction of emissions of greenhouse gases not
26 Art. 3-4, UNFCCC, Supra note 22. 27 B. HACKMANN, “analysis of the governance architecture to regulate GHG emissions from international
shipping”, Int Environ Agreements 2012, vol. 12, (85)96. 28 E. HAITES, “Linking emissions trading schemes for international aviation and shipping emissions”, Climate
Policy 2009, vol. 9, (415)416-418. 29 Ibid. 30 Europa Nu, “Raamverdrag van de Verenigde Naties inzake klimaatverandering (UNFCCC)”. https://www.europa-
nu.nl/id/vi92fd8xvcmw/raamverdrag_van_de_verenigde_naties. (accessed 12/07/2017) 31 UNFCCC, “Status of ratification of the Kyoto Protocol”.
http://unfccc.int/kyoto_protocol/status_of_ratification/items/2613.php. (accessed 23/07/17) 32 Art. 4 UNFCCC, Supra note 22; Art. 10 Kyoto Protocol to the United Nations Framework Convention on Climate
Change, Kyoto, 11 December 1997, United Nations Treaty Series no. 2303, entered into force on 16 February 2005.
(Hereinafter Kyoto Protocol); Y. SHI, “Reducing greenhouse gas emissions from international shipping: Is it time to
consider market-based measures?”, Marine Policy 2016, vol. 64, (123)125.
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controlled by the Montreal Protocol from aviation and marine bunker fuels, working through the
International Civil Aviation Organization and the International Maritime Organization, respectively”.33
Due to this article, GHG emissions from shipping are not part of the national inventories under the Kyoto
Protocol and therefore not subject to the agreed binding emission targets. Instead, the IMO is delegated to
regulate the GHG issue from international shipping.34
2.1.2. PARIS AGREEMENT
The Paris Agreement was adopted on 12 December 2015 at the Paris Climate Conference (COP 21) and
entered into force on 4 November 2016.35 It is the first global climate deal, in which governments determine
their own contribution towards fighting climate change, with the overall objective of keeping the global
average temperature below an increase of 2°C compared to the pre-industrial levels.36 GHG emissions from
shipping are however nowhere mentioned in the Agreement.37
GHG emissions from international shipping are consequently not regulated within the framework of the
UNFCCC.
2.2. International Maritime Organization
The IMO (known until 1982 as the Inter-Governmental Maritime Consultative Organization or IMCO) is a
specialized agency of the United Nations and currently has 172 members. The IMO was established in 1948
at an international conference in Geneva and came into existence in 1958.38 The main role of the IMO is to
create a regulatory framework to improve the shipping industry in terms of safety, security and
environmental performance.39
33 Emphasis added. 34 B. HACKMANN, “Analysis of the governance architecture to regulate GHG emissions from international
shipping”, Int Environ Agreements 2012, vol. 12, (85)90; E. HAITES, “Linking emissions trading schemes for
international aviation and shipping emissions”, Climate Policy 2009, vol. 9, (415)416-417. 35 Paris Agreement, Paris, 12 December 2015, United Nations Treaty Collection, entered into force 4 November
2016. 36 European Commission, “Paris Agreement”. https://ec.europa.eu/clima/policies/international/negotiations/paris_en.
(accessed 23/07/17) 37 Y. SHI, “Are greenhouse gas emissions from international shipping a type of marine pollution?”, Marine Pollution
Bulletin 2016, vol. 113, (187)188. 38 IMO, “Brief History of IMO”. http://www.imo.org/en/About/HistoryOfIMO/Pages/Default.aspx. (accessed
13/07/2017) 39 IMO, “Introduction to IMO”. http://www.imo.org/en/About/Pages/Default.aspx. (accessed 20/07/17)
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The aims of the IMO are, as summarized by Article 1(a) of the IMO Convention, "to provide machinery for
cooperation among Governments in the field of governmental regulation and practices relating to technical
matters of all kinds affecting shipping engaged in international trade; to encourage and facilitate the
general adoption of the highest practicable standards in matters concerning maritime safety, efficiency of
navigation and prevention and control of marine pollution from ships"40. On the basis of this Convention
the prevention and control of marine pollution therefore falls within the scope of the IMO mandate.41
The IMO adopted a range of measures and conventions to prevent and control pollution from ships. One of
the most important marine environmental conventions is the International Convention for the prevention of
Pollution from Ships (MARPOL 73/78), which was adopted in 1973 by the IMO.42 It entered into force on
2 October 1983 and today 155 states, representing 99,14% of the global tonnage are party to MARPOL
73/78.43 The MARPOL Convention addresses pollution from ships, including air pollution.
In 1997, a Protocol was adopted to amend the Convention, with a new Annex VI added to address air
pollution from ships (MARPOL Annex VI).44 Annex VI sets limits on sulphur oxide (SOx) and nitrogen
oxide (NOx) emissions from ships and prohibits deliberate emissions of ozone-depleting substances (ODS).
Annex VI also regulates shipboard incineration, and emissions of volatile organic compounds (VOC) from
tankers.45 MARPOL Annex VI entered into force on 19 May 2005 and a revised Annex VI with significantly
tightened emissions limits was adopted in October 2008, entering into force on 1 July 2010.46 This revised
Annex VI also introduced emission control areas (ECAs) to reduce emissions of those air pollutants further
in designated sea areas.47
40 Article 1(a) Convention on the Intergovernmental Maritime Consultative Organization, Geneva, 6 March 1948,
United Nations Treaty Series no. 289, entered into force on 17 March 1958. (Emphasis added)
41 B. HACKMANN, “analysis of the governance architecture to regulate GHG emissions from international
shipping”, Int Environ Agreements 2012, vol. 12, (85)88. 42 International Convention for the Prevention of Marine Pollution from Ships, 1973, as modified by the Protocol of
1978 relating thereto (MARPOL 73/78), United Nations Treaty Series no. 1340, entered into force on 2 October
1983 (Annexes I and II). 43 IMO, “Summary of Status of Conventions”.
http://www.imo.org/en/About/Conventions/StatusOfConventions/Pages/Default.aspx. (accessed 23/07/17) 44 IMO, “International Convention for the Prevention of Pollution from Ships (MARPOL)”.
http://www.imo.org/en/about/conventions/listofconventions/pages/international-convention-for-the-prevention-of-
pollution-from-ships-(marpol).aspx. (Accessed 13/07/17) 45 IMO, “Prevention of Air Pollution from Ships”.
http://www.imo.org/en/OurWork/environment/pollutionprevention/airpollution/pages/air-pollution.aspx. (accessed
14/07/17) 46 A. MARAGKOGIANNI et al. , Mitigating Shipping Emissions in European Ports: Social and Environmental
Benefits, SpringerBriefs in Applied Sciences and Technology, 2016, DOI 10.1007/978-3-319-40150-8_1, 13-14.
(eBook) 47 IMO, “Prevention of Air Pollution from Ships”.
http://www.imo.org/en/OurWork/environment/pollutionprevention/airpollution/pages/air-pollution.aspx. (accessed
14/07/17)
10
2.2.1. REDUCTION OF GHG EMISSIONS FROM SHIPS
2.2.1.1. Ship Energy Efficiency Measures
Since 1997, the IMO has been working on regulations in the area of reducing air pollution from international
shipping. The Marine Environment Protection Committee (MEPC) is the IMO’s main body addressing
marine-pollution related matters. In particular it is concerned with the adoption and amendment of
conventions and other regulations and measures to ensure their enforcement. The MEPC was first
established as a subsidiary body of the IMO Assembly and was raised to full constitutional status in 1985.48
In response to Article 2(2) Kyoto Protocol, the IMO intensified its work relating to GHG emissions from
international shipping and added this issue to the agenda of the MEPC.49
In 2003, in Resolution A.963(23), the IMO Assembly “URGES the Marine Environment Protection
Committee to identify and develop the mechanism or mechanisms needed to achieve the limitation or
reduction of GHG emissions from international shipping and, in doing so, to give priority to:
(a) the establishment of a GHG emission baseline;
(b) the development of a methodology to describe the GHG efficiency of a ship in terms of a GHG emission
index for that ship. In developing the methodology for the GHG emission indexing scheme, the MEPC should
recognize that CO2 is the main greenhouse gas emitted by ships;
(c) the development of Guidelines by which the GHG emission indexing scheme may be applied in practice.
The Guidelines are to address issues such as verification;
(d) the evaluation of technical, operational and market-based solutions;”50.
The MEPC accelerated its work of searching for solutions to control and reduce GHG emissions from
international shipping, and in July 2009 it finalized a package of specific technical and operational reduction
measures.51 Technical measures generally focus on energy savings through improved energy efficiency
design, improved propulsion and power system, and alternative or cleaner fuels. Operational measures, on
48 IMO, “Structure of the IMO”. http://www.imo.org/en/About/Pages/Structure.aspx. (accessed 13/07/17) 49 B. HACKMANN, “analysis of the governance architecture to regulate GHG emissions from international
shipping”, Int Environ Agreements 2012, vol. 12, (85)89. 50 Assembly, IMO Policies and Practices related to the Reduction of Green House Gas Emissions from Ships,
Resolution A.963(23), 5 December 2003, as available on
http://www.imo.org/en/KnowledgeCentre/IndexofIMOResolutions/Pages/Assembly-%28A%29.aspx. (Emphasis
added) 51Ø. BUHAUG et al., Second IMO GHG Study 2009, International Maritime Organization (IMO), London, UK,
April 2009. (Hereinafter: Second IMO GHG Study 2009)
11
the other hand, aim to reduce emissions during operation at ship or fleet level by, for example, optimizing
speed, voyage planning, fleet management, and on-board energy management.52
Eventually, after prolonged negotiations, on 15 July 2011, GHG emissions from international shipping were
partially regulated by such technical and operational measures. These mandatory measures were adopted by
the Parties to MARPOL Annex VI represented in the MEPC, when it met for its 62nd session from 11 to 15
July 2011 at IMO Headquarters in London (MEPC 62). This is the first mandatory global greenhouse gas
reduction regime for an international industry sector.53
The technical (EEDI) and operational (SEEMP) measures were adopted in the form of amendments to
Annex VI to MARPOL 73/78 and entered into force on 1 January 2013.54 The new Regulations apply to all
ships of 400 gross tonnage (GT) and above.55 A new Chapter 4 was added to MARPOL Annex VI. In this
Chapter, the Energy Efficiency Design Index (EEDI) was made mandatory for new ships and the Ship
Energy Efficiency Management Plan (SEEMP) for all ships.56 The main objective of EEDI and SEEMP is
to reduce GHG emissions from ships through improved design and operations.
As the main technical measure, the EEDI requires new build ships from 2013 onwards to comply with
reduction targets for different ship type and size segments. The mandatory reduction targets increase in
stringency every five years up to 2030. The EEDI provides a measure of CO2 emissions per cargo carried,
expressed in grams of CO2 per ship's capacity-mile (gCO2/t nm) (the smaller the EEDI the more energy
efficient the ship design).57 It is a non-prescriptive, performance-based mechanism whereby ship designers
52 E.A. BOUMAN et al., “State-of-the-art technologies, measures, and a potential for reducing GHG emissions from
shipping – A review”, Transport Research Part D 2017, vol. 52, (408)412. 53 IMO, “Mandatory energy efficiency measures for international shipping adopted at IMO environment meeting”,
MEPC – 62nd session: 11 to 15 July 2011, Briefing: 42, July 15, 2011, available at:
http://www.imo.org/en/MediaCentre/PressBriefings/Pages/42-mepc-ghg.aspx#.WWxzDRT8vG4. 54 MEPC, Amendments to the Annex of the Protocol of 1997 to amend to amend the International Convention for the
Prevention of Pollution from Ships, 1973, as modified by the Protocol of 1978 relating thereto (Inclusion of
regulations on energy efficiency for ships in MARPOL Annex VI), Resolution MEPC.203(62), 15 July 2011, as
available on http://www.imo.org/en/ourwork/environment/pollutionprevention/airpollution/pages/index-of-mepc-
resolutions-and-guidelines-related-to-marpol-annex-vi.aspx; Y. SHI, “Are greenhouse gas emissions from
international shipping a type of marine pollution?”, Marine Pollution Bulletin 2016, vol. 113, (187)188. 55 IMO, “Greenhouse Gas Emissions”.
http://www.imo.org/en/OurWork/Environment/PollutionPrevention/AirPollution/Pages/GHG-Emissions.aspx.
(accessed 14/07/17) 56 IMO, “Energy Efficiency Measures”.
http://www.imo.org/en/OurWork/Environment/PollutionPrevention/AirPollution/Pages/Technical-and-Operational-
Measures.aspx. (accessed 14/07/17) 57 N. REHMATULLA, J. CALLEYA & T. SMITH, “The implementation of technical energy efficiency and CO2
emission reduction measures in shipping”, Ocean Engineering 2017, Vol. 139, (184)184; IMO, “Energy Efficiency
Measures”. http://www.imo.org/en/OurWork/Environment/PollutionPrevention/AirPollution/Pages/Technical-and-
Operational-Measures.aspx. (accessed 14/07/17)
12
and shipbuilders can choose the most cost-efficient technical solutions for the ship once the minimum energy
efficiency level required by the EEDI is achieved.58
In accordance with Regulation 22 of MARPOL Annex VI, each ship is also obliged to keep on board a ship-
specific Ship Energy Efficiency Management Plan (SEEMP). The IMO has adopted guidelines for the
development of a SEEMP.59 These 2016 Guidelines supersede the 2012 Guidelines for the development of
a Ship Energy Efficiency Management Plan (SEEMP), adopted by resolution MEPC.213(63). According to
the 2016 Guidelines there are two parts to a SEEMP. Part I provides a possible approach to monitoring ship
and fleet efficiency performance over time and options to be considered when seeking to optimize the
performance of the ship. Part II provides the methodologies that ships of 5,000 gross tonnage and above
should use to collect the data required pursuant to regulation 22A of MARPOL Annex VI and the processes
that the ship should use to report the data to the ship's Administration or any organization duly authorized
by it.60 The SEEMP must be developed in accordance with these Guidelines.
Part I of SEEMP is intended to be a management tool to assist a company in managing the ongoing
environmental performance of its vessels. This part should reflect the efforts to improve a ship's energy
efficiency through four steps: planning, implementation, monitoring, self-evaluation and improvement.61
With respect to Part II of SEEMP, the 2016 Guidelines provide guidance for developing a ship-specific
method to collect, aggregate, and report ship data with regard to annual fuel oil consumption, distance
travelled, hours underway and other data (“data collection system”) which are required by regulation 22A
of MARPOL Annex VI to be reported to the Administration.62 A description of such a method must be
included in the SEEMP on or before 31 December 2018 for ships of 5000 GT and above.63
2.2.1.2. Mandatory Data Collection System for Fuel Oil Consumption of Ships
At its 70th session (24-28 October 2016), the MEPC adopted mandatory MARPOL Annex VI requirements
for ships to record and report their fuel oil consumption, by resolution MEPC.278(70). Under the new
requirements, ships of 5000 GT and above will have to collect consumption data for each type of fuel oil
58 Y. SHI, “Are greenhouse gas emissions from international shipping a type of marine pollution?”, Marine Pollution
Bulletin 2016, vol. 113, (187)188. 59 MEPC, 2016 Guidelines for the development of a Ship Energy Efficiency Management Plan (SEEMP), Resolution
MEPC.282(70), 28 October 2016, §1.2., as available on
http://www.imo.org/en/KnowledgeCentre/IndexofIMOResolutions/Marine-Environment-Protection-Committee-
%28MEPC%29/Pages/default.aspx. (Hereinafter: 2016 Guidelines) 60 2016 Guidelines, Supra note 59, § 1.2. 61 2016 Guidelines, Supra note 59, §3.6. 62 2016 Guidelines, Supra note 59, §6.2. (Emphasis added) 63 Regulation 22.2. MARPOL Annex VI.
13
they use, as well as other, additional, specified data including proxies for transport work.64 The aggregated
data will be reported to the ship’s flag State at the end of each calendar year, and if the data has been reported
in accordance with the requirements, the flag State will issue a Statement of Compliance to the ship. Flag
States will be required to subsequently transfer this data to the IMO Ship Fuel Oil Consumption Database.65
The IMO Secretary-General Kitack Lim said “The data collection system will equip IMO with concrete data
to help it make the right decisions, as well as enhancing its credentials as the best placed and competent
forum for regulating international shipping”.66 It is the first step in a three-step approach agreed at MEPC
68 (May 2015) and will provide the basis for an objective, transparent and inclusive policy debate in the
MEPC.67
2.2.1.3. Roadmap for reducing GHG emissions from ships
The MEPC 70 (October 2016) also approved a roadmap “for developing a comprehensive IMO strategy on
reduction of GHG emissions from ships”, which would be applicable from 2017 to 2023.68 The roadmap
follows a three-step approach and provides for an initial but comprehensive IMO strategy on reduction of
GHG emissions from ships to be adopted in 2018 and a revised one in 2023. The first step involves ‘data
collection’, followed by ‘data analysis’, which forms the basis for the third step: ‘decision-making on what
further measures, if any, are required’.69 The roadmap contains a list of planned activities, including further
IMO GHG studies and relevant timelines.70
In view of the projected growth in world trade, technical and operational measures alone would not be
sufficient to reduce GHG emissions from shipping to a satisfactory level. Emissions projections demonstrate
64 IMO, “Data collection system for fuel oil consumption of ships”.
http://www.imo.org/en/OurWork/Environment/PollutionPrevention/AirPollution/Pages/Data-Collection-
System.aspx. (accessed 15/07/17) 65 IMO, “New requirements for international shipping as UN body continues to address greenhouse gas emissions”,
Briefing: 28 28/10/2016, as available on: http://www.imo.org/en/MediaCentre/PressBriefings/Pages/28-MEPC-data-
collection--.aspx. (Hereinafter: Briefing MEPC 70) 66 Ibid. 67 IMO, Presentation at MEPC 71 on IMO’s Fuel Oil Consumption Database, London, UK 4 July 2017, 3, as
available on:
http://www.imo.org/en/OurWork/Environment/PollutionPrevention/AirPollution/Documents/Secretariat%20-
%20IMO%20Ship%20Fuel%20Oil%20Consumption%20Database.pdf. 68 Briefing MEPC 70, Supra note 65. 69 IMO, Presentation at MEPC 71 on IMO’s Fuel Oil Consumption Database, London, UK 4 July 2017, 3, as
available on:
http://www.imo.org/en/OurWork/Environment/PollutionPrevention/AirPollution/Documents/Secretariat%20-
%20IMO%20Ship%20Fuel%20Oil%20Consumption%20Database.pdf;, 70 Briefing MEPC 70, Supra note 65.
14
that improvements in efficiency are important to mitigate an emissions increase. However, even the
modelled improvements with the greatest energy savings would not cause a downward trend.71
During the 2007-2010 period, The MEPC considered other possibilities to reduce GHG emissions from
shipping, such as market-based mechanisms (MBMs). Several MBMs were proposed, such as an
International GHG fund and a maritime emissions trading scheme (METS). Although an expert group
carried out a feasibility study and an impact assessment to evaluate how each proposed mechanism could
contribute to the reduction of GHG emissions, to date no decision has been taken on which MBM proposal
should be further developed.72
2.2.2. PREVENTION OF OTHER AIR POLLUTANTS
Although the subject of my master’s dissertation concerns GHG emissions from shipping, for the sake of
clarity it is also important to briefly mention the measures taken by the IMO to mitigate other air pollutants
from international shipping.
In addition to GHGs, air emissions from ships include sulphur oxides (SOx) and nitrogen oxides (NOx),
with both acidifying and eutrophication effects, and various types of particles that cause impacts on health
and climate. NOx contributes towards eutrophication and, together with volatile organic compounds
(VOCs), induces the formation of ground-level ozone, which negatively impacts human health and the
environment.73
As mentioned above, MARPOL Annex VI, which was adopted in 1997, sets limits on sulphur oxide (SOx)
and nitrogen oxide (NOx) emissions from ships, prohibits deliberate emissions of ozone-depleting
substances (ODS) and also regulates shipboard incineration and emissions of volatile organic compounds
(VOC) from tankers. MARPOL Annex VI entered into force on 19 May 2005 and a revised Annex VI with
significantly tightened emissions limits was adopted in October 2008, which entered into force on 1 July
2010. This revised Annex VI also introduced emission control areas (ECAs) to further reduce emissions of
those air pollutants in designated sea areas.
71 Third IMO GHG Study 2014, Supra note 2, 4.
72 Second IMO GHG Study 2009, Supra note 51; M. CAMES et al., Key Issues at Stake at the 69th Session of the
IMO Marine Environment Protection Committee (MEPC 69), European Parliament, April 2016, as available on:
http://www.europarl.europa.eu/committees/en/supporting-analyses-search.html. 73 K. SALO et al., “Emissions to the Air” in K. ANDERSSON et al. (eds.), Shipping and the Environment:
Improving Environmental Performance in Marine Transportation, Springer-Verlag Berlin Heidelberg, 2016, DOI
10.1007/978-3-662-49045-7_1, (169)169-170. (eBook)
15
2.2.2.1. Global sulphur cap
Regulation 14.1.3. of the revised MARPOL Annex VI states that the sulphur content of any fuel used on
board a ship must be reduced from a current 3.50 Mass Percent (% m/m) to 0.50% m/m from 1 January
2020, depending on the outcome of a review, to be concluded by 2018.74
MEPC 70 (October 2016) considered an assessment of fuel oil availability to inform the decision to be taken
by the Parties to MARPOL Annex VI, and decided that the fuel oil standard (0.50% sulphur limit) shall
become effective on 1 January 2020.75
Inside an Emission Control Area (ECA), however, the limits for SOx and particulate matter (PM) must be
further reduced from 1% m/m (since 1 July 2010) to 0.10% m/m, effective from 1 January 2015.76 The
implementation of an ECA will minimize SOx and PM emissions in certain parts of the world, primarily
coastal regions. It is recognized that the harmful impact of SOx and PM emissions in coastal regions is much
greater than on the high seas, because a lot of people live in coastal regions.77
There are currently four ECAs established:
1. Baltic Sea area – as defined in Annex I of MARPOL (SOx only);
2. North Sea area – as defined in Annex V of MARPOL (SOx only);
3. North American area (entered into effect 1 August 2012) – as defined in Appendix VII of Annex
VI of MARPOL (SOx, NOx and PM); and
4. United States Caribbean Sea area (entered into effect 1 January 2014) – as defined in Appendix VII
of Annex VI of MARPOL (SOx, NOx and PM).78
74 L. STEVENS et al., “Is new emission legislation stimulating the implementation of sustainable and energy-
efficient maritime technologies?”, Research in Transportation Business & Management 2015, vol. 17, (14)17. 75 MEPC, Effective date of implementation of the fuel oil standard in Regulation 14.1.3 of MARPOL Annex VI,
Resolution MEPC.280(70), 28 October 2016, as available on
http://www.imo.org/en/KnowledgeCentre/IndexofIMOResolutions/Marine-Environment-Protection-Committee-
%28MEPC%29/Pages/default.aspx; IMO, “Sulphur oxides (SOx) – Regulation 14”.
http://www.imo.org/en/OurWork/Environment/PollutionPrevention/AirPollution/Pages/Sulphur-oxides-(SOx)-–-
Regulation-14.aspx. (accessed 18/07/17) 76 L. STEVENS et al., “Is new emission legislation stimulating the implementation of sustainable and energy-
efficient maritime technologies?”, Research in Transportation Business & Management 2015, vol. 17, (14)17; IMO,
“Sulphur oxides (SOx) – Regulation 14”.
http://www.imo.org/en/OurWork/Environment/PollutionPrevention/AirPollution/Pages/Sulphur-oxides-(SOx)-–-
Regulation-14.aspx. (accessed 18/07/17) 77 L. STEVENS et al., “Is new emission legislation stimulating the implementation of sustainable and energy-
efficient maritime technologies?”, Research in Transportation Business & Management 2015, vol. 17, (14)17. 78 IMO, “Sulphur oxides (SOx) – Regulation 14”.
http://www.imo.org/en/OurWork/Environment/PollutionPrevention/AirPollution/Pages/Sulphur-oxides-(SOx)-–-
Regulation-14.aspx. (accessed 18/07/17)
16
2.2.2.2. Control of diesel engine NOx emissions
Control of diesel engine NOx emissions is achieved through survey and certification requirements. The NOx
control requirements of Annex VI apply to installed marine diesel engine of over 130 kW output power
other than those used solely for emergency purposes, irrespective of the tonnage of the ship on which such
engines are installed. Different levels (Tiers) of control apply based on the ship construction date and within
any particular Tier the actual limit value is determined from the engine’s rated speed. The NOx emission
standards are commonly referred to as the Tier I-III Standards.
The Tier III standards only apply to the specified ships while operating in NOx Emission Control Areas
(NECAs), while Tier I-II standards apply globally.79 The Tier I standard was defined by the 1997 version
of MARPOL Annex VI, while the Tier II and III standards were introduced by the revised Annex VI, which
was adopted in 2008.80
In the revised MARPOL Annex VI, progressive reductions in NOx emissions from marine diesel engines
installed on ships are also included, with a "Tier II" emission limit for engines installed on a ship constructed
on or after 1 January 2011. There is also a more stringent "Tier III" emissions limit for engines installed on
a ship constructed on or after 1 January 2016 operating in ECAs (North American Emission Control Area
and the U.S. Caribbean Sea Emission Control Area). Marine diesel engines installed on a ship constructed
on or after 1 January 1990 but prior to 1 January 2000 are required to comply with "Tier I" emission limits,
if an approved method for that engine has been certified by an Administration.81
79 IMO, “Nitrogen Oxides (NOx) – Regulation 13”.
http://www.imo.org/en/OurWork/Environment/PollutionPrevention/AirPollution/Pages/Nitrogen-oxides-(NOx)-–-
Regulation-13.aspx. (accessed 18/07/17) 80 A. MARAGKOGIANNI et al. , Mitigating Shipping Emissions in European Ports: Social and Environmental
Benefits, SpringerBriefs in Applied Sciences and Technology, 2016, DOI 10.1007/978-3-319-40150-8_1, 14.
(eBook) 81 IMO, “Prevention of Air Pollution from Ships”.
http://www.imo.org/en/OurWork/environment/pollutionprevention/airpollution/pages/air-pollution.aspx. (accessed
18/07/17)
17
3. Regional Policy Framework – The EU
The EU and its Member States have a strong preference to regulate GHG emissions from international
shipping on a global level, both under the UNFCCC and the IMO, with the IMO taking the lead.82 However,
the international response to the challenge of mitigating GHG emissions from international shipping has
been rather disappointing. The Kyoto Protocol delegates the responsibility of regulating GHG emissions
from shipping to the IMO and in the Paris Agreement on Climate Change the shipping sector is not
mentioned. Although the IMO has taken technical (EEDI) and operational measures (SEEMP) and adopted
a mandatory data collection system, these instruments are not sufficient by themselves to reduce GHG
emissions to a satisfactory level. The inability of these regulations to significantly reduce GHG emissions
from shipping is also reflected in the projected future 50-250% rise in GHG emissions from shipping, which
takes into account the implementation of these measures.83
Despite the fact that the EU considers the IMO to be the most appropriate international forum for regulation
of emissions from shipping, the EU has its own climate and shipping policy. In 2009, the European
Commission adopted strategic goals and recommendations for the EU maritime transport policy until
2018.84 One of the key priorities which was outlined by the Commission is: “Ensure steady progress towards
a coherent and comprehensive approach to reduce greenhouse gas emissions (GHG) from international
shipping, combining technical, operational and market-based measures”85. This is reinforced in the 2011
White paper on Transport.86
82 European Commission, “Reducing emissions from the shipping sector”.
https://ec.europa.eu/clima/policies/transport/shipping_en. (accessed 19/07/17) 83 J. SCOTT, T. SMITH, N. REHMATULLA & B. MILLIGAN, “The Promise and Limits of Private Standards in
Reducing Greenhouse Gas Emissions from Shipping”, Journal of Environmental Law 2017, vol. 29, (231)235-236;
Third IMO GHG Study 2014, Supra note 2, 20; M. CAMES et al., Emission Reduction Targets for International
Aviation and Shipping, Study for the ENVI Committee, European Parliament, November 2015, 17, as available on
http://www.europarl.europa.eu/committees/en/supporting-analyses-search.html. 84 J. Graichen et al., Key Issues at Stake at the 71st Session of the IMO Marine Environment Protection Committee
(MEPC 71), ENVI Committee Briefing, European Parliament, June 2017, as available on:
http://www.europarl.europa.eu/committees/en/supporting-analyses-search.html.
85 European Commission, Communication from the Commission to the European Parliament, the Council, the
European Economic and Social Committee and the Committee of the Regions - Strategic goals and recommendations
for the EU’s maritime transport policy until 2018, COM(2009) 8 final, 21 January 2009, §4.1., as available on:
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52009DC0008.
86 European Commission, Communication from the Commission to the European Parliament, the Council, the
European Economic and Social Committee and the Committee of the Regions – Integrating maritime transport
emissions in the EU greenhouse gas reduction policies, COM(2013) 479 final, 28 January 2013, as available on:
http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1500567524337&uri=CELEX:52013DC0479. (Hereinafter:
COM(2013))
18
In the 2011 White Paper on transport, the European Commission claims that CO2 emissions from maritime
transport should be reduced by at least 40% in 2050, compared to the 2005 levels.87 Until now, however,
emissions from shipping have not been included in the EU’s GHG emission reduction targets. To address
these emissions from shipping, the EU has adopted a stepwise approach.
In 2013 the European Commission set out a strategy to integrate maritime transport emissions in the EU’s
greenhouse gas reduction policies. The gradual approach consists of three consecutive steps:
1. Implementation of a system for Monitoring, Reporting and Verification (MRV) of emissions;
2. Definition of reduction targets for the maritime transport sector;
3. Application of a market-based measure (MBM).88
The first step is implemented by Regulation 2015/757 (as amended by Delegated Regulation 2016/207189)
on the monitoring, reporting and verification of carbon dioxide emissions from maritime transport, adopted
on 29 April 2015. It requires large ships over 5000 GT, loading or unloading cargo or passengers at EU
maritime ports from 1 January 2018 to monitor and later to report their related CO2 emissions and other
relevant information in accordance with their monitoring plan.90
According to the impact assessment set out in Regulation 2015/757, the MRV system is expected to reduce
CO2 emissions by 2% and overall transportation costs by 1.2 billion euros. The Regulation furthermore
states that such a MRV system is “a prerequisite for any MBM, efficiency standard or other measure,
whether applied at Union level or globally”. It also reiterates that “given the international nature of
shipping, the preferred and most effective method of reducing greenhouse gas emissions in international
maritime transport would be by global agreement”.91 Although no reduction targets have still been set, the
Regulation could indirectly support the EU's climate action and support the ongoing global debate on
mitigating GHG emissions from ships.92
87 European Commission, White Paper - Roadmap to a Single European Transport Area – Towards a competitive and
resource efficient transport system, COM(2011) 144 final, 28 March 2011, §29, as available on: http://eur-
lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52011DC0144. 88 COM(2013), Supra note 86, 5. 89 Commission Delegated Regulation (EU) 2016/2071 of 22 September 2016 amending Regulation (EU) 2015/757 of
the European Parliament and of the Council as regards the methods for monitoring carbon dioxide emissions and the
rules for monitoring other relevant information (Text with EEA relevance ), OJ L 320 26 November 2016, 1. 90 Regulation (EU) 2015/757 of the European Parliament and of the Council of 29 April 2015 on the monitoring,
reporting and verification of carbon dioxide emissions from maritime transport, and amending Directive 2009/16/EC
(Text with EEA relevance), OJ L 123 19 May 2015, 55 (Hereinafter Regulation 2015/757); European Commission,
“Reducing emissions from the shipping sector”. https://ec.europa.eu/clima/policies/transport/shipping_en. (accessed
20/07/17) 91 Regulation 2015/757, Supra note 90, (13). (Emphasis added) 92 European Parliament, “Legislative train schedule resilient energy Union with a climate change policy – greenhouse
gas reduction targets for international maritime shipping”. http://www.europarl.europa.eu/legislative-train/theme-
19
Although the EU wants to regulate GHG emissions from shipping on a global level, it has thus decided to
take unilateral action and is even considering including maritime emissions in the EU ETS. The EU is clearly
pushing the IMO to address this issue on a global level. On 15 December 2016, the Committee on the
Environment, Public Health and Food Safety (ENVI) of the European Parliament agreed on proposals to
revise the EU ETS.93 In the compromise package of proposals, the members of ENVI call for EU shipping
emissions to be included in the EU ETS from 2023 if the IMO fails to deliver a global deal by 2021.94
The IMO's Secretary-General Lim reacted on this agreement in a letter to Martin Schulz (President of the
European Parliament), Jean-Claude Juncker (President of the European Commission) and Donald Tusk
(President of the European Council). In this letter he said: “I am concerned that a final decision to extend
the EU-ETS to shipping emissions would not only be premature but would seriously impact on the work of
IMO to address GHG emissions from international shipping. Inclusion of emissions from ships in the EU-
ETS significantly risks undermining efforts on a global level”.95 This openly shows that although the IMO
and the EU are cooperating with each other to regulate GHG emissions from shipping, there are tensions
between the two organizations.
resilient-energy-union-with-a-climate-change-policy/file-greenhouse-gas-reduction-targets-for-international-
shipping. (accessed 21/07/17) 93 European Parliament, “Legislative train schedule resilient energy Union with a climate change policy – Revision
of the EU Emission Trading Scheme Directive for the 2021-2030 period. http://www.europarl.europa.eu/legislative-
train/theme-resilient-energy-union-with-a-climate-change-policy/file-revision-of-the-eu-ets-2021-2030. (accessed
22/07/17); X, “Industry stakeholders react on the EU ETS Decision”, GREEN4SEA 16 December 2016.
https://www.green4sea.com/industry-stakeholders-react-on-the-eu-ets-decision/. 94 Committee on the Environment, Public Health and Food Safety, Report on the proposal for a directive of the
European Parliament and of the Council amending Directive 2003/87/EC to enhance cost-effective emission
reductions and low-carbon investments, EP Doc A8-0003/2017, 13 January 2017, 8-9, as available on:
http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+REPORT+A8-2017-
0003+0+DOC+XML+V0//EN. 95 IMO, “IMO Secretary-General speaks out against regional emission trading system”, Briefing: 03 09/01/2017, as
available on: http://www.imo.org/en/MediaCentre/PressBriefings/Pages/3-SG-emissions.aspx. (Emphasis added)
20
4. Market based measures for global and regional policy actions
As we have seen in the previous sections, efforts have been made on a global and regional level to reduce
GHG emissions from shipping. Several operational and technical measures have been adopted, both by the
IMO (EEDI, SEEMP and a data collection system) and the EU (MRV system). Research has shown,
however, that due to the projected growth of seaborne trade, these measures alone are not sufficient to reduce
GHG emissions to a satisfactory level in order to ensure that the sector makes an appropriate contribution
towards achieving the 2°C reduction goal.96 EU-related CO2 emissions from shipping are expected to
increase by a further 81% by 2050 compared to 1990 levels97 and BAU scenarios predict an increase of 50-
250% by 2050 on a global level98.
For this reason, apart from the technical and operational measures, which are “command and control”
regulatory measures, market-based measures (MBMs) have also been discussed within the IMO and the
EU.99
Another important reason to consider a MBM, is that it could reconcile the different core principles on
which the IMO and the UNFCCC are built. As aforementioned, the UNFCCC is based on the CBDR
principle.100 The IMO, however, is based on the principle of “no more favourable treatment” (NMFT). The
NMFT principle requires port States to enforce IMO standards in a uniform manner to all ships in their
ports, regardless of flag.101 There are a lot of discussions within the IMO concerning the applicability of
both principles. Developing countries are logically in favour of applying the CBDR principle to the
regulation of GHG emissions from ships, whereas developed countries, in contrast, are in favour of applying
the NMFT principle. Contrary to the energy efficiency measures adopted by the IMO, which only take into
account the NMFT principle, a MBM could potentially address the conflict between the CBDR and NMFT
principle.102 Several MBM proposals which were submitted to the IMO (see infra), acknowledge the
96 Z. BAZARI and T. LONGVA, Assessment of IMO Mandated Energy Efficiency Measures for International
Shipping – Estimated CO2 Emissions Reductions from Introduction of Mandatory Technical and Operational Energy
Efficiency Measures for Ships, IMO Doc MEPC 63/INF.2, Annex, October 2011, 8; Third IMO GHG Study 2014,
Supra note 2, 20; Y. SHI, “Reducing greenhouse gas emissions from international shipping: Is it time to consider
market-based measures?”, Marine Policy 2016, vol. 64, (123)125. 97 COM(2013), Supra note 86, 2. 98 Third IMO GHG Study 2014, Supra note 2, 20. 99 The economic literature differentiates “command and control” policies, in which the public authority set up
standards and rules to directly reduce environmental damages, from policies based on “economic tools” aiming at
internalizing the cost of environmental damages. (C. DE PERTHUIS, R. TROTIGNON, “Governance of CO2
markets: Lessons from the EU ETS”, Energy Policy 2014, vol. 75, (100)100). 100 See Part I, Section 2.1. of this master’s dissertation. 101 Second IMO GHG Study 2009, Supra note 51, 20. 102 Y. SHI, “Reducing greenhouse gas emissions from international shipping: Is it time to consider market-based
measures?”, Marine Policy 2016, vol. 64, (123)125.
21
differences between developing and industrialized countries and include design elements enabling to
compensate developing countries for the financial impacts of a MBM.103 As about three quarters of the
world tonnage, by deadweight, of all merchant vessels engaged in international trade is registered in
developing countries, it is important that a global mechanism, regulating shipping emissions, is also
accepted by the developing countries.104
MBMs place a price on GHG emissions and are cost-effective policy instruments, providing economic
incentives for the maritime industry to use up-to-date technological, operational and managerial practices
to reduce emissions (in-sector reductions).105 The revenues generated by an MBM can also be used to
purchase ‘offsets’ to reduce GHG emissions outside the shipping sector (out-of-sector reductions). In
addition, MBMs can create funds that could be used for different purposes, such as adaptation and transfer
of technologies.106
4.1. IMO policy options
In discussions within the IMO, policies are commonly grouped into three categories:
1. Technical policy options, i.e. aimed at improving the design efficiency of the fleet.
2. Operational policy options, i.e. policies aimed at improving the operational efficiency of the fleet.
3. Market-based policy options, i.e. instruments addressing CO2 emissions directly.107
Several Market-based policy options have been extensively discussed and considered in depth since MEPC
56 (July 2006). At MEPC 59 (July 2009), the Committee recognized that technical and operational measures
alone would not be sufficient to satisfactorily reduce GHG emissions from international shipping.108 A work
plan for further consideration of market-based measures was agreed.109 At MEPC 60 (March 2010), the
103 B. HACKMANN, “analysis of the governance architecture to regulate GHG emissions from international
shipping”, Int Environ Agreements 2012, vol. 12, (85)97. 104 Second IMO GHG Study 2009, Supra note 51, 20. 105 COM(2013), Supra note 86, 7; IMO, “Market-Based Measures”.
http://www.imo.org/fr/OurWork/Environment/PollutionPrevention/AirPollution/Pages/Market-Based-
Measures.aspx. (accessed 21/07/17); K. WANG et al., “Modeling the impacts of alternative emission trading
schemes on international shipping”, Transportation Research Part A 2015, vol. 77, (35)35. 106 IMO, “Market-Based Measures”.
http://www.imo.org/fr/OurWork/Environment/PollutionPrevention/AirPollution/Pages/Market-Based-
Measures.aspx. (accessed 21/07/17) 107 Second IMO GHG Study 2009, Supra note 51, 67. 108 IMO, “Market-Based Measures”.
http://www.imo.org/fr/OurWork/Environment/PollutionPrevention/AirPollution/Pages/Market-Based-
Measures.aspx. (accessed 21/07/17) 109 MEPC, Work Plan for further consideration of market-based measures, IMO Doc MEPC 59/24/Add.1, Annex 16,
July 2009.
22
Committee called for an Expert Group to undertake a feasibility study and impact assessment of all the
MBM proposals submitted in accordance with this work plan.110
The IMO Secretary General appointed the Expert Group, which was asked to consider nine criteria in its
evaluation, namely:
1. ‘the environmental effectiveness, e.g., the extent to which the proposed MBM is effective in
contributing to the reduction of greenhouse gas emissions from international shipping;
2. the cost-effectiveness of the proposed MBM and its potential impact(s) on trade and sustainable
development;
3. the proposed MBM's potential to provide incentives to technological change and innovation – and
the accommodation of current emission reduction and energy efficiency technologies;
4. the practical feasibility of implementing the proposed MBM;
5. the need for technology transfer to, and capacity-building within, developing countries, in particular
the least developed countries (LDCs) and the small island developing States (SIDS), in relation to
implementation and enforcement of the proposed MBM, including the potential to mobilize climate
change finance for mitigation and adaptation actions;
6. the MBM proposal's relation with other relevant conventions such as UNFCCC, Kyoto Protocol
and WTO, as well as its compatibility with customary international law, as depicted in UNCLOS;
7. the potential additional administrative burden, and the legal aspects for National Administrations
by implementing and enforcing the proposed MBM;
8. the potential additional workload, economic burden and operational impact for individual ships, the
shipping industry and the maritime sector as a whole, of implementing the proposed MBM; and
9. the MBM's compatibility with the existing enforcement and control provisions under the IMO legal
framework’.111
The Expert Group analysed ten proposals, which were submitted to the IMO (See Table 1). The results were
presented at MEPC 61(September 2010)112, and there were extensive debates on the most suitable MBM.113
110 MEPC, Report of the Marine Environment Protection Committee on its Sixtieth Session, IMO Doc MEPC 60/22,
Annex 8, 12 April 2010, 1. 111 MEPC, Report of the Marine Environment Protection Committee on its Sixtieth Session, IMO Doc MEPC 60/22,
Annex 8, 12 April 2010, 2-3. 112 See: MEPC, Full report of the work undertaken by the Expert Group on Feasibility Study and Impact Assessment
of possible Market-based Measures, IMO Doc MEPC 61/INF.2, 13 August 2010. 113 See: MEPC, Report of the Marine Environment Protection Committee on its sixty-first session, IMO Doc MEPC
61/24, 6 October 2010, 44-49.
23
However no consensus could be reached and at MEPC 65(May 2013) it was decided to suspend the
discussions.114
Table 1 Summary of MBM proposals 115
MBM Proposals Proponents Working mechanisms Base Documents
International Fund for GHG
emissions from ships
(GHG Fund)
Cyprus, Denmark, the
Marshall Islands, Nigeria and
International Parcel Tankers
Association (IPTA)
Establish a global reduction target for
international shipping, set by either UNFCCC
or IMO. Emissions above the target line would
be offset largely by purchasing approved
emissions reduction credits. The offsetting
activities would be financed by a contribution
paid by ships on every tonne of bunker fuel
purchased.
MEPC 60/4/8
Leveraged Incentive Scheme
(LIS)
Japan A part of the GHG Fund contributions, which
are collected on marine bunker is refunded to
ships meeting or exceeding agreed efficiency
benchmarks and labelled as "good
performance ships".
MEPC 60/4/37
Port State Levy (PSL) Jamaica Levies a uniform emissions charge on all
vessels calling at their respective ports based
on the amount of fuel consumed by the
respective vessel on its voyage to that port (not
bunker suppliers).
MEPC 60/4/40
114 IMO, “Market-Based Measures”.
http://www.imo.org/fr/OurWork/Environment/PollutionPrevention/AirPollution/Pages/Market-Based-
Measures.aspx. (accessed 21/07/17) 115 MEPC, Full report of the work undertaken by the Expert Group on Feasibility Study and Impact Assessment of
possible Market-based Measures, IMO Doc MEPC 61/INF.2, 13 August 2010, 6-9; IMO, “Market-Based Measures”.
http://www.imo.org/fr/OurWork/Environment/PollutionPrevention/AirPollution/Pages/Market-Based-
Measures.aspx. (accessed 22/07/17); Lay out is based on Y. SHI, “Reducing greenhouse gas emissions from
international shipping: Is it time to consider market-based measures?”, Marine Policy 2016, vol. 64, (123)126.
24
MBM Proposals Proponents Working mechanisms Base Documents
Ship Efficiency and Credit
Trading
(SECT)
United States of America All ships, including those in the existing fleet,
would be subject to mandatory energy
efficiency standards. As one means of
complying with the standard, SECT would
establish an efficiency-credit trading
programme. These standards would become
more stringent over time.
MEPC 60/4/12
Vessel Efficiency System
(VES)
World Shipping Council Establishes mandatory efficiency standards for
new and existing ships. Each vessel would be
judged against a requirement to improve its
efficiency by X% below the average efficiency
(baseline) for the specific vessel class and size.
Standards would be tiered over time with
increasing stringency. Existing ships failing to
meet the required standard through technical
modifications would be subject to a fee applied
to each tonne of fuel consumed.
MEPC 60/4/39
Global Emission Trading
System (ETS) for international
shipping
Norway
Sets a sector-wide cap on net emissions from
international shipping and establishes a trading
mechanism to facilitate the necessary emission
reductions, be they in-sector or out-of-sector.
A number of allowances (Ship Emission
Units) corresponding to the cap would be
released into the market each year.
MEPC 61/4/22
Global ETS for international
shipping
United Kingdom Differs from the Norwegian ETS proposal in
two aspects: the method of allocating
emissions allowances (national instead of
global auctioning) and the approach to setting
the emissions cap (set with a long-term
declining trajectory).
MEPC 60/4/26
25
MBM Proposals Proponents Working mechanisms Base Documents
Global ETS for international
shipping
France Sets out additional details on auction design
under a shipping ETS. In all other aspects the
proposal is similar to the Norwegian ETS
proposal.
MEPC 60/4/41
Penalty on trade and
development
Bahamas Insists that the imposition of any costs should
be proportionate to the contribution by
international shipping to global CO2
emissions. It should apply to all ships engaged
in both domestic and international maritime
transport as fuel prices impact all market
segments and trades.
MEPC60/4/10
Rebate Mechanism (RM) for a
market-based instrument for
international shipping
IUCN Compensate developing countries for the
financial impact of a MBM. It could be
applied to any maritime MBM which
generates revenue.
MEPC 60/4/55
The two MBMs which have received the most attention under the IMO are an ETS for international shipping
and an International Compensation Fund for GHG emissions, which sets a global levy on marine bunkers.116
There were three types of emission trading systems (ETS) for international shipping submitted to the IMO.
There are only a few differences between the three proposals. The proposal from the UK differs from the
Norwegian ETS in that emission allowances are allocated and it has a different approach to setting the
emissions cap. The French proposal provides additional details on the auction design and is in all other
aspects similar to the Norwegian ETS proposal.117
The Second IMO GHG Study included a policy assessment, based on the nine evaluation criteria, of a
possible maritime emission trading system (METS). According to this assessment, a METS appears to be a
cost-effective policy instrument, with high environmental effectiveness (See Table 2).118 Despite the high
degree of CO2 abatement potential, however, a global ETS has not yet been formed under the auspices of
116 Second IMO GHG Study 2009, Supra note 51, 70. 117 Y. SHI, “The challenge of reducing greenhouse gas emissions from international shipping: assessing the
international maritime organization's regulatory response”, Yearbook of International Environmental Law 2012, vol.
23, 131-57. Also available on: http://ro.uow.edu.au/cgi/viewcontent.cgi?article=2191&context=lhapapers, 39. 118 Second IMO GHG Study 2009, Supra note 51, 87.
26
the IMO. The possible implementation of an ETS or any other MBM is currently not on the agenda of the
IMO, so it is not likely that a global ETS will be implemented in the near future. According to K. Wang et
al. (2015), the implementation of a regional ETS appears more likely.119
Table 2 Summary assessment of market-based policy options 120
Evaluation criteria121
Market-based instruments
METS International GHG Fund
Environmental effectiveness Very high Very high
Cost-effectiveness Very good Very good
Incentive to technological change High High
Practical feasibility of
implementation
Moderate Moderate
4.2. EU policy options
In 2013, the European Commission drafted a strategy to progressively integrate GHG emissions from
shipping into the 2030 climate and energy framework. This 2030 climate and energy framework was
adopted in October 2014 by EU leaders and builds on the 2020 climate and energy package. The framework
sets three binding key targets for the year 2030, one of which is to reduce GHG emissions by at least 40%
compared to 1990 levels.
The strategy of the Commission to include maritime GHG emissions in the EU’s reduction commitment
contains a stepwise approach. As mentioned in Section 3 of Part I, the three steps are:
1. Implementation of a system for MRV of emissions
2. Definition of reduction targets for the maritime transport sector
119 K. WANG et al., “Modeling the impacts of alternative emission trading schemes on international shipping”,
Transportation Research Part A 2015, vol. 77, (35)37. 120 Based on ‘Table 6.6. Summary assessment of policies, based on condensed criteria’, Second IMO GHG Study
2009, Supra note 51, 86. 121 The nine evaluation criteria were condensed into four in order to improve the readability of the analysis in the
Second IMO GHG Study (see p. 73 of the Second IMO GHG Study 2009, Supra note 51).
27
3. Application of a market based measure (MBM).
The Impact Assessment of the strategy identified three options as “the most promising” MBMs to address
maritime GHG emissions, namely:
1. A Contribution-based Compensation Fund. A voluntary contribution (in €/tCO2) would be paid into
the fund. The contribution would depend on the emissions by the ship covered by the regulation. A
complementary instrument would also be set up. (e.g. speed limits, ETS, etc.) and participation in
the fund would be provided as a voluntary opt-out from the complementary instrument.
2. A Target-based Compensation Fund. This is based on establishing a unique target for all ships
covered by the regulation. A sector-wide entity (such as an association or public body) takes
responsibility for ensuring compliance with the target. Each ship covered by the regulation has to
establish a contractual relationship with this entity to ensure the achievement of the target. A
membership fee should be paid, which supports investments in ship efficiency, as well as provisions
in case of collective overshooting of the target.
3. An Emissions Trading System (ETS). A ship has to surrender allowances at the end of the
compliance period corresponding to its emissions during the previous year.122
There is a possibility that the EU will include maritime GHG emissions in the existing EU ETS in the near
future. In July 2015, the European Commission submitted a legislative proposal for a directive to revise the
EU ETS for the period 2021-2030, following guidance issued by the European Council in its Conclusions
of October 2014.123 The proposal is subject to the ordinary legislative procedure and thus needs to be
discussed by the Council and the European Parliament.
On 15 February 2017, the European Parliament adopted amendments to the proposal. In these amendments,
the European Parliament says that “all sectors of the economy are required to contribute to the reduction of
carbon dioxide emissions” and has been pushing for more ambitious action by IMO. Recognizing the work
carried out at the international level, the Parliament calls for the adoption of “clear targets to reduce
international maritime emissions through the IMO” as a matter of urgency. “If however, any such agreement
is reached by the end of 2021, the sector should be included under the EU ETS and a fund should be
122 COM(2013), Supra note 86, 8. 123 G. ERBACH, Post-2020 reform of the EU Emissions Trading System, Briefing EU legislation in progress,
European Parliamentary Research Service, April 2017, 1, as available on:
http://www.europarl.europa.eu/thinktank/en/search.html. (Hereinafter: G. ERBACH (2017)); European Commission,
Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive
2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, COM(2015) 337 final -
2015/0148 (COD), 15 July 2015, as available on: http://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX:52015PC0337&qid=1501315693100. (Hereinafter: EC Proposal for a Directive
amending Directive 2003/87/EC, COM(2015) 337 final - 2015/0148 (COD))
28
established”.124 After the Council adopted its general approach on 28 February 2017, trilogue negotiations
between the Council, the Parliament and the Commission on the EU ETS revision have started on the fourth
of April this year.125 So now we must wait to see whether the European Parliament proposal on the inclusion
of maritime emissions in the ETS will be further taken into consideration. In Part III, I will examine whether
it would be possible from a legal point of view to include emissions from ships in the EU ETS and what
possible sticking points exist.
124 European Parliament, Amendments adopted by the European Parliament on 15 February 2017 on the proposal for
a directive of the European Parliament and of the Council amending Directive 2003/87/EC to enhance cost-effective
emission reductions and low-carbon investments (COM(2015)0337 – C8-0190/2015 – 2015/0148(COD)),
Strasbourg, 15 February 2017, P8_TA(2017)0035, Amendment 5, as available on
http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P8-TA-2017-
0035+0+DOC+XML+V0//EN; J. GRAICHEN et al., Key Issues at Stake at the 71st Session of the IMO Marine
Environment Protection Committee (MEPC 71), ENVI Committee Briefing, European Parliament, June 2017, as
available on: http://www.europarl.europa.eu/committees/en/supporting-analyses-search.html.
125C. DE LUSIGNAN, Press Release EU ETS Trialogues Must Reach A Workable Compromise, EUROFER , 4 April
2017, as available on: http://www.eurofer.org/News%26Events/Press%20releases.itpl.
http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P8-TA-2017-0035+0+DOC+XML+V0//EN
29
5. Evaluation
In this Chapter I have examined the current international and regional (EU) policy framework to address the
reduction of greenhouse gas emissions from shipping. On the international level, a lot of action is being
taken to tackle climate change. Under the UNFCCC, a global agreement was adopted in 2015 to keep the
global average temperature below a 2°C increase compared to pre-industrial levels, and the Kyoto Protocol
to the UNFCCC sets binding GHG emissions reduction targets up to 2020. However, despite efforts to tackle
climate change and reduce GHG emissions from other sectors, the maritime transport sector, which is a
large GHG contributor, is generally excluded from the UNFCCC framework. Instead, the IMO is seen as
the most appropriate organization to regulate this issue. The IMO has put a lot of effort into trying to find
mechanisms to reduce GHG emissions from international shipping. In 2011, MARPOL Annex VI, which
addresses air pollution from ships, was amended to include technical and operational efficiency measures.
In 2016, the IMO also adopted a roadmap “for developing a comprehensive IMO strategy on reduction of
GHG emissions from ships”, which contains a list of activities, studies and timelines. It is widely accepted,
however, including by the IMO, that technical and operational efficiency measures alone are not sufficient
to reduce GHG emissions from shipping to a satisfactory level. The IMO has therefore been examining
possible market-based measures but no global mechanism has been adopted to date.
At the regional level, the EU has its own climate and shipping policy, but nonetheless, emissions from
shipping are not (yet) included in its reduction targets. The EU has been pushing the IMO towards (greater)
global action. The EU has pressured the IMO by stating that if it does not come up with a global mechanism
to address the issue, the EU will implement the sector under the EU ETS. The question remains, however,
of whether a regional ETS, or any regional market-based measure would be a just solution, considering the
international nature of shipping.
30
PART II. The European Union Emissions Trading System (EU ETS)
The purpose of this Chapter is to provide a descriptive analysis of several aspects of the European Union
Emissions Trading system, whereby its achievements, shortcomings and challenges will be evaluated. In
order to examine whether the inclusion of the maritime transport sector in the EU ETS would be a just
solution to reduce GHG emissions from shipping, it is important to properly understand how the scheme is
applied and what its strengths and weaknesses are. Since the EU ETS is a ‘cap-and-trade’ system, there is
also a section dedicated to explaining the ‘cap-and-trade’ concept and a section that analyses the EU's
reasons for choosing this system. Aviation within the scheme will receive special attention, due to its
similarities with the maritime transport sector. The first section briefly sets out the climate context.
1. Context
1.1. EU climate policy
The EU’s emissions trading system (EU ETS) was officially launched in 2005 and was the first and largest
market-based regulation mechanism to reduce GHG emissions.126 It is the cornerstone of EU climate policy
and the key tool for cutting greenhouse gas emissions in line with the internationally agreed reduction
targets.127
The EU has set itself objectives for reducing GHG emissions up to 2050. For 2020, the EU gave a
commitment to reduce GHG emissions by 20% relative to 1990 levels. This is one of the binding key targets
in the 2020 Climate & Energy Package.128 Looking beyond 2020, the EU has set itself a binding target of
reducing GHG emissions to 40% below 1990 levels by 2030. This objective is part of the 2030 Climate &
Energy Framework, which builds on the 2020 Climate & Energy Package.129 For 2050, EU leaders
committed to reduce emissions by 80-95% by 2050 as part of efforts by developed countries as a group to
126 G. BEL and S. JOSEPH, Industrial Emissions Abatement: Untangling the Impact of the EU ETS and the
Economic Crisis, Working Paper 2014/22, Research Institute of Applied Economics, 4.
http://www.ub.edu/irea/working_papers/2014/201422.pdf. 127 European Commission, EU ETS factsheet, 2016, as available on: https://ec.europa.eu/clima/policies/ets_en. 128 For more information on the 2020 Climate & Energy Package, see: European Commission, “2020 climate &
energy package”. https://ec.europa.eu/clima/policies/strategies/2020_en. (accessed 2/08/17) 129 For more information on the 2030 Climate & Energy Framework, see: European Commission, “2030 climate &
energy framework”. https://ec.europa.eu/clima/policies/strategies/2030_en. (accessed 2/08/17)
31
reduce their emissions to a similar extent. In 2016, the European Commission published a roadmap for
building a “low-carbon” European economy in which this long-term goal is also implemented.130
The EU is therefore very ambitious in setting its reduction goals. It is also participating in international
efforts to tackle climate change under the framework of UNFCCC. The EU has committed to a second phase
of the Kyoto Protocol (2013-20), with its internal 20% reduction target forming the basis for this
commitment. The EU is also part of the Paris Climate Agreement, which was adopted in 2015.131
1.2. History
The history of the EU ETS goes back to 1997, when the Kyoto Protocol to the UNFCCC was adopted. The
Kyoto Protocol set legally binding GHG emissions reduction targets for 37 industrialized countries for the
first commitment period (2008-12).132 The EU and its Member States committed to reduce GHG emissions
by 8% by 2008 to 2012 compared to 1990 levels. To meet these Kyoto commitments, there was a clear need
for new policy instruments on the Community level. From 1998 onwards, discussions started on a possible
ETS and in March 2000, the European Commission presented a Green Paper on an EU emission trading
system.133 The Green paper caused a debate across Europe on the suitability and possible functioning of
greenhouse gas emissions trading within the EU and the EU ETS was eventually established in 2003 by
Directive 2003/87/EC.134 This initial EU ETS Directive contains the main rules for the pilot phase (2005-
07) and the Kyoto Protocol Commitment phase (2008-12).135 The scheme has been in force since 1 January
2005 and is the first and largest cross-border ‘cap-and trade’ system for GHG emissions to have been
implemented.136
130Eurostat, “Greenhouse gas emission statistics”. http://ec.europa.eu/eurostat/statistics-
explained/index.php/Greenhouse_gas_emission_statistics. (accessed 2/08/17) 131G. ERBACH (2017), Supra note 123, 2. 132 European Commission, EU ETS Handbook, 2015, 7, as available on: https://ec.europa.eu/clima/policies/ets_en.
(Hereinafter: EU ETS Handbook 2015) 133 J. B. SKJÆRSETH, J. WETTESTAD, EU Emissions Trading: Initiation, Decision-making and Implementation,
Routledge, New York, 2016, 5-7; European Commission, Green Paper on greenhouse gas emissions trading within
the European Union, COM(2000) 87 final, 8 March 2000, as available on: http://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX:52000DC0087. 134 Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme
for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC
(Text with EEA relevance), OJ L 275 25 October 2003, 32. (Hereinafter: ETS Directive 2003/87/EC) 135 J. WETTESTAD, T. JEVNAKER, Rescuing EU Emissions Trading: The Climate Policy Flagship, 2016, DOI
10.1057/978-1-137-56674-4_1. (eBook) 136 S. BORGHESI et al. (2016), Infra note 154, 1; L. K. MCALLISTER, “The Overallocation Problem in Cap-and-
Trade: Moving Toward Stringency”, Columbia Journal of Environmental Law 2009, Vol. 43, (395)408 (Hereinafter:
L. K. MCALLISTER (2009)) ; A.D. ELLERMAN, C. MARCANTONINI, A. and ZAKLAN, The EU ETS: Eight
32
2. The concept of a cap-and-trade mechanism
In contrast to traditional ‘command-and-control’ regulatory measures, which depend on government
agencies to define both the environmental goals and the means of meeting them, a cap-and-trade system is
a market-based solution to pollution generated by certain industries or countries.137 In past decades there
has been extensive debate in literature and among policy makers on which market-based instrument is most
suitable to fight climate change in a way that is cost efficient and legally feasible. The complexity of climate
change policy requires:
Policymakers to set binding and ambitious long-term emissions reduction goals;
Economic incentives that encourage taking action in a flexible manner;
Knowledge sharing about innovative mitigation practices; and
Solid compliance mechanisms.138
Among the different possible market-based instruments, a cap-and-trade system is considered as one of the
most appropriate for climate change policies and has gained increasing importance worldwide.139
Cap-and-trade systems usually share the same basic structure:
1. A regulator (government) sets a ‘cap’ on the total amount of emissions of certain pollutants from a
set of regulated sources (e.g. polluting countries, as in the case of the Kyoto Protocol or industries,
as in the case of the EU ETS) over a fixed compliance period;
2. In accordance with this cap, allowances are created, each representing the right to emit one unit of
the pollutant (pollution permits);
3. The allowances are allocated by the regulator to the polluting entities (regulated sources);
4. A market is established, whereby the polluting entities may trade the allowances according to their
emissions needs;
Years and Counting, EUI Working Paper RSCAS 2014/04, Robert Schuman Centre for Advanced Studies, January
2014, 1, As available on: http://www.eui.eu/Home.aspx. 137 T. TIETENBERG, The Tradable permits Approach to Protecting the Commons: What Have We Learned?,
Working Paper No. 36, Fondazione Eni Enrico Mattei, June 2002, as available on:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=315500; M. FREEDMAN et al., “Mandated climate change
disclosures: a study of large US firms that emit carbon dioxide” in C. R. LEHMAN, (eds.), Sustainability and
Governance, Emerald, Bingley, 2015, (99)100. 138 A. MIOLA et al., “Designing a climate change policy for the international maritime transport sector: Market-
based measures and technological options for global and regional policy actions”, Energy Policy 2011, vol. 39,
(5490)5491. (Hereinafter: A. MIOLA et al. (2011)) 139 Ibid.; S. BORGHESI et al. (2016), Infra note 154, Preface.
33
5. At the end of each compliance period, each polluting entity must show that it holds a sufficient
number of allowances to cover the total number of units of pollution that it has emitted during that
period.140
If the cap-and-trade system allows banking, the polluting entities may save unused allowances for
trading or use in subsequent compliance periods.141
A cap-and-trade system thus sets a cap on emissions levels, with distribution and trading of pollution permits
up to that cap. The purpose is to incentivise the reduction of emissions levels in a cost-effective way by
restricting access to the resource through the allocation of tradable permits.142 There is a general consensus
among economists that such economic incentives rather than fixed rules should pave the way to a more
sustainable climate.143
140L. K. MCALLISTER (2009), Supra note 136, (395)398; J. DIRIX, W. PEETERS & S. STERCKX, “Is the EU a
just climate policy?”, New Political Economy 2015, vol. 20, (702)704; A. CHARITOU, “Discussion of “The
Association Between Energy Taxation, Participation in an Emissions Trading System, and the Intensity of Carbon
Dioxide Emissions in the European Union”, The International Journal of Accounting 2015, vol. 50, (418)419. 141 L. K. MCALLISTER (2009), Supra note 136, (395)398. 142 J. DIRIX, W. PEETERS & S. STERCKX, “Is the EU a just climate policy?”, New Political Economy 2015, vol.
20, (702)704. 143 A. MIOLA et al. (2011), Supra note 138, (5490)5491; C. DE PERTHUIS, R. TROTIGNON, “Governance of
CO2 markets: Lessons from the EU ETS”, Energy Policy 2014, vol. 75, (100)100.
34
3. General understanding of the EU ETS
3.1. Purpose and scope
The EU ETS is a ‘cap-and-trade’ system which sets a maximum (cap) on the total amount of GHG emissions
from installations and aircraft operators. A fixed annual number of allowances is allocated to the participants
(freely or by auction). These allowances can be traded among the GHG emitters, so that the total volume of
emissions from installations and aircraft operators stays within the cap.144 One European Union allowance
(EUA) gives the owner the right to emit one tonne of CO2 or the equivalent amount of N2O and PFCs
(CO2e).145 At the end of each year the participant must return as many EUAs as it emitted tonnes of CO2e
during that year. If the participant has insufficient allowances, it must either take measures to reduce its
emissions or buy more allowances on the market. When the participant fails to surrender sufficient
allowances at the end of the year, heavy fines are imposed (these are set at €100/tCO2 and rising).146
Participation in the EU ETS is mandatory for companies operating in sectors covered by the system.147
The purpose of the EU ETS is to promote reductions of greenhouse gas emissions in a cost-effective and
economically efficient manner.148
As the centrepiece of the EU’s 2020 Climate and Energy Package, the EU ETS covers approximately 45%
of the EU’s total greenhouse gas emissions. It covers emissions of CO2, N2O and PFCs, and applies to more
than 11000 power stations and industrial plants in 31 countries.149 Since 2012 it now also applies to the
aviation sector.150
Table 3 Greenhouse gases and sectors covered by the EU ETS 151
Carbon dioxide (CO2) Nitrous oxide (N2O) Perfluorocarbons (PFCs)
From:
• Power and heat generation
From: From:
• Aluminium production
144 EU ETS Handbook 2015, Supra note 132, 4. 145 G. ERBACH (2017), Supra note 123, 1. 146 EU ETS Handbook 2015, Supra Note 132, 16-17. 147 European Commission, COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT
Accompanying the document Proposal for a Directive of the European Parliament and of the Council amending
Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, SWD(2015) 135
final, 15 July 2015, 15, as available on: http://eur-lex.europa.eu/legal-
content/EN/ALL/?uri=CELEX:52015SC0135&qid=1501324948890. 148 Art. 1 ETS Directive 2003/87/EC, Supra note 134. 149 The 31 countries include the 28 EU Member States as well as Iceland, Liechtenstein and Norway. 150 G. ERBACH (2017), Supra note 123, 3. 151 European Commission, EU ETS factsheet, 2016, as available on: https://ec.europa.eu/clima/policies/ets_en.
35
• Energy-intensive industrial sectors
including oil refineries, steel works
and production of iron, aluminium,
metals, cement, lime, glass, ceramics,
pulp, paper, cardboard, acids and bulk
organic chemicals
• Civil aviation
• Production of nitric, adipic
and glyoxylic acids and
glyoxal
3.2. Development in phases
The EU ETS was first established in 2003 by EU ETS Directive 2003/87/EC, became operational in 2005
and is being implemented in four phases, named ‘trading periods’. For each phase, the EU sets a multi-year
cap, with no limit on banking within that phase. Banking means that when an ETS participant has a ‘surplus’
of allowances, it can carry these allowances forward to the next phase.152 Banking was not allowed, however,
between phases 1 and 2.153 The scheme was initially based on grandfathering of emission allowances. EUAs
were allocated for free, taking into account the historical emissions of the sectors and installations covered
by the scheme. The EUAs were distributed to companies according to the specific National Allocation Plans
(NAPs) developed by the EU Member States. This EU ETS format covers the first two phases. These two
phases revealed some shortcomings, such as an overallocation of allowances compared to the total amount
of emissions.154 During phase 1, the EU ETS had allocated about 5.6% more allowances than needed to
cover the emissions and by the end of phase 2, there was a surplus of 2 billion allowances.155 Furthermore,
free allocation is generally considered to be less efficient than auctioning, which makes the polluters pay
for a pollution permit.156
Phase one was a ‘learning-by-doing’ pilot phase that covered the years 2005-2007. This phase was used to
test price formation in the carbon market and to establish the necessary infrastructure for monitoring,
reporting and verification of emissions.157 Phase two coincided with the first commitment period of the
152 EU ETS Handbook 2015, Supra note 132, 133. 153 L. K. MCALLISTER (2009), Supra note 136, (395)409. 154 S. BORGHESI et al., The European Emission Trading System and Its Followers,
SpringerBriefs in Environmental Science, 2016, DOI 10.1007/978-3-319-31186-9_1, 2. (eBook). (Hereinafter: S.
BORGHESI et al. (2016)) 155 L. K. MCALLISTER (2009), Supra note 136, (395)409; G. ERBACH (2017), Supra note 123, 4. 156 C. EGENHOFER, “The Making of the EU Emissions Trading Scheme: Status, Prospects and Implications for
Business”, European Management Journal 2007, vol. 25, (453)454; 157 EU ETS Handbook 2015, Supra note 132, 7.
36
Kyoto protocol (2008-2012). During this phase, Iceland Norway and Liechtenstein joined, the number of
allowances was reduced by 6.5% and aviation was brought into the system (1/1/2012).158
The EU ETS is currently in its third phase, which coincides with the second commitment period of the
Kyoto protocol (2013-2020). The rules of this phase were adopted by EU ETS Directive 2009/29/EC,
amending Directive 2003/87/EC.159 In contrast to phases 1 and 2, the default method of allocating
allowances should be auctioning. In 2013, 40% of EUAs were allocated by auctioning and the European
Commission estimates that this proportion will increase to 57% during 2013-2020. The way the fixed cap
is set has also changed in phase 3. To meet the EU’s 2020 GHG emissions reduction target of 20%, an EU-
wide cap was established, which decreases annually by a linear reduction factor (LRF) of 1.74% calculating
from 2010. This should eventually result in a reduction of GHG emissions by 21% by 2020, compared to
2005 levels.160 Croatia also joined the EU ETS on 1 January 2013.161
The fourth phase covers the years 2021-2030. As aforementioned, in July 2015 the European Commission
submitted a legislative proposal for a directive to revise the EU ETS for the period 2021-2030.162 The
proposal envisages a reduction in GHG emissions by at least 43% by 2030 in comparison with 2005 levels,
in the sectors covered by the ETS. This would be in line with the EU’s 2030 Climate and Energy policy
framework and part of its contribution to the Paris Agreement. In summary, the proposal consists of three
main elements: (1) a more ambitious linear reduction factor for GHG emissions (2.2%); (2) new rules for
free allocation and carbon leakage (this is the risk that increased costs due to climate policies in one
jurisdiction, such as the EU, could lead companies to transfer their production to other countries that have
laxer standards or measures to cut GHG emissions)163; (3) provisions for funding innovation and
modernization.164In April 2017, interinstitutional negotiations on the revision of the EU ETS post-2020
began between the Parliament, the Council and the Commission.165
158 European Commission, EU ETS factsheet, 2016, as available on: https://ec.europa.eu/clima/policies/ets_en. 159 Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009 amending Directive
2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community
(Text with EEA relevance), OJ L 140 5 June 2009, 63. (Hereinafter: ETS Directive 2009/29/EC) 160 EU ETS Handbook 2015, Supra note 132, 22. 161 European Commission, EU ETS factsheet, 2016, as available on: https://ec.europa.eu/clima/policies/ets_en. 162 EC Proposal for a Directive amending Directive 2003/87/EC, COM(2015) 337 final - 2015/0148 (COD), Supra
note 123. 163 EU ETS Handbook 2015, Supra note 132, 60. 164 G. ERBACH (2017), Supra note 123, 4. 165 European Parliament, “Legislative train schedule resilient energy Union with a climate change policy – Revision
of the EU Emission Trading Scheme Directive for the 2021-2030 period. http://www.europarl.europa.eu/legislative-
train/theme-resilient-energy-union-with-a-climate-change-policy/file-revision-of-the-eu-ets-2021-2030. (accessed
27/07/17)
37
3.3. Why cap-and-trade
Cap-and-trade mechanisms have been widely discussed in the literature and many view this as the most
promising tool for reducing GHG emissions or other air pollutants.166 It is even said that emissions trading
schemes are the ‘cornerstones’ of climate change policy.167 According to the European Commission, the EU
chose a cap-and-trade system as the best means of meeting GHG emissions reduction targets at the lowest
overall cost to the participants and the economy as whole. It allows a set environmental outcome to be
achieved at the lowest cost.168 The Commission, among others, argue that this is preferable to other forms
of pricing, such as carbon taxes, which do not guarantee any particular level of reduction. With a tax the
price is known, but the resulting emission level is not known in advance, resulting in uncertainty regarding
the environmental outcome.169 In addition, taxes are considered to be politically difficult to implement.170
A cap-and-trade system provides several benefits, of which flexibility is one of the most praised. Regulated
sources tend to support cap-and-trade regulation, due to the flexibility that trading provides. In contrast to a
traditional command-and-control regulation, polluting entities are able to choose if, when and how they will
reduce their emissions. Environmentalists, on the other hand, like the system because of the cap, which
provides certainty about the total amount of pollution that will be emitted by the regulated sources for the
period of time during which the caps are set. The cap must, however, be stringent enough to be
environmentally effective.171
The Commission summarized the reasons for choosing a cap-and-trade system as follows:
Certainty about quantity. This is due to the cap, as I just explained. The cap will support the EU in
achieving its GHG emissions reduction goals;
Cost-effectiveness. This is due to the flexibility of trading. If a polluter has insufficient allowances,
it must either take measures to reduce its emissions or buy more allowances on the market. This
ensures that emissions are cut where it costs least to do so. To give a short explanation: if the cost
to reduce emissions is lower than the market price of an EUA, this encourages companies to invest
in emission reducing technologies. If, however, the cost of reducing emissions is higher than the
166 L. K. MCALLISTER (2009), Supra note 136, (395)396. 167 S. BORGHESI et al. (2016), Supra note 154, 1. 168 EU ETS Handbook 2015, Supra note 132, 5. 169 L. ZETTERBERG et al., Europe’s choice – Facts and function of the EU emissions trading system, Mistra Indigo,
IVL Swedish Environmental Research Institute, May 2014, 8.
http://www.ivl.se/download/18.343dc99d14e8bb0f58b52a1/1443177288965/EU%2BETS%2Brapport.pdf. 170 Ibid.; A. MIOLA et al. (2011), Supra note 138, (5490)5491. 171 L. K. MCALLISTER (2009), Supra note 136, (395)396-397.
38
market price of allowances (also known as the ‘carbon price’), they can buy allowances on the
market.172
The collective emissions target is thus reached at the lowest possible cost.173
Revenue. If EUAs are auctioned, this creates revenues, at least 50% of which should be used to
tackle climate change in the EU and third countries174;
Minimizing risk to Member State Budgets. The EU ETS covers almost half of EU’s GHG emissions,
which reduces the risk that Member States will need to purchase additional international units in
order to meet their commitments under the Kyoto Protocol.175
However, the ETS has not been free from criticism. It is often criticised for its weak caps, free allocation of
allowances to the biggest polluters and purchase of "offsets" – carbon credits bought from outside the cap-
and-trade system from carbon reduction projects in the developing world.176 These allegations will be
analysed in this chapter.
3.4. Cap setting
The cap setting procedure has changed during the different phases. In the first two phases, cap setting was
highly decentralized, as stipulated in the initial EU ETS Directive 2003/87/EC. According to D. Ellerman
et al. (2014), “the EU ETS was to be best understood as a system for linking 25 individual systems that set
their own caps and determined their own allocations subject to some mutually agreed review by the
European Commission”.177 The EU-wide cap was set on a bottom-up basis by National Allocation Plans
(NAPs) which were subject to approval by the European Commission. Each Member State had to establish
an NAP, in which they determined the number of EUAs to be allocated and how the EUAs would be
distributed to the regulated sources within their jurisdiction. The overall cap was then the sum of the
172 G. ERBACH (2017), Supra note 123, 3. 173 L. ZETTERBERG et al., Europe’s choice – Facts and function of the EU emissions trading system, Mistra Indigo,
IVL Swedish Environmental Research Institute, May 2014, 8.
http://www.ivl.se/download/18.343dc99d14e8bb0f58b52a1/1443177288965/EU%2BETS%2Brapport.pdf. 174 Art. 10(3) ETS Directive 2009/29/EC, Supra note 159. 175 EU ETS Handbook 2015, Supra note 132, 5. 176 SANDBAG, “What is emissions trading?”, The Guardian 5 July 2011.
https://www.theguardian.com/environment/2011/jul/05/what-is-emissions-trading 177 A.D. ELLERMAN, C. MARCANTONINI, A. and ZAKLAN, The EU ETS: Eight Years and Counting, EUI
Working Paper RSCAS 2014/04, Robert Schuman Centre for Advanced Studies, January 2014, 2, as available on:
http://www.eui.eu/Home.aspx.
39
allowances allocated in the NAPs.178 In phase one the cap was set at 2.181 Gigatonnes of CO2 equivalent
per year (Gt CO2e/year) and in phase 2, the cap was reduced to 2.083 Gt CO2e/year.179
This system did not turn out well. Since the first phase, the annual caps were set at levels higher than BAU
emissions, which caused an oversupply of allowances. During phase 1, the EU ETS had allocated about
5.6% more allowances than were needed to cover total emissions. Due to this oversupply, the price of the
allowances fell to zero.180 After phase 1 it was expected that the cap during phase 2 would be more
ambitious. The annual cap was set 13% lower on an annual average basis than the cap in phase 1 and 6%
lower than the comparable 2005 emissions.181 However, emissions in the period 2008-2012 were influenced
by many factors, such as changes in the fuel mix (electricity sector), increased use of renewable energy,
accelerated use of international credits between 2008 and 2012 and the effects of the economic crisis
(causing a lower demand for allowances), and according to the European Environment Agency (EEA) this
resulted in a large surplus of around 1.8 billion allowances.182
With the adoption of the EU ETS Directive 2009/29/EC, amending Directive 2003/87/EC, the NAP process
was abandoned for the third trading period, starting in 2013. Instead, a centrally set EU-wide cap was
introduced. The cap is calculated and established at EU level, by a decision of the European Commission,
before the start of the trading period.183
3.4.1. FIXED INSTALLATION CAP
For fixed installations, the cap decreases each year by a LRF of 1.74%, compared to 2010 (mid-point of the
second trading period 2008-2012).184 In absolute terms this means that the number of EUAs will be reduced
yearly by 38,264,246 allowances.185 The 2013 cap was set by Decision 2010/634 and amounts to 2.039
billion allowances.186 Eventually, the annual reduction of the cap should lead to a reduction in GHG
178 L. K. MCALLISTER (2009), Supra note 136, (395)409; L. ZETTERBERG et al., Europe’s choice – Facts and
function of the EU emissions trading system, Mistra Indigo, IVL Swedish Environmental Research Institute, May
2014, 10. http://www.ivl.se/download/18.343dc99d14e8bb0f58b52a1/1443177288965/EU%2BETS%2Brapport.pdf.
(Hereinafter: L. ZETTERBERG et al. (2014)) 179 L. ZETTERBERG et al. (2014), Supra note 178, 16. 180 European Commission, EU ETS factsheet, 2016, as available on: https://ec.europa.eu/clima/policies/ets_en. 181 L. K. MCALLISTER (2009), Supra note 136, (395)409. 182 EEA, Trends and projections in Europe 2013 Tracking progress towards Europe's climate and energy targets
until 2020, Report No. 10/2013, European Environment Agency, 2013, 9, as available on:
https://www.eea.europa.eu/publications/trends-and-projections-2013; J. DIRIX, W. PEETERS & S. STERCKX, “Is
the EU a just climate policy?”, New Political Economy 2015, vol. 20, (702)704. (According to G. ERBACH (2017),
Supra note 123, 4, the total surplus after phase 2 was 2 billion allowances) 183 EU ETS Handbook 2015, Supra note 132, 22; S. BORGHESI et al. (2016), Supra note 154, 6. 184 Art. 9, ETS Directive 2009/29/EC, Supra note 159. 185 EU ETS Handbook 2015, Supra note 132, 22 186 Art. 1, Commission Decision 2010/634/EU of 22 October 2010 adjusting the Union-wide quantity of allowances
to be issued under the Union Scheme for 2013 and repealing Decision 2010/384/EU, OJ L 279 23 October 2010, 34.
40
emissions by 21% by 2020, compared to 2005 levels. The LRF will be reviewed by the European
Commission, with the aim of adopting an “adjustment” Decision by 2025.187 In the Commission's proposal
on the revision of the EU ETS for phase 4 (2021-2030), it is already stipulated that the LRF must change to
2.2% from 2021 onwards, which should result in a 43% overall GHG emissions reduction for sectors
covered by the EU ETS by 2030.188
Although a new EU-wide cap with a linear reduction factor was set, the surplus of allowances increased
further to 2.1 billion in 2013. In 2015, the surplus was reduced to 1.78 billion, but this was due to the
introduction of ‘backloading’ in phase 3.189 Without this measure, the surplus would have been almost 40%
higher at the end of 2015.190
3.4.2. AVIATION CAP
Since 2012, the aviation sector is also included in the EU ETS. The necessary legislation was adopted by
Directive 2008/101/EC (referred to hereinafter as the Aviation Directive), amending the initial EU ETS
Directive, which now includes provisions for aviation.191 The cap for aircraft operators is determined by
historical aviation emissions in the European Economic Area, which are based on the years 2004-2006 and
derived from data from the European Organisation for the Safety of Air Navigation and from actual fuel
consumption data provided by aircraft operators.192 The provisional cap for aviation is set at a constant level
of 210,349,264 aviation allowances per year for the entire phase 3 period (2013-2020), corresponding to
95% of the historical aviation emissions.193 However, the number of allowances has been increased by
116,524 per year from 1 January 2014 onwards to ensure Croatia’s full integration within the EU ETS.194
The scope to which the cap applies is determined in the EU ETS Directive, which will be discussed in
Section 5.2.2. of Part II.
187 S. BORGHESI et al. (2016), Supra note 154, 6. 188 EC Proposal for a Directive amending Directive 2003/87/EC, COM(2015) 337 final - 2015/0148 (COD), Supra
note 123, 9. 189 Backloading is a short-term measure and means that the European Commission postponed the auctioning of 900
million allowances until 2019-2020. This ‘back-loading’ of auction volumes does not reduce the overall number of
allowances to be auctioned during phase 3, only the distribution of auctions over the period. 190 European Commission,”Market Stability Reserve”. https://ec.europa.eu/clima/policies/ets/reform_en. (accessed
28/07/2017) 191 Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008 amending Directive
2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within
the Community (Text with EEA relevance), OJ L 8 13 January 2009, 3 (Hereinafter Directive 2008/101/EC); EU
ETS Handbook 2015, Supra note 132, 89. 192 EU ETS Handbook 2015, Supra note 132, 89-90. 193 Art. 3c(2), Directive 2008/101/EC, Supra note 191; EU ETS Handbook 2015, Supra note 132, 23. 194 European Commission, “Allocation to aviation”. https://ec.europa.eu/clima/policies/ets/allowances/aviation_en.
(accessed 29/07/17)
41
The diagram below (Figure 1) indicates how cap setting evolves through the first three trading periods. It
shows that as from 2012 onwards, the EU-wide cap is determined by the sum of the fixed installation cap
and the aviation cap.195
Figure 1 Evolution of cap setting 196
3.5. Allocation
Allocation of EUAs takes place either by free allocation or by auctioning.
Just like cap setting, in the first two trading periods (2005-2012) the allocation of allowances was highly
decentralized, since it was also determined by the National Allocation Plans (NAPs). The default method
was free allocation based on grandfathering (allocation was based on emissions from previous years). In
phase one, 95% of EUAs were allocated for free and in phase two this was 90%. Decentralized free
allocation of allowances was politically necessary to ensure Member State and industry support.197
However, the system seemed to be problematic in different ways. It appeared that some industries passed
on the ‘opportunity’ cost of their emission allowances to the consumer, while receiving the allowances for
free. These are so-called ‘windfall profits’.198 Grandfathering was also criticised as rewarding high emitters,
195 For the period 01/01/2012 – 31/12/2012, a different cap was set for aviation, which corresponded to 97% of the
historical aviation emissions. (Art. 3c(1) Directive 2008/101/EC, Supra note 191) 196 Image retrieved from EU ETS Handbook 2015, Supra note 132, 22. 197 C. EGENHOFER, “The Making of the EU Emissions Trading Scheme: Status, Prospects and Implications for
Business”, European Management Journal 2007, vol. 25, (453)454-455. 198 G. ERBACH (2017), Supra note 123, 4.
42
while not taking early action into account.199 Another criticism was the competitive impact of different
allocations to the same installations in different Member States in what is intended to be a single market.200
With the start of phase three, decentralized free allocation based on grandfathering was abandoned.201
Auctioning became the default method and free allocation is primarily based on a benchmarking system.
These two methods are described below.
3.5.1. AUCTIONING
From the third phase (2013-2020) onwards, the standard method of allocation is auctioning, which allows
participants to buy allowances at the market price. This is stipulated in article 10 of the EU ETS Directive.202
Auctioning has several advantages. It is considered to be an efficient, transparent and non-discriminatory
alternative to free allocation. In addition, it implements the “polluter pays” principle, because the emitting
entities have to pay for every tonne of CO2e that they emit.203
As of 2013, power generators must buy all their allowances, with exceptions for some countries. In sectors
other than power generation, there is a gradual shift to auctioning.204 In 2013, about 40% of the EUAs were
auctioned. According to the EU ETS Directive, this percentage will gradually increase and by 2027, all
allowances should be auctioned.205 However, as part of the 2030 climate and energy policy framework, EU
leaders decided to continue free allocation until 2030.206
The distribution of auctioning rights between Member States is stipulated in article 10(2) of the EU ETS
Directive. Of the total allowances available for auction, 88% are distributed to the Member States on the
basis of their GHG emissions in phase 1 (2005-2007). A further 10% are distributed to the ‘poorer’ Member
199 EU ETS Handbook 2015, Supra note 132, 40. 200 A.D. ELLERMAN, C. MARCANTONINI, A. and ZAKLAN, The EU ETS: Eight Years and Counting, EUI
Working Paper RSCAS 2014/04, Robert Schuman Centre for Advanced Studies, January 2014, 3, As available on:
http://www.eui.eu/Home.aspx. (Hereinafter: A.D. ELLERMAN (2014)) 201 A.D. ELLERMAN (2014), Supra note 200, 3. 202 Art. 10, ETS Directive 2009/29/EC, Supra note 159. 203 S. BORGHESI et al. (2016), Supra note 154, 7. 204 European Commission, “Free allocation”. https://ec.europa.eu/clima/policies/ets/allowances_en. (accessed
30/07/17) 205 L. ZETTERBERG et al. (2014), Supra note 178, 17. 206 European Commission, “Carbon leakage”. https://ec.europa.eu/clima/policies/ets/allowances/leakage_en.
(accessed 30/07/17)
43
States, with lower income per capita. The remaining 2% of auction rights are distributed to countries which
undertook ‘early action’ and reduced their GHG emissions by at least 20% in 2005, compared to 1990.207
Member States are responsible for ensuring that their share of allowances are auctioned.208 The auctioning
of allowances is governed by the EU ETS Auction Regulation209. This Regulation specifies the timing,
administration and other aspects of auctioning to ensure that it is conducted in an open, transparent,
harmonised and non-discriminatory manner.210 Allowances are sold on an auction platform and the Auction
Regulation makes provision for the Member States and the European Commission to jointly establish a
common auction platform. The Commission considers that “a common platform best ensures respect of the
principles of non-discrimination, transparency and simplicity, provides the best guarantees for full, fair and
equitable access to small and medium sized enterprises and small emitters covered by the EU ETS, and best
minimises the risk of market abuse”.211 The member states are not, however, obliged to sell their allowances
on the common platform. They can opt out of the common platform and set up their own platform. Germany,
the United Kingdom and Poland have exercised this right.212
There are currently two auction platforms in place: The European Energy Exchange (EEX) in Leipzig. This
is the common platform on which most allowances are sold. The second auction platform is ICE Futures
Europe (ICE) in London. This is the United Kingdom's platform.213 Each bidder may apply for admission
to bid anywhere in the EU (and in Liechtenstein, Norway and Iceland). Once authorized, the bidder can then
place any number of bids, with a lot size of 500 or 1000 allowances, that they want to buy at a given price.
The auction platform then determines and publishes the clearing price at which the demand for allowances
equals the number of allowances for sale. When a bidder placed a bid which is the same, or higher than the
clearing price, the bid was successful. All the successful bidders receive the allowances at the same price,
regardless the price in their bid.214 If the volume of allowances is not entirely sold, however, the auction is
207 Art. 10(2), ETS Directive 2009/29/EC, Supra note 159; EU ETS Handbook 2015, Supra note 132, 31; L.
ZETTERBERG et al. (2014), Supra note 178, 17. 208 EU ETS Handbook 2015, Supra note 132, 29. 209 Commission Regulation (EU) No 1031/2010 of 12 November 2010 on the timing, administration and other
aspects of auctioning of greenhouse gas emission allowances pursuant to Directive 2003/87/EC of the European
Parliament and of the Council establishing a scheme for greenhouse gas emission allowances trading within the
Community (Text with EEA relevance), OJ L 302 8 November 2010, 1. 210 EU ETS Handbook 2015, Supra note 132, 28. 211 European Commission, “Auctioning. https://ec.europa.eu/clima/policies/ets/auctioning_en. (accessed 30/07/17) 212 Ibid. 213 Ibid. 214 L. ZETTERBERG et al. (2014), Supra note 178, 17.
44
cancelled. In that case the auctioned volume will be distributed across the next auctions on the same auction
platform.215
In the period 2013-2015, Member States auctioned almost 2 billion allowances, equivalent to EUR 11.7
billion in revenues.216 The revenues generated from the auctions are distributed to the Member States
according to their auction rights.217 Germany, the biggest emitter in the EU, received most of this money
(over 20%) followed by the UK, Spain and Italy. The EU ETS Directive stipulates that at least 50% of the
revenues generated from auction should be used for climate action in the EU and third countries.218 On
average, member states report that they have spent 85% of the total auctioning revenues for climate purposes
during the 2013 to 2015 period. The majority of this money was allocated to domestic actions (EUR 8,691
million or 82%), while less than 9% (EUR 1,048 million) was spent on international climate actions.219
3.5.2. FREE ALLOCATION
Although auctioning has been the default method for the allocation of allowances since 2013, almost half
of allowances are still allocated free of charge to manufacturing industry and, exceptionally, to power
generation in certain Eastern European Member States.220
The power generation sector, which is responsible for 55% of the EU’s GHG emissions221, is considered not
to face any competition and free allocation to this sector was therefore abandoned at the end of the second
trading period (2012).222 Another reason for this is that during the first two trading periods this sector was
able to make windfall profits. There is only one exception to support the modernization of the power
215 EU ETS Handbook 2015, Supra note 132, 32. 216 E.K. VELTEN et al., Smart Cash for the Climate: Maximising Auctioning Revenues from the EU Emissions
Trading System - An analysis of current reporting by Member States and options for improvement, Full report
MaxiMiseR, Ecologic Institute, December 2016, 3. http://ecologic.eu/sites/files/publication/2016/2584-
maximiseretsfulltechnicalreport_final.pdf. 217 A.D. ELLERMAN (2014), Supra note 200, 4. 218 Art. 10(3), ETS Directive 2009/29/EC, Supra note 159; EU ETS Handbook 2015, Supra note 132, 35. 219 E.K. VELTEN et al., Smart Cash for the Climate: Maximising Auctioning Revenues from the EU Emissions
Trading System - An analysis of current reporting by Member States and options for improvement, Full report
MaxiMiseR, Ecologic Institute, December 2016, 3. http://ecologic.eu/sites/files/publication/2016/2584-
maximiseretsfulltechnicalreport_final.pdf. 220 Ibid. 221 Eurostat, “Greenhouse gas emissions, analysis by source sector, EU-28, 1990 and 2014 (percentage of total)”.
http://ec.europa.eu/eurostat/statistics-
explained/index.php/File:Greenhouse_gas_emissions,_analysis_by_source_sector,_EU-
28,_1990_and_2015_(percentage_of_total)_new.png. (accessed 30/07/17) 222 A.D. ELLERMAN (2014), Supra note 200, 3.
45
generation sector in certain Member States, as stipulated in article 10c of the EU ETS Directive. The sectors
in these Member States receive free allowances, in amounts that will decrease until 2019.223
In contrast to the power generation sector, manufacturing industry received 80% of allowances for free at
the start of phase 3. This proportion will gradually be reduced on a yearly basis to 30% in 2020.224 Some
sectors, however, which face a significant risk of ‘carbon leakage’ will continue to receive their allowances
100% free. Carbon leakage refers to the risk that companies will transfer their production to other countries
that have laxer standards or measures to reduce GHG emissions.225 This risk exists for highly competitive
sectors. The EU ETS Directive stipulates in article 10a when “a sector or subsector shall be deemed to be
exposed to a significant risk of carbon leakage”.226 The sectors and subsectors which are considered to face
a risk of carbon leakage are defined in an official list, established by the European Commission.227
As stipulated in article 10a of the EU ETS Directive, free allocation is based on Community-wide ex-ante
benchmarks, that reward the most carbon-efficient installations in each sector. A benchmark is a reference
value, in tCO2e, relative to a production activity. The value is used to calculate free allocation of allowances
per installation.228 The product-specific benchmarks reflect the average GHG emission performance of the
10% best performing installations in the EU for a given product. Furthermore, the benchmarks are not based
on the fuel used, the technology or geographical location of the installations. The principle is ‘one product
= one benchmark’, which is intended to ensure transparency and no distortion of competition, while also
providing an incentive to reduce GHG emissions and make production more efficient.229 Installations that
meet the benchmarks, will in principle receive (almost) all their allowances for free. Installations which do
not reach the benchmark will receive fewer allowances than they need to cover their emissions. These
installations must reduce their emissions, buy EUAs on the market or combine both options.230
223 EU ETS Handbook 2015, Supra note 132, 36. 224 Art. 10a(11) ETS Directive 2009/29/EC, Supra note 159; European Commission, “Allocation to industrial
installations”. https://ec.europa.eu/clima/policies/ets/allowances/industrial_en. (accessed 31/07/17) 225 European Commission, “Carbon leakage”. https://ec.europa.eu/clima/policies/ets/allowances/leakage_en.
(accessed 31/07/17) 226 Art. 10a(15)(16), ETS Directive 2009/29/EC, Supra note 159. 227 European Commission, “Carbon leakage”. https://ec.europa.eu/clima/policies/ets/allowances/leakage_en.
(accessed 31/07/17) 228 EU ETS Handbook 2015, Supra note 132, 47. 229 S. BORGHESI et al. (2016), Supra note 154, 9. 230 European Commission, “Allocation to industrial installations”.
https://ec.europa.eu/clima/policies/ets/allowances/industrial_en. (accessed 31/07/17)
46
The calculation of the total amount of free allowances that an installation will receive is based on a formula
where the production quantity (expressed in tonnes) is multiplied by the benchmark value.231 The exact
calculation, however, is not dealt with further in this master’s dissertation.232
3.5.3. ALLOCATION TO AVIATION
From phase 3 onwards, 82% of the allowances are allocated for free to aircraft operators. The amount of
free allocations is based on the verified tonne-kilometre data for 2010. ‘Tonne-kilometre’ is a unit for
measuring aviation activity and refers to the passengers and freight that operators carry, multiplied by the
total distance travelled. Of the total allowances, 15% are auctioned and the remaining 3% are set aside for
new entrants and fast-growing airlines.233
Free allocation of EU aviation allowances (EUAAs) is based on a benchmark established by the European
Commission and European Environment Agency Joint Committee in 2011. The benchmark (emissions per
tonne-kilometre) is calculated by dividing the total annual amount of free allowances available, by the sum
of tonne-kilometre data from applications by aircraft operators. Based on this benchmark, aircraft operators
receive 0.6422 allowances per 1,000 tonne-kilometre travelled of phase 3 of the ETS.234
The EUAAs are issued to aircraft operators only and cannot be held or surrendered by stationary
installations. Aircraft operators can, however, hold and surrender both general allowances and aviation
allowances to comply with the EU ETS.235
3.6. Compliance and enforcement
3.6.1. COMPLIANCE CYCLE
To justify the integrity of the EU ETS, compliance and enforcement are essential. This was already
recognized by the European Commission at an early stage. In its Green paper on greenhouse gas emissions
trading within the European Union, the Commission states that strict compliance and enforcement are
231 European Commission, “Carbon leakage”. https://ec.europa.eu/clima/policies/ets/allowances/leakage_en.
(accessed 31/07/17) 232 For more information on the calculation of free allocation using benchmarks: see EU ETS Handbook 2015, Supra
note 132, 44. 233 EU ETS Handbook 2015, Supra note 132, 90. 234 EU ETS Handbook 2015, Supra note 132, 90; A. LÖFGR et al., Architecture of the EU Emissions Trading System
in Phase 3 and the Distribution of Allowance Asset Values, Discussion Paper, Resources for the Future, October
2015, 6-7. http://www.rff.org/files/document/file/RFF-DP-15-45_0.pdf. 235 Ibid.
47
necessary “to enhance confidence in the trading system, make it work in an efficient way in accordance with
the rules of the internal market and at the same time increase the likelihood of achieving the desired
environmental result”.236 Monitoring, reporting and verification are thereby seen as an essential feature of
the EU ETS.237
Each aircraft operator and industrial installation is required to monitor and report its annual emissions to its
Competent Authority (CA). This annual procedure of monitoring, reporting and verification (MRV), is
called the compliance cycle.238 Figure 2 illustrates the compliance cycle from the perspective of the aircraft
operators and participating installations.
Figure 2 Compliance cycle239
236 European Commission, Green Paper on greenhouse gas emissions trading within the European Union,
COM(2000) 87 final, 8 March 2000, 24, as available on: http://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX:52000DC0087. 237 L. ZETTERBERG et al. (2014), Supra note 178, 15. 238 EU ETS Handbook 2015, Supra note 132, 101. 239 Figure retrieved from EU ETS Handbook 2015, Supra note 132, 101.
48
The compliance cycle is regulated by articles 12-15 of the EU ETS Directive, as further implemented by
EU Regulations 600/2012240 and 601/2012241. Since 2013, the monitoring and reporting of GHG emissions
must be done in accordance with the EU Monitoring and Reporting Regulation (MRR – EU Regulation
601/12). Each aircraft operator and installation is required to submit a monitoring plan to its Competent
Authority, which in their turn must approve the plan.242 Furthermore, aircraft operators and installations are
required to deliver an annual emission report (AER) to the Competent Authority. The AER provides the
total amount of GHGs emitted by an operator in a given year and must be verified by an independent,
accredited verifier in accordance with the EU Accreditation and Verification Regulation (EU Regulation
600/12).243
In summary, the compliance cycle requires aircraft operators and installations to do the following each year:
1. Carry out monitoring activities according to the approved monitoring plan;
2. Submit an annual verified GHG emissions report to the Competent Authority before 31 March;
3. Surrender the equivalent number of allowances before 30 April;
4. Where needed, submit a report on possible improvements to the monitoring plan before 30 June. A
report on possible improvements is needed whenever recommended by the verifier or on a regular
basis, depending on the size of the installation.244
3.6.2. SURRENDERING ALLOWANCES
As part of the annual compliance cycle, the participants are required to surrender a quantity of EUAs to the
Union registry to cover all their emissions at the end of each period (by 30 April).245 One EUA is equivalent
240 Commission Regulation (EU) No 600/2012 of 21 June 2012 on the verification of greenhouse gas emission
reports and tonne-kilometre reports and the accreditation of verifiers pursuant to Directive 2003/87/EC of the
European Parliament and of the Council (Text with EEA relevance), OJ L 181 12 July 2012, 1. 241 Commission Regulation (EU) No 601/2012 of 21 June 2012 on the monitoring and reporting of greenhouse gas
emissions pursuant to Directive 2003/87/EC of the European Parliament and of the Council (Text with EEA
relevance), OJ L 181 12 July 2012, 30. 242 EU ETS Handbook 2015, Supra note 132,114. 243 EU ETS Handbook 2015, Supra note 132, 82. 244 EU ETS Handbook 2015, Supra note 132, 114. 245 The Union registry is an electronic accounting system that ensures the accurate accounting of EU allowances
issued under the EU ETS and international credits. The registry keeps track of the ownership of allowances held in
electronic accounts, just as a bank has a record of all its customers and their money. (European Commission, “Union
registry”. https://ec.europa.eu/clima/policies/ets/registry_en. (accessed 1/08/17); EU ETS Handbook 2015, Supra
note 132, 72)
49
to one tonne of CO2e. Once allowances are surrendered, they are cancelled so that they can only be used
once.246 Eligible international credits can also be used to cover emissions up to a maximum allowed limit.
3.6.2.1. Use of international credits
Besides EU allowances, participants can cover a certain amount of their emissions with credits generated
from emissions-saving projects outside the EU. These international credits, also called “offsets” are
financial instruments which represent one tonne of CO2e reduced due to such an emissions reduction
project.247
The international credits that can be used within the EU ETS are credits from the Kyoto Protocol’s two
project-based mechanisms, Joint Implementation (JI)248 and Clean Development Mechanism (CDM)249.
Both projects generate Kyoto carbon credits: CDM creates Certified Emission Reductions (CERs) and JI
creates Emission Reduction Units (ERUs) respectively, each being equivalent to 1 tonne of CO2e.250
The use of international credits is partly motivated by the generally lower abatement costs outside the
coverage of the EU ETS, primarily in developing countries. It therefore lowers the compliance cost for
participants in the EU ETS. Although the direct effect is that it only benefits the EU ETS participants who
make use of these international credits, it induces an additional cost-saving effect for all participants,
because it lowers the demand for EU allowances and thus their price. Hence, the main argument for
establishing a link between the EU ETS and the Kyoto Protocol’s project-based mechanisms is therefore
that it reduces the cost.251 Another argument for the use of international credits is that it drives demand and
finance for emissions reduction projects in less developed countries.252 It is intended to trigger transfers of
246 L. ZETTERBERG et al. (2014), Supra note 178, 15. 247 European Commission, “Use of international credits”. https://ec.europa.eu/clima/policies/ets/credits_en. (accessed
1/08/17) 248 A programme under the Kyoto Protocol that allows industrialised countries to meet part of their required cuts in
greenhouse gas emissions by paying for projects that reduce emissions in other industrialised countries. (EU ETS
Handbook 2015, Supra note 132, 96) 249 This is an arrangement under the Kyoto Protocol that allows industrialised countries with a GHG reduction
commitment (called Annex 1 countries) to invest in projects that reduce GHG emissions in developing countries as
an alternative to more expensive GHG emissions reductions in their own countries. (EU ETS Handbook 2015, Supra
note 132, 96); for more info on the JI and CDM, see: UNFCCC, “The Mechanisms under the Kyoto Protocol: Clean
development mechanism, joint implementation and emissions trading”.
http://unfccc.int/kyoto_protocol/mechanisms/items/1673.php. (accessed 1/08/17). 250 EU ETS Handbook 2015, Supra note 132, 96. 251 R. TROTIGNON, “Combining cap-and-trade with offsets: lessons from the EU-ETS”, Climate Policy 2012, vol.
12, (273)274. 252 L. ZETTERBERG et al. (2014), Supra note 178, 20.
50
low-carbon technologies and good practices outside the cap-and trade boundaries, for as long as the
reductions obtained are less expensive than the EUAs themselves.253
To justify the use of credits, however, the emissions reductions from these projects must be quantifiable,
enforceable and additional254. The EU restricted the use of international credits to no more than 50% of the
emissions reductions to be made between 2008 and 2020. However, in the second trading period (2008-
2012), there were no real restrictions on the use of international credits. The amount of international credits
surrendered increased from 4% of total verified emissions in 2008 and 2009, to 7% in 2010, 13% in 2011
and 26% in 2012. The additional use of CERs and ERUs significantly contributed to an accumulating surplus
of allowances, which has been a problem since the inception of the EU ETS. According to the European
Environment Agency, of the estimated surplus of 1.8 billion allowances after phase two, about 1 billion
allowances can be attributed to the fact that operators surrendered CERs and ERUs even though verified
emissions were below the available amount of allowances.255
For the third trading period (2013-2020), the EU took a more targeted approach and established new quality
standards. As of May 2013, the EU prohibited the use of JI and CDM credits from projects involving certain
industrial gases (HFC-23 destruction and N2O from adipic acid production).256 Regarding the more targeted
approach, the EU restricted credits from new CDM projects only to projects located in States defined by the
UN as ‘Least Developed Countries’. Furthermore, the EU set a stricter limit on the maximum number of
credits each installation can use.257 All these measures should help to temper the influx of international
credits into the EU ETS.258
253 R. TROTIGNON, “Combining cap-and-trade with offsets: lessons from the EU-ETS”, Climate Policy 2012, vol.
12, (273)274. 254 L. ZETTERBERG et al. (2014), Supra note 178, 20. 255 EEA, Trends and projections in Europe 2013 Tracking progress towards Europe's climate and energy targets
until 2020, Report No. 10/2013, European Environment Agency, 2013, 36-39, as available on:
https://www.eea.europa.eu/publications/trends-and-projections-2013. 256 Credits from: land-use, land-use change and forestry (LULUCF) projects; nuclear projects; large hydropower
projects with over 20MW of installed capacity (subject to conditions) were already prohibited. (EU ETS Handbook
2015, Supra note 132, 96) 257 For more information on the quantitative restrictions on international credit usage, see: EU ETS Handbook 2015,
Supra note 132, 96-97. 258 J. DELBEKE, P. VIS, EU Climate Policy Explained, Routledge, New York, 2015, 52-54.
51
In line with the EU’s Climate and Energy Package 2030, which sets domestic reduction targets, the EU does
not envisage using international credits after 2020. The Paris Agreement, however, established a new
mechanism to replace the CDM and JI after 2020.259
3.6.3. NON-COMPLIANCE
When aircraft operators or installations do not comply with their obligations under the EU ETS and do not
surrender sufficient allowances at the end of each period, there are two sanctions imposed by the EU ETS
Directive. Article 16(3) of the EU ETS Directive stipulates that “Member States shall ensure that any
operator who does not surrender sufficient allowances by 30 April of each year to cover its emissions during
the preceding year shall be held liable for the payment of an excess emissions penalty”260. On 1 January
2013 the penalty was €100/tCO2e emitted for which the operator or aircraft operator has not surrendered
allowances and it rises in accordance with the European index of consumer prices.261
In addition to the pecuniary sanction, Member States must ensure that the names of operators who are in
breach of requirements to surrender sufficient allowances are published.262 This is the so-called “name and
shame” procedure.263
259 European Commission, “Use of international credits”. https://ec.europa.eu/clima/policies/ets/credits_en. (accessed
1/08/17); art. 6(4) Paris Agreement, Paris, 12 December 2015, United Nations Treaty Collection, entered into force 4
November 2016. 260 Art. 16(3) ETS Directive 2003/87/EC, Supra note 134. (emphasis added) 261 Art. 16(4) ETS Directive 2009/29/EC, Supra note 159. 262 Art. 16(2) ETS Directive 2003/87/EC, Supra note 134. 263 S. BORGHESI et al. (2016), Supra note 154, 5.
52
4. Evaluation of EU ETS
4.1. Achievements and shortcomings
Since its inception, the EU ETS has been much debated and has received increasing attention from
policymakers and scholars. The system has been praised but also widely criticised. In the previous sections
I have tried to provide a descriptive analysis of how EU emissions trading works, with a discussion of some
essential features of the EU ETS. Since the EU ETS is very complex and technical, I focused on what I feel
are the most important and perhaps controversial aspects of the system.
Since its introduction, the EU ETS has developed considerably. It has shown achievements, but has also
revealed shortcomings, especially during the first two trading periods (2005-2012). The main problems are
the oversupply and related price volatility of allowances. Since the start of the second trading period (2008),
there has been a rapid build-up of allowances, causing an oversupply.264 The main reasons are:
overallocation during phase 1 and a drastic decrease in demand for allowances in phase 2. The imbalance
between supply and demand as of phase 2 can be explained by several factors: early auctioning of
allowances to the power industry since phase 3; a strong and unexpected influx of international credits; and
the effects of the economic crisis.265
Due to the surplus of allowances, the carbon price fell to zero after the first trading period and has been
highly volatile since then.266 The carbon price is very important because it influences decisions by
participants both in the short-term management of their existing assets, and in the longer-term direction of
their investments.267 The problem with low priced allowances is therefore that it reduces participants’
incentives to invest in low-carbon technology. This seriously compromises the effectiveness of the EU
ETS.268 This is also acknowledged by the European Commission, which states that “the surplus risks
undermining the orderly functioning of the carbon market; in the longer term, it could affect the ability of
264 At the start of phase 3 in 2013, the EU ETS had a surplus of around 2 billion allowances. (European Commission,
”Market Stability Reserve”. https://ec.europa.eu/clima/policies/ets/reform_en. (accessed 2/07/2017)) 265 S. BORGHESI et al. (2016), Supra note 154, 74; L. ZETTERBERG et al. (2014), Supra note 178, 24. 266 As the surplus has grown, the carbon price fell to €2.81 in April 2013, but subsequently rose to €5 by April 2014.
The EU has estimated that reducing emissions to levels consistent with reaching the two-degree target would require
a carbon price of at least €32 to €63 by 2030. (L. ZETTERBERG et al. (2014), Supra note 178, 24) 267 C. DE PERTHUIS, R. TROTIGNON, “Governance of CO2 markets: Lessons from the EU ETS”, Energy Policy
2014, vol. 75, (100)101. 268 G. BEL and S. JOSEPH, Industrial Emissions Abatement: Untangling the Impact of the EU ETS and the
Economic Crisis, Working Paper 2014/22, Research Institute of Applied Economics, 17.
http://www.ub.edu/irea/working_papers/2014/201422.pdf.
53
the EU ETS to meet more demanding emission reduction targets cost-effectively”.269 In immediate response
to this surplus of allowances, the European Commission postponed (‘back-loaded’) the auctioning of 900
million allowances to the end of phase 3. This ‘backloading’ measure does not, however, reduce the total
amount of allowances, but only influences their distribution. It is expected to have only a short-term effect.270
The measure was therefore followed by a proposal for a long-term measure of establishing a Market Stability
Reserve. The 900 million allowances that were back-loaded in 2014-2016 will be transferred to the reserve
instead of being auctioned in 2019-2020. Unallocated allowances will also be transferred to the reserve. The
Market Stability Reserve was established by Decision (EU) 2015/1814 of the European Parliament and of
the Council of 6 October 2015 and will be operational as from January 2019. Its aim is to address the current
surplus of allowances and improve the system's shock resilience by adjusting the supply of allowances to
be auctioned.271
In response to this oversupply and ‘lessons learned’ from the first two trading periods, several structural and
regulatory changes took place as of phase 3: An EU-wide cap with a linear reduction factor, progressive
phasing out of free allocation of allowances in favour of auctioning, sharply reduced use of international
credits and replacement of national registries by a single Union registry.272 The EU ETS clearly made some
improvements. The EU ETS is a learning process, whereby the EU has already been shown to have made
serious efforts to make the system work efficiently. The system can also show certain achievements.
One of the main achievements of the EU ETS is that it has created a carbon market, thereby putting a price
on a large proportion of the EU’s GHG emissions. It has established a system covering almost half the EU’s
GHG emissions from more than 11000 stationary installations in 31 countries. The EU ETS was initially
designed to meet the Kyoto Protocol commitments and achieve a GHG emissions reduction of 21% by 2020,
which will likely be achieved. According to the EEA, GHG emissions from the sectors covered by the EU
ETS have decreased significantly since 1990. In 2015, the EU ETS emissions from Member States’
269 European Commission, COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT
Accompanying the document Proposal for a Directive of the European Parliament and of the Council amending
Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, SWD(2015) 135
final, 15 July 2015, 15, as available on: http://eur-lex.europa.eu/legal-
content/EN/ALL/?uri=CELEX:52015SC0135&qid=1501324948890. (Hereinafter: European Commission (2015)) 270 European Commission, “Market Stability Reserve”. https://ec.europa.eu/clima/policies/ets/reform_en. (accessed
2/07/2017) 271 European Commission (2015), Supra note 269, 18; European Commission, “Market Stability Reserve”.
https://ec.europa.eu/clima/policies/ets/reform_en. (accessed 4/08/17); Decision (EU) 2015/1814 of the European
Parliament and of the Council of 6 October 2015 concerning the establishment and operation of a market stability
reserve for the Union greenhouse gas emission trading scheme and amending Directive 2003/87/EC (Text with EEA
relevance), OJ L 264 9 October 2015, 1. 272 European Commission (2015), Supra note 269, 17; A.D. ELLERMAN (2014), Supra note 200, 19.
54
stationary installations had decreased by 24% since 2005. However, the reduction was largely the result of
changes in the combination of fuels used to produce heat and electricity, and a substantial increase in
electricity generation from renewables. GHG emissions from sectors other than power generation have not
decreased as much.273
The impact assessment accompanying the EU ETS revision proposal for phase 4 (2021-30) revealed some
preliminary findings on a study to evaluate the existing ETS Directive. These preliminary findings indicate
that “the EU ETS as a policy tool combining environmental regulation with a market instrument is working
in practice and delivering on its targets. Emissions in the covered sectors have decreased steadily, and even
though not all emission reductions can be attributed to the ETS alone, evidence has been found that the
system does contribute effectively to emission reductions”.274
In summary, we could say that the EU ETS is a promising tool, which should be strengthened, so that it can
reduce GHG emissions effectively in the longer term. The current debate among scholars and policy makers
is mainly focusing on finding mechanisms to regulate the supply of allowances better, with the Market
Stability Reserve as a potential solution to the problem. Since this will only enter into force in 2019, it
remains to be seen what its impact will be.
Despite all the criticisms and debates concerning the effectiveness of the EU ETS, I agree with S. Borghesi
et al. (2016), who states that “the system has symbolic value, which goes beyond purely economic
considerations and demonstrates the will of the EU to stand as a leader in the international environmental
policy context”.275 The EU ETS was the first and largest GHG ETS to be implemented, and it therefore
provides a valuable example and numerous lessons, of what a multinational cap-and-trade system to regulate
GHG emissions can and cannot do.276 Since the EU ETS was launched in 2005, many other emissions
trading systems have emerged around the world. These ETSs will be briefly discussed in the section below.
4.2. Global trends in emissions trading
Since the start of the EU ETS, the potential benefits of an ETS have been recognized worldwide. Many
governments have considered implementation of an ETS as a climate policy tool and to date, there are 19
273 EEA, Trends and projections in Europe 2016 - Tracking progress towards Europe's climate and energy targets,
European Environment Agency, 2016, 33-34, as available on: https://www.eea.europa.eu/themes/climate/trends-and-
projections-in-europe. 274 European Commission (2015), Supra note 269, 18-19. 275 S. BORGHESI et al. (2016), Supra note 154, 74. 276 A.D. ELLERMAN (2014), Supra note 200, 20.
55
ETSs in force. According to a report from International Carbon Action Partnership (ICAP), it is expected
that by the end of 2017, emissions trading will regulate more than seven billion tonnes of GHG emissions
(see Figure 3). ETSs will operate in economies generating close to half the world’s GDP and covering more
than 15% of global emissions.277
Figure 3 Global Trends in Emissions Trading278
277 ICAP, Emissions Trading Worldwide, Status Report 2017, International Carbon Action Partnership, 2017, 19-22,
as available on: https://icapcarbonaction.com/en/publications. 278 Retrieved from: ICAP, Emissions Trading Worldwide, Status Report 2017, International Carbon Action
Partnership, 2017, 22, as available on: https://icapcarbonaction.com/en/publications.
56
The number of emissions trading systems around the world is increasing and continues to develop, improve
and consolidate. Besides the EU ETS, national and sub-national systems are operating or under development
in Canada, China, Japan, New Zealand, South Korea, Switzerland and the United States.279 As the number
of ETSs increase, the opportunities for linking these systems also increase. For example, the EU ETS is
expected to be linked to the Swiss ETS and technical negotiations for this have already been finalized.280
Also remarkable, is the ‘rise’ of ETSs in China, which has launched seven pilot regional carbon trading
markets since 2013 in Beijing, Tianjin, Shanghai, Guangdong, Shenzhen, Hubei and Chongqing. These
cover a range of heavy industrial sectors. Moreover, China is expected to launch its national ETS this year,
creating the world’s largest carbon market.281
The Paris Agreement also provides for a robust and ambitious basis for the use of international markets and
through its article 6, it encourages countries to collaborate by allowing Parties to use international trading
of emission allowances.282
Economists have even predicted that over time a unified global carbon market will emerge, triggering the
necessary investments to transition to a low-carbon economy.283
279 European Commission, “International Carbon Market”. https://ec.europa.eu/clima/policies/ets/markets_en.
(accessed 4/08/17) 280 European Commission, “International Carbon Market”. https://ec.europa.eu/clima/policies/ets/markets_en.
(accessed 4/08/17) 281 X, “China to launch world's largest carbon market soon”, China Daily 16 February 2017.
http://www.chinadaily.com.cn/business/2017-02/16/content_28224387.htm. 282 European Commission, “International Carbon Market”. https://ec.europa.eu/clima/policies/ets/markets_en.
(accessed 4/08/17); ICAP, Emissions Trading Worldwide, Status Report 2017, International Carbon Action
Partnership, 2017, 22, as available on: https://icapcarbonaction.com/en/publications. 283 ICAP, Emissions Trading Worldwide, Status Report 2017, International Carbon Action Partnership, 2017, 2, as
available on: https://icapcarbonaction.com/en/publications.
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5. Aviation
5.1. Context
In order to make a proper analysis of whether the shipping sector could be implemented in the EU ETS, a
comparison can be made with the aviation sector. Both sectors are large GHG emissions contributors and
like the shipping sector, aviation is generally excluded from GHG emissions regulations. In 2012, the
contribution to global CO2 emissions from international aviation and maritime transport amounted to 1.3%
and 2.2%, respectively. In both sectors the emissions are predominantly international (62% and 79%,
respectively). Together, international and domestic civil aviation and maritime transport accounted for 4.2%
of global CO2 emissions.284 According to several BAU scenarios, these emissions will continue to increase,
due to the growth of transport demand. They are both one of the fastest growing transport sectors and if no
appropriate measures are taken, GHG emissions from civil aviation and maritime transport are estimated to
grow by 2050 by 300-700%285 and 50-250%286, respectively.287 If both sectors want to contribute equally to
other sectors, as part of the global effort to mitigate climate change and stay below the 2°C target,
international aviation and shipping emissions need to be reduced significantly. According to a Study for the
ENVI Committee, aviation emissions must be reduced by at least 41% by 2050, compared to 2005 levels,
while shipping emissions must be reduced by at least 63%.288
Under the UNFCCC, attempts have been made to regulate aviation and shipping emissions. Discussions
focused on how to allocate these emissions to Parties. However, no agreement could be reached and Parties
agreed as part of the Kyoto Protocol to pursue the reduction of emissions from international aviation and
shipping through the ICAO and the IMO, respectively.289
International action, however, has been slow and because the EU saw international action as insufficient, it
decided to take unilateral action. In 2012, aviation activities were included in the EU ETS and it has also
284 M. CAMES et al., Emission Reduction Targets for International Aviation and Shipping, Study for the ENVI
Committee, European Parliament, November 2015, 10, as available on
http://www.europarl.europa.eu/committees/en/supporting-analyses-search.html. 285 ICAO, Information Paper, Global Aviation CO2Emissions Projections to 2050, GIACC/4-IP/1, 20 May 2009.
https://www.icao.int/environmental-protection/GIACC/Giacc-4/Giacc4_ip01_en.pdf. 286 Third IMO GHG Study 2014, Supra note 2, 20. 287 E. HAITES, “Linking emissions trading schemes for international aviation and shipping emissions”, Climate
Policy 2009, vol. 9, (415)415. 288 M. CAMES et al., Emission Reduction Targets for International Aviation and Shipping, Study for the ENVI
Committee, European Parliament, November 2015, 9, as available on
http://www.europarl.europa.eu/committees/en/supporting-analyses-search.html. 289 Art. 2.2. Kyoto Protocol, Supra note 32; E. HAITES, “Linking emissions trading schemes for international
aviation and shipping emissions”, Climate Policy 2009, vol. 9, (415)416-418; See: Part I, Section 2.1 of this master’s
dissertation.
58
made clear that it is willing to include maritime emissions too if the IMO does not develop a mechanism
targeting these emissions in the near future.290 The European Commission identified this need to take
unilateral actions if no such actions are taken on the international level (by the ICAO and the IMO) as early
as 2002.291
In the next section, the inclusion of the aviation sector in the EU ETS will be discussed, examining the
preliminary ruling of the Court of Justice of the European Union (CJEU) on the validity of the Aviation
Directive.
5.2. Aviation within the EU ETS
Against the backdrop of what the EU considered as international institutional failure, the Aviation Directive
(Directive 2008/101/EC) was adopted in 2008, following a proposal from the European Commission in
2006.292 Initially, as of 2012, all flights departing from or arriving at any airport on the territory of the EU
Member States and Lichtenstein, Norway and Iceland were covered by the EU ETS.293 Every aircraft
operator landing in or departing from an EU airport must hold and surrender sufficient emissions allowances
for every tonne of carbon dioxide generated during the flight. This caused a lot of opposition from non-EU
aircraft operators, because the system also includes emissions that are generated outside the EU airspace.294
5.2.1. CJEU’S RULING IN CASE C-366/10
In 2009, the Air Transport Association of America (ATA) and several US airlines challenged the validity
of the Aviation Directive before the High Court of Justice of England and Wales, which requested the Court
of Justice of the European Union (CJEU) for a preliminary ruling. In Case C-366/10, The CJEU examined
the extent to which individuals can rely on principles of customary international law and provisions of
international treaties to contest EU legislation. Furthermore, it examined the validity of the Aviation
Directive in the light of international treaty law and customary international law.295 The Advocate General
290 C. HERMELING et al., “Sailing into a dilemma – An economic and legal analysis of an EU trading scheme for
maritime emissions”, Transportation Research Part A 2015, vol. 78, (34)35. 291 Art. 5.2.(iii)(a)(b) Decision No 1600/2002/EC of the European Parliament and of the Council of 22 July 2002
laying down the Sixth Community Environment Action Programme, OJ L 242 10 September 2002, 1. 292 Directive 2008/101/EC, Supra note 191; S. BOGOJEVIC, “Legalising Environmental Leadership: A Comment on
the CJEU’S Ruling in C-366/10 on the Inclusion of Aviation in the EU Emissions Trading Scheme”, Journal of
Environmental Law 2012, vol. 24, (345)348. (Hereinafter: S. BOGOJEVIC (2012)) 293 Annex I, EU ETS Directive, as amended by Directive 2008/101/EC, Supra note 191. 294 S. BOGOJEVIC (2012), Supra note 292, (345)349. 295 CJEU 21 December 2011, Case C-366/10, ATA and others v. Secretary of State for Energy and Climate Change,
ECLI:EU:C:2011:864. (Hereinafter ATA)
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Kokott delivered her opinion on 6 October 2011, pronouncing that Directive 2008/101/EC is compliant with
international law.296 Following this opinion, on 11 December 2011, the CJEU delivered its judgement on
the reference for a preliminary ruling, which confirmed the general conclusions of the Advocate General.297
This case law is not only important for the scope of application of the Aviation Directive, but also to
determine the (legal) feasibility of a possible inclusion of the shipping sector in the EU ETS. Only those
aspects of case C-366/10 (Hereinafter ATA), which could be relevant in assessing the possible inclusion of
the maritime transport sector will be discussed in this section. I will focus on the possibility that the EU will
take unilateral measures to regulate emissions by international shipping and the extraterritorial reach of the
EU ETS.
The CJEU stated in ATA that an individual may contest the validity of EU law, relying on principles of
customary international law and provisions of international treaties, under four conditions.: (1) the EU must
be bound by the rules; (2) the nature and broad logic of international law may not preclude an examination
of EU law; (3) the international law provision must be unconditional and sufficiently precise; (4) and it must
not be subject to the adoption of any subsequent measure.298
In the request for a preliminary ruling, reference was made to:
“the principle of customary international law that each State has complete and exclusive sovereignty
over its airspace;
the principle of customary international law that no State may validly purport to subject any part of
the high seas to its sovereignty;
the principle of customary international law of freedom to fly over the high seas;
the principle of customary international law (the existence of which is not accepted by the
Defendant) that aircraft overflying the high seas are subject to the exclusive jurisdiction of the
country in which they are registered, save as expressly provided for by international treaty;
the Chicago Convention (in particular Articles 1, 11, 12, 15 and 24);
the Open Skies Agreement (in particular Articles 7, 11(2)(c) and 15(3));
the Kyoto Protocol (in particular, Article 2(2))”.299
296 See Opinion AG KOKOTT of 6 October 2011, ATA, ECLI:EU:C:2011:637. 297 See ATA, Supra note 295; 297 B. F. HAVEL, J. Q. MULLIGAN, “The Triumph of Politics: Reflections on the
Judgment of the Court of Justice of the European Union Validating the Inclusion of Non-EU Airlines in the
Emissions Trading Scheme”, Air and Space Law 2012, vol. 37, (3)8. 298 Ibid., §52-55. 299 ATA, Supra note 295, §45.
60
On the basis of these principles of international customary law and provisions of international treaties, the
claimants challenged the Aviation Directive mainly on three grounds: “First, they contend that the European
Union is exceeding its powers under international law by not confining its emissions trading scheme to
wholly intra-European flights and by including within it those sections of international flights that take place
over the high seas or over the territory of third countries. Secondly, they maintain that an emissions trading
scheme for international aviation activities should be negotiated and adopted under the auspices of the
ICAO; it should not be introduced unilaterally. Thirdly, they are of the opinion that the emissions trading
scheme amounts to a tax or charge prohibited by international agreements”300. This last argument will not
be discussed in this master’s dissertation.
5.2.1.1. Unilateral action outside the ICAO
The CJEU and the Advocate General examined the Kyoto Protocol and the EU-US Open Skies Agreement
as potential sources to restrain the EU from taking unilateral action.
With regard to the Kyoto Protocol, the CJEU affirms that the EU has approved the Kyoto Protocol and it
thus forms an integral part of the EU legal order. However, the CJEU finds that the Kyoto Protocol is not
unconditional or sufficiently precise to confer rights on individuals.301 The argument that an ETS should be
adopted under the auspices of the ICAO, is thus rejected by the CJEU. The Advocate General further states
in its opinion that article 2(2) of the Kyoto Protocol, which proclaims that ‘parties shall pursue limitation or
reduction of emissions of greenhouse gases …, working through the International Civil Aviation
Organization…’, is not a commitment to work exclusively through the ICAO. Both the CJEU and the
Advocate General thus find that the EU may take unilateral actions to regulate GHG emissions from
international aviation.302 The EU-US Open Skies Agreement, also does not prevent the EU from taking
unilateral action.303
300 Opinion AG KOKOTT of 6 October 2011, ATA, ECLI:EU:C:2011:637, §42. (Hereinafter AG ATA) 301 ATA, Supra note 295, §77. 302 B. F. HAVEL, J. Q. MULLIGAN, “The Triumph of Politics: Reflections on the Judgment of the Court of Justice
of the European Union Validating the Inclusion of Non-EU Airlines in the Emissions Trading Scheme”, Air and
Space Law 2012, vol. 37, (3)24-25. 303 The Open Skies Agreement is not further discussed here, because this is not relevant in the light of the objective
of this master’s thesis; Ibid.
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5.2.1.2. Extraterritorial scope of the EU ETS
One fundamental complaint against the EU is that it is exceeding its powers under international law by not
confining its ETS to wholly intra-European flights and by including within it those sections of international
flights that take place over the high seas or over the territory of third countries.304
For this claim they rely on article 7 of the EU-US Open Skies Agreement, which “requires aircraft engaged
in international navigation to comply with the laws and regulations of the European Union only when the
aircraft enter or depart from the territory of the Member States or, in the case of its laws and regulations
relating to the operation and navigation of such aircraft, when their aircraft are within that territory. They
maintain that Directive 2008/101 seeks to apply the allowance trading scheme laid down by Directive
2003/87 not only upon the entry of aircraft into the territory of the Member States or on their departure from
that territory, but also to those parts of flights that are carried out above the high seas and the territory of
third States”.305
The claimants also rely on three principles of customary law, namely: the principle that each State has
complete and exclusive sovereignty over its airspace; the principle that no State may validly purport to
subject any part of the high seas to its sovereignty; and the principle of freedom to fly over the high seas.306
Those principles are for the CJEU to determine whether the EU had competence, in the light thereof, to
adopt Directive 2008/101 in that it extends the application of Directive 2003/87 to aircraft operators of third
States whose flights which arrive at and depart from an airport situated in the territory of a Member State of
the EU are carried out in part over the high seas and over the third States’ territory.307
The Court and the Advocate General affirm that the EU is bound by the Open Skies Agreement and the
principles of customary law. However, they reject the claim that the application of the Aviation Directive
to non-EU carriers infringes these principles and article 7 of the Open Skies Agreement.308
With regard to the principle of exclusive sovereignty of a Member State over its airspace, the Court justifies
the obligation on non-EU operators to surrender allowances, relying on the territoriality principle. The Court
states that: “that directive is not intended to apply as such to international flights flying over the territory of
the Member States of the European Union or of third States when such flights do not arrive at or depart from
an aerodrome situated in the territory of a Member State”309.
304 AG ATA, Supra note 300, §42. 305 ATA, Supra note 295, §131. (emphasis added) 306 ATA, Supra note 295, §103. 307 ATA, Supra note 295, §108. (emphasis added) 308 ATA, Supra note 295, §130,§135. 309 ATA, Supra note 295, §117.
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The Court explains that once operators enter the territory of the EU, they are subject to the jurisdiction of
that Member State and the EU and thus must comply with EU legislation: “European Union legislation may
be applied to an aircraft operator when its aircraft is in the territory of one of the Member States and, more
specifically, on an aerodrome situated in such territory, since, in such a case, that aircraft is subject to the
unlimited jurisdiction of that Member State and the European Union”310.
The Court concludes that Directive 2008/101 which extends the application of the EU ETS to aviation “does
not infringe the principle of territoriality or the sovereignty which the third States from or to which such
flights are performed have over the airspace above their territory, since those aircraft are physically in the
territory of one of the Member States of the European Union and are thus subject on that basis to the
unlimited jurisdiction of the European Union”311.
The CJEU thus states that the EU can use market-based environmental measures (EU ETS) to ensure that
commercial operators who operate partly within the EU’s internal market, but are situated abroad, comply
with Union law.312 This is remarkable, because according to this view, this could also mean that the EU
would be allowed to include emissions from international shipping within the EU ETS.313
The CJEU (and the Advocate General) develop this reasoning further by stating that the territoriality
principle does not prevent airlines having to surrender allowances calculated in the light of the whole of the
international flight performed by the relevant aircraft from or to an EU-based airport.314 The CJEU states
that the EU can impose these environmental obligations on commercial operators, relying on the
environmental provisions of primary Union law:
“it must be pointed out that, as European Union policy on the environment seeks to ensure a high level of
protection in accordance with Article 191(2) TFEU, the European Union legislature may in principle choose
to permit a commercial activity, in this instance air transport, to be carried out in the territory of the European
Union only on condition that operators comply with the criteria that have been established by the European
Union and are designed to fulfil the environmental protection objectives which it has set for itself, in
particular where those objectives follow on from an international agreement to which the European Union
is a signatory, such as the Framework Convention and the Kyoto Protocol”315.
310 ATA, Supra note 295, §124. 311 ATA, Supra note 295, §125. (emphasis added) 312 S. BOGOJEVIC (2012), Supra note 292, (345)351. 313 This will be examined in Part III of this master’s thesis. 314 ATA, Supra note 295, §128; AG ATA, Supra note 300, §154. 315 ATA, Supra note 295, §128.
63
Furthermore the Court states that: “the fact that, in the context of applying European Union environmental
legislation, certain matters contributing to the pollution of the air, sea or land territory of the Member States
originate in an event which occurs partly outside that territory is not such as to call into question,…”316.
The Advocate General also points out the importance of environmental protection and climate change
measures by stating: “Such an approach reflects the nature as well as the spirit and purpose of environmental
protection and climate change measures. It is well known that air pollution knows no boundaries and that
greenhouse gases contribute towards climate change worldwide irrespective of where they are emitted; they
can have effects on the environment and climate in every State and association of States, including the
European Union”317.
As pointed out by S. Bogojevic (2012), this reasoning is important in two ways. It shows that the EU’s
environmental competences can be used to define conditions for a commercial activity within the EU. In
this way, it positions environmental protection at the forefront of economic activities within the EU.
Furthermore, it demonstrates that the regulation of emissions by commercial operators which are only partly
active in the EU, can be justified by commitments made under international environmental law (such as
from the Kyoto Protocol).318
5.2.1.3. Concluding remarks
In its judgement, the CJEU thus clearly supports the EU in taking unilateral measures to reduce GHG
emissions when international action is insufficient. It legitimizes the EU's regulatory control of GHG
emissions of international aviation, since international law does not call into question the validity of the
Aviation Directive. As S. Bogojevic (2012) points out, the CJEU legitimises the EU’s role in establishing
far-reaching regional regulatory responses to global institutional failings.319
This view is also supported by the Advocate General who stated: “Whether and when the European Union,
working outside the framework of the ICAO, should unilaterally take measures to limit or reduce greenhouse
gases from aviation is ultimately a question of expediency,[…] It is precisely in the weighing-up of the
advantages and disadvantages of acting alone at a regional level to limit or reduce greenhouse gases from
aviation and in choosing the timing of such action that the competent EU institutions must be given a
discretion”.320
316 ATA, Supra note 295, §129. 317 AG ATA, Supra note 300, §154. 318 S. BOGOJEVIC (2012), Supra note 292, (345)351-352. 319 S. BOGOJEVIC (2012), Supra note 292, (345)352, 355. 320 AG ATA, Supra note 300, §185.
64
She points out here that adequate multilateral measures have not yet been taken under the auspices of the
ICAO and that “The EU institutions could not reasonably be required to give the ICAO bodies unlimited
time in which to develop a multilateral solution”.321 In addition, by stating that: “the European Union and
its Member States expressly continue to seek an agreement on global measures to reduce greenhouse gas
emissions from aviation”, she indicates that unilateral action does not mean that the EU is not in favour of
multilateral action under the auspices of the ICAO.322
5.2.2. CURRENT SCOPE OF APPLICATION
Controversy remained after the preliminary ruling of the CJEU. In 2012, under international pressure, the
risk of a “trade war” and the claims by the ICAO that it would adopt more appropriate measures, the
European Commission proposed a ‘stop-the-clock’ Decision.323 This means that international aviation
would be excluded from the EU ETS for one year. Flights between airports within the EU would still be
covered by the EU ETS. The European Commission argued that "stopping the clock" creates space for the
political negotiations and demonstrates confidence on the side of the EU that together with international
partners they will succeed in agreeing to agree on meaningful international action through the ICAO.324 The
decision was eventually adopted on 24 April 2013.325
At its 38th session in 2013, the ICAO Assembly agreed to develop a global market-based mechanism by
2016, which must take effect as from 2020.326 Following this agreement, the EU decided, for the 2013–2016
321 AG ATA, Supra note 300, §186. 322 AG ATA, Supra note 300, §187. 323 A.D. ELLERMAN (2014), Supra note 200, 7. 324 European Commission, Stopping the clock of ETS and aviation emissions following last week's International Civil
Aviation Organisation (ICAO) Council, MEMO/12/854, 12 November 2012, as available on:
http://europa.eu/rapid/press-release_MEMO-12-854_en.htm; European Commission, Proposal for a DECISION OF
THE EUROPEAN PARLIAMENT AND OF THE COUNCIL derogating temporarily from Directive 2003/87/EC of
the European Parliament and of the Council establishing a scheme for greenhouse gas emission allowance trading
within the Community, COM(2012) 697 final-2012/0328 (COD), 20 November 2012, as available on: http://eur-
lex.europa.eu/legal-content/ga/TXT/?uri=CELEX:52012PC0697. 325 Decision No 377/2013/EU of the European Parliament and of the Council of 24 April 2013 derogating
temporarily from Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within
the Community Text with EEA relevance, OJ L 113 25 April 2013,1. 326 ICAO, Consolidated statement of continuing ICAO policies and practices related to environmental protection —
Climate change, Assembly Resolution A38-18, adopted at the 38th Session of the ICAO Assembly (24 September- 4
October 2013), I-68. https://www.icao.int/environmental-protection/Documents/A38-17_A38-18.pdf.
65
period, to limit the scope of the EU ETS Directive concerning aviation activities to flights between airports
in the European Economic Area. This was implemented by Regulation 421/2014.327
Eventually, at its 39the session, the ICAO Assembly reached an agreement on a global market based
mechanism (GMBM) on 6 October 2016. The agreement was adopted by Assembly Resolution A39-3
which “decides that a GMBM in the form of the Carbon Offsetting and Reduction Scheme for International
Aviation (CORSIA) to address any annual increase in total CO2 emissions from international civil aviation
(i.e. civil aviation flights that depart in one country and arrive in a different country) above the 2020 levels,
taking into account special circumstances and respective capabilities”.
Emissions that exceed 2020 levels will thus have to be offset by investment in green projects and
programmes. The scheme will be implemented in several phases. During the pilot phase (2021-23), States
can participate voluntarily, but emissions data should already be collected from 2019. CORSIA will become
compulsory from 2027 onwards.
In response to this agreement, the European Commission filed a proposal for a Regulation to continue the
current limitation of scope for aviation activities and to prepare to implement a global market-based measure
from 2021. This would implement the Assembly Resolution A39-3. It is envisaged that a Regulation will
be adopted by the end of 2017.328
5.3. Conclusion
From this analysis, we can conclude that by a lack of initiative by an international body (ICAO), the EU
takes matters in own hands. This approach is also supported by the CJEU. In the ATA case, it legitimized
the EU regulatory control of GHG emissions of (international) aviation and stated that international law
does not call into question the validity of the Aviation Directive.
Even though the scope of the EU ETS was eventually limited to flights within the European Economic Area,
it was a good initiative. This unilateral action by the EU has pushed the ICAO to take global measures and
327 Regulation (EU) No 421/2014 of the European Parliament and of the Council of 16 April 2014 amending
Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community,
in view of the implementation by 2020 of an international agreement applying a single global market-based measure
to international aviation emissions Text with EEA relevance, OJ L 129 30 April 2014, 1. 328 European Commission, Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE
COUNCIL amending Directive 2003/87/EC to continue current limitations of scope for aviation activities and to
prepare to implement a global market-based measure from 2021, COM/2017/054 final - 2017/017 (COD), 3 February
2017, as available on: http://eur-lex.europa.eu/legal-
content/EN/TXT/?qid=1486375121448&uri=COM:2017:54:FIN.
66
eventually, the ICAO reached an agreement on a global market based mechanism. The approach of the EU
has thus clearly borne fruit.
It is likely that the same scenario will happen for the regulation of GHG emissions from shipping. When the
IMO does not show any initiative to adopt a global mechanism in the near future, the EU will probably
follow the same approach and will include maritime emissions in its EU ETS.
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Part III. Shipping within the EU ETS
In the previous chapter a broad explanation was given about the working of the EU ETS, whereby I
examined aviation within the scheme. As explained, an ETS provides several advantages and is being used
more and more worldwide. The EU ETS particularly, has proved to be a promising tool to reduce GHG
emissions. It is now applied to the aviation sector and in this chapter, I will examine if it would be possible
from a legal point of view to include shipping within the scheme. I will focus on the legal challenges of
different design options of an EU Maritime Emissions Trading System (EU METS). Thereby I will assess
whether an EU METS, where a cap-and-trade system is restricted to the EU, is desirable in the light of the
global nature of shipping. The cost-effectiveness and economic implications of an EU ETS for shipping will
however not be analysed.
In the first section, I will give a brief overview of several policy challenges faced by the EU when including
the maritime transport sector in its EU ETS.
1. Policy challenges
The integration of maritime emissions in the EU ETS would be a good starting point to internalize external
climate related costs of maritime transport.329 This would mean that the maritime transport sector would
also contribute to international efforts to tackle climate change. Land-based transport is already included in
the national registries of the Parties to the Kyoto Protocol and emissions from aviation are also being
regulated. The aviation sector was included in the EU ETS and in 2016, a global market based measure was
developed under the auspices of the ICAO. Although efforts have been made to regulate GHG emissions
from shipping, to date no (global) system is in place and the inclusion of maritime transport in the EU ETS
would be a first step in the right direction to ensure that all sectors of the economy contribute in achieving
emission reduction targets. This is also in line with the EU climate policy and its “2050 low-carbon economy
roadmap”, which states that all sectors need to contribute to make the European economy more climate-
friendly and less energy consuming.330
329 As we have seen in Part I of this master’s dissertation, technical (EEDI) and operational (SEEMP) measures have
already been adopted by the IMO, but research indicates that these measures alone would not achieve an absolute
reduction of GHG emissions from shipping. (Third IMO GHG Study 2014, Supra note 2, 20) 330 European Commission, “2050 low-carbon economy”. https://ec.europa.eu/clima/policies/strategies/2050_en.
(accessed 9/08/17)
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The implementation of the maritime sector in the EU ETS might be ambitious, but there are several
challenges which cannot be overlooked:
Environmental effectiveness
The main purpose of an ETS is to reduce GHG emissions. However, with a regional scheme, the scope is
only limited, so it is important that it is designed in a way that it is environmentally effective. The
geographical scope is thereby very important.
Administrative challenge
An ETS for shipping also entails an administrative challenge, such as compliance and enforcement. Until
recently, there was only limited data available on emissions from shipping, which makes cap-setting,
enforcement and monitoring more difficult. However, in 2015, the EU adopted a Regulation on the
monitoring, reporting and verification of carbon dioxide emissions from maritime transport, which makes
it possible to acquire more information on ships’ emissions. The MRV Regulation could be a first step to
implement shipping in the EU ETS.331 The administrative burden would also be less when shipping would,
just like aviation, be included in an existing ETS, such as the EU ETS, because there is already an
institutional framework in place, with a good enforcement system.332
Carbon leakage and ‘flagging out’
Another important challenge, is the risk of carbon leakage. This means that carbon-intensive activities get
re-allocated towards area’s or sectors with less stringent policies, or the industry outside the region gains
more market share.333 In the context of shipping, this relates mainly to the problem of shipping firms
changing their activities, to avoid being subject to the regulation, for example by avoiding regions where an
ETS applies.334 To address this risk, the scheme must foresee an extensive coverage of shipping activities.
This is a significant problem, whereby the best solution should be the introduction of a global METS,
because there would be no carbon leakage caused by ships which avoid regions that implemented a regional
ETS.335
331 See Part I, Section 3 of this master’s dissertation. 332 For more information on compliance and enforcement, see: Part II, Section 3.6. of this master’s dissertation. 333 A. MIOLA et al. (2011), Supra note 138, (5490)5493. 334 S. KOESLER, et al., “Course set for a cap? A case study among ship operators on a maritime ETS”, Transport
Policy 2015, vol. 37, (20)27. 335 A. MIOLA et al. (2011), Supra note 138, (5490)5494.
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In addition, there exists a risk of ‘flagging out’ when the scheme would only be applied to ships registered
in EU Member States. This is because some countries allow ‘open registries’. This means that the shipowner
does not have to be a national of that country to register his ship under that Nation’s flag. In this way,
shipowners which are EU nationals, can register their ships in non-participating EU ETS countries.
‘Flagging out’ would further compromise the environmental effectiveness, thus the system should best be
‘flag-blind’ to cover ships from any nationality.336
Practical issues
An ETS for shipping does also involve a lot of practical issues:
Cap-setting. This is very important to ensure environmental effectiveness of the system. If the cap
is not stringent enough, an oversupply can occur, as seen in the previous Chapter.337
Allocation of allowances:
o Who would be the liable entity to surrender allowances. Different actors are involved in the
operation of a ship, for example: the shipowner, operator, charterer, etc.
o How will allowances be allocated. There is a great difference in ship sizes, type and usage,
which require a considered choice on the distribution of allowances. The options are:
▪ Free allocation based on grandfathering. Under this method, entities receive free
allowances based on their historic emissions during a certain period. This method
seems problematic for shipping. The main difficulty is that ships can switch their
trades, schedules, flags and charterers relatively easy. If ships are chosen as the
responsible entity, it is possible that some ships will be advantaged above others.
For example, when they travelled more during the reference period.338 This system
is no longer used within the EU ETS.339
336 H. RINGBOM, “Global Problem – Regional Solution? International Law Reflections on an EU CO2 Emissions
Trading Scheme for Ships”, The International Journal of Marine and Coastal Law 2011, vol. 26, (613)618; The
majority of world’s merchant fleet tonnage is registered in an open registry. (J. VAN LEEUWEN, “The
regionalization of maritime governance: Towards a polycentric governance system for sustainable shipping in the
European Union”, Ocean & Coastal Management 2015, vol. 117, (23)26.) 337 See Part II, Section 3.4. of this master’s dissertation, 338 A. MIOLA et al. (2011), Supra note 138, (5490)5493; T. BÄUERLE et al., Integration of Marine Transport into
the European Emissions Trading System: Environmental, economic and legal analysis of different options, Report
No. (UBA-FB) 001372, Environmental Research of the Federal Ministry of the Environment, Nature, Conservation
and Nuclear Safety, May 2010, 74.
http://www.umweltbundesamt.de/sites/default/files/medien/461/publikationen/3942.pdf. (Hereinafter: T. BÄUERLE
et al. (2010)) 339 See Part II, Section 3.5. of this master’s dissertation.
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▪ Free allocation, using benchmarks. This is now applied in the EU ETS.340 For
aviation, tonne-kilometres are used to calculate the benchmark. An average
benchmark is used, which does not take into account the different sizes and types
of aircrafts. A similar approach could be applied for shipping, although it is difficult
to design a benchmark that does not discriminate against the shipping categories.
▪ Auctioning. This is the default method for stationary installations within the EU
ETS.341 It is also established for aviation, although it is not the standard method.
This system could easily be adapted to the maritime sector.342
What ships will be covered and on what basis (by ship, by fleet, on a per-voyage basis or by any
other period)343
I mentioned just a few challenges and practical issues to demonstrate that an ETS for shipping should not
be taken for granted. However, the purpose of this Chapter is to determine if it would be possible from a
legal point of view to include maritime transport in the EU ETS. Consequently, I will not elaborate further
on the challenges mentioned above.
Jurisdiction
The most important policy challenge for the purpose of this Chapter, is whether the EU has the jurisdiction
under international law to include the maritime transport sector within the EU ETS. This question is relevant
when the EU would oblige non-EU vessels to comply with the system. In addition, when the EU would have
the jurisdiction to oblige foreign vessels to comply with the system, it must be assessed how far this
jurisdiction extends.
Based on this analysis I will conclude whether the EU has the possibility, from a legal point of view, to
extend its EU ETS to shipping.
340 See Part II, Sections 3.5.2.-3.5.3. of this master’s dissertation. 341 See Part II, Section 3.5.1. of this master’s dissertation. 342 T. BÄUERLE et al. (2010), Supra note 338, 77. 343 H. RINGBOM, “Global Problem – Regional Solution? International Law Reflections on an EU CO2 Emissions
Trading Scheme for Ships”, The International Journal of Marine and Coastal Law 2011, vol. 26, (613)618.
(Hereinafter: H. RINGBOM (2011))
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2. Compatibility of an EU METS with international law
When the EU ETS would be extended to include GHG emissions from shipping, it is likely that the EU will
impose the obligation to surrender allowances on any vessel entering an EU port. This system was also
foreseen for aviation within the scheme. Initially, as of 2012, all flights departing from or arriving at any
airport on the territory of the EU Member States and Lichtenstein, Norway and Iceland were covered by the
EU ETS.344
An EU METS, which requires foreign ships entering a port of a Member State of the EU to surrender
sufficient allowances to cover their emissions, raises some important questions regarding port-state
jurisdiction. These legal questions will be examined below. Thereby I will focus on the United Nations
Convention on the Law of the Sea (UNCLOS) and on rules of international customary law.345 As the EU is
a party to UNCLOS, any EU environmental policy regulation relating emissions from shipping must comply
with this Convention.346
First, the general rules concerning the division of jurisdiction will be discussed. On the basis thereof, I will
try to analyse in which situations the EU would have the jurisdiction to impose obligations on (foreign)
ships.
An EU METS could also have an effect on international trade. However, the compatibility of an EU METS
with World Trade Law will not be discussed in this master’s dissertation.347
344 Annex I, EU ETS Directive, as amended by Directive 2008/101/EC, Supra note 191; See Part II, Section 5 of this
master’s dissertation. 345 UNCLOS and international customary law are both sources of the international law of the sea. While a
convention is only binding upon the parties to it, rules of international customary law are binding upon all States in
the international community. (Y. TANAKA, The International Law of the Sea, Cambridge University Press,
Cambridge, 2015, 9) 346 A. MIOLA et al., Regulating Air Emissions from Ships – The State of the Art on Methodologies, Technologies and
Policy Options, JRC Reference Report, JRC European Commission, 2010, 41.
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.185.4166&rep=rep1&type=pdf. 347 For more information on the compatibility with World Trade Law, see: C. HERMELING et al., “Sailing into a
dilemma – An economic and legal analysis of an EU trading scheme for maritime emissions”, Transportation
Research Part A 2015, vol. 78, (34)46-48. (Hereinafter: C. HERMELING et al. (2015))
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2.1. Division of jurisdiction
Jurisdiction refers to the ability of a State to set binding rules and enforce these rules. When a State may
legally adopt binding rules, it has prescriptive jurisdiction. In addition, when a State has the power to take
measures to ensure compliance with these rules, it has enforcement jurisdiction.348
The division of jurisdiction to regulate international shipping activities is basically governed by UNCLOS,
as interpreted and amended by rules and principles of general international law (hereinafter customary
international law).349
UNCLOS was adopted on 10 December 1982, entered into force on 14 November 1994 and is currently
binding for 168 States, including the EU.350 It is considered to be the ‘constitution for oceans’ and sets outs
the principles and norms for the conduct of relations among states on maritime issues.351
Within the framework of UNCLOS, jurisdiction to regulate maritime activities is distributed between three
entities: the Flag State, the Coastal State and the Port State. Furthermore, as illustrated by figure 4, UNCLOS
identifies five main maritime zones for which different jurisdiction rules count352:
1. Internal waters. This are waters on the landward side of the normal baseline (which is the low water
line along the coast), straight baseline and archipelagic baseline from which the territorial sea is
measured (article 8, 47 UNCLOS);
2. Territorial sea. This is an area extending the internal waters 12 nautical miles (nm) seaward,
measured from the baseline (article 3 UNCLOS);
3. Contiguous zone. This area is adjacent to the territorial sea and may not extend beyond 24 nm from
the baseline from which the territorial sea is measured (article 33 UNCLOS);
4. Exclusive Economic Zone (EEZ). This is an area adjacent to the territorial sea and it shall not extend
beyond 200 nm from the baseline where the territorial sea is measured (article 57 UNCLOS);
348 D. R. GUNARATNE, “Prescriptive and enforcement jurisdiction: territorial and extraterritorial application”.
https://ruwanthikagunaratne.wordpress.com/2011/04/13/jurisdiction/. (accessed 10/08/17) 349 C. HERMELING et al. (2015), Supra note 347, (34)42. 350 United Nations Convention on the Law of the Sea, Montego Bay, 10 December 1982, United Nations Treaty
Series no.1833, entered into force on 16 November 1994 (Hereinafter UNCLOS); UN, Chronological lists of
ratifications of, accessions and successions to the Convention and the related Agreements.
http://www.un.org/depts/los/reference_files/chronological_lists_of_ratifications.htm. (accessed 9/08/17) 351 M. H. NORDQUIST (eds.), United Nations Convention on the law of the sea 1982, Volume VII: a commentary,
Martinus Nijhoff Publishers, Leiden, 2011, xvii. 352 The Continental Shelf and the Area are not discussed here, because they are not relevant for the purpose of this
master’s dissertation.
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5. High sea. All parts of the sea that are not included in the exclusive economic zone, in the territorial
sea or in the internal waters of a State, (or in the archipelagic waters) (article 86 UNCLOS);353
Figure 4 Maritime zones354
The international law of the sea is governed by three principles: the principle of freedom, the principle of
sovereignty and the principle of common heritage of mankind.355 The first two principles are relevant to
determine the scope of national jurisdiction over the oceans.
353 See M. RAVIN, Law of the Sea – Maritime Boundaries and Dispute Settlement Mechanisms, Research paper,
United Nations –The Nippon Foundation of Japan Fellowship Programme, 2005, 5-19.
http://www.un.org/depts/los/nippon/unnff_programme_home/fellows_pages/fellows_papers/mom_0506_cambodia.p
df. (Hereinafter: M. RAVIN (2005)) 354 Retrieved from: MRAG, “Costs and benefits arising from the establishment of maritime zones in the
Mediterranean Sea”. http://www.mrag.co.uk/experience/costs-and-benefits-arising-establishment-maritime-zones-
mediterranean-sea. (accessed 10/08/17) 355 Y. TANAKA, The International Law of the Sea, Cambridge University Press, Cambridge, 2015, 16.
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The principle of freedom aims to ensure the freedom of various uses of the ocean and is applied on the high
seas. The high seas are open to all states and are excluded from national sovereignty.356 This principle is
consolidated through state practice and is implemented in the UNCLOS.357
The principle of sovereignty on the other hand, seeks to safeguard interests of coastal states and promotes
the extension of national jurisdiction and territorialisation of the oceans. This principle relates to all the
other maritime zones, apart from the high sea.358
The general rules regarding the jurisdiction within the different maritime zones will be explained below.
2.1.1. COASTAL STATE JURISDICTION
States having a coastline, are called Coastal States. Under international law, the degree of territorial
jurisdiction varies according to the maritime zone.
Internal waters
A coastal State exercises full sovereignty over its internal waters, including foreign ships within this zone.
This is because internal waters are assimilated with the land territory of the State. Ships which are voluntary
present within the internal waters of the coastal State thus subject themselves to the territorial jurisdiction
of that State.359 Foreign merchant vessels and all its crewmembers are fully subject to the criminal, civil and
administrative jurisdiction of the coastal State.360 Under international customary law, this is called the
territoriality principle.
Territorial Sea
As described by article 2(1) UNCLOS, the sovereignty of the coastal State extends beyond its land territory
and internal waters to the territorial sea. A coastal State thus also enjoys territorial sovereignty over this
area. However, in contrast to internal waters, all States have the right of innocent passage through the
territorial sea. According to article 18(1) UNCLOS, “passage means navigation through the territorial sea
for the purpose of: (a) traversing that sea without entering internal waters or calling at a roadstead or port
356 M. RAVIN (2005), Supra note 353, 18. 357 Article 89 of UNCLOS; According to Article 87 of UNCLOS the freedom of the high seas consists of: (a)
freedom of navigation; (b) freedom of overflight; (c) freedom to lay submarine cables and pipelines, subject to Part
VI; (d) freedom to construct artificial islands and other installations permitted under international law, subject to Part
VI; (e) freedom of fishing, subject to the conditions laid down in section 2; (f) freedom of scientific research, subject
to Parts VI and XIII. 358 Y. TANAKA, The International Law of the Sea, Cambridge University Press, Cambridge, 2015, 18-19. 359 H. RINGBOM (2011), Supra note 343, (613)620. 360 M. RAVIN (2005), Supra note 353, 6; Warships and other government ships, operated for noncommercial
purposes enjoy sovereign immunity (article 32 UNCLOS; Y. TANAKA, The International Law of the Sea,
Cambridge University Press, Cambridge, 2015, 80).
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facility outside internal waters; or (b) proceeding to or from internal waters or a call at such roadstead or
port facility”. The coastal State has only under certain conditions the jurisdiction to prescribe and enforce
national rules on ships during this passage.361 Articles 21, 22 and 25 of UNCLOS provide the rights of the
coastal State with respect to innocent passage.362
The main restriction for prescriptive jurisdiction over foreign vessels is that the “laws and regulations shall
not apply to the design, construction, manning or equipment of foreign ships unless they are giving effect
to generally accepted international rules or standards”363.
Contiguous Zone and EEZ
Within the contiguous zone and the EEZ, the coastal State does not have territorial sovereignty. It only has
certain sovereign rights. This means that the coastal State may exercise prescriptive and enforcement
jurisdiction only concerning matters defined by law.364
The contiguous zone is established to prevent violation of laws and regulations within the coastal States’
territory. Article 33(1) UNCLOS states that: “In a zone contiguous to its territorial sea, described as the
contiguous zone, the coastal State may exercise the control necessary to:
(a) prevent infringement of its customs, fiscal, immigration or sanitary laws and regulations within its
territory or territorial sea;
(b) punish infringement of the above laws and regulations committed within its territory or territorial sea”.365
Within the EEZ, the coastal States’ rights, jurisdiction and duties are described in article 56 UNCLOS. It is
important to note that the sovereign rights of the coastal State over the EEZ are essentially limited to
activities relating to economic exploration and exploitation.366 According to article 56(1)(b)(iii) UNCLOS,
the coastal State has prescriptive and enforcement jurisdiction with regard to the protection and preservation
of the marine environment.367 However, this environmental jurisdiction is essentially limited to adopting
and enforcing laws which are in conformity and give effect to “generally accepted international rules and
standards established through the competent international organization or general diplomatic conference”.368
It is widely accepted that this refers to environmental regulations of MARPOL and the IMO.369 Given this,
361 Article 24 UNCLOS. 362 Y. TANAKA, The International Law of the Sea, Cambridge University Press, Cambridge, 2015, 95. 363 Article 21(2) of UNCLOS. 364 Y. TANAKA, The International Law of the Sea, Cambridge University Press, Cambridge, 2015, 6-7. 365 M. RAVIN (2005), Supra note 353, 12. 366 Y. TANAKA, The International Law of the Sea, Cambridge University Press, Cambridge, 2015, 130. 367 Ibid., 133. 368 Article 210(5) UNCLOS. 369 C. HERMELING et al. (2015), Supra note 347, (34)43.
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it seems difficult for a coastal State to justify that rules with purely internal or regional origin could be
applied to foreign ships while they are in its EEZ.370
Furthermore, it must be noted that from the six freedoms of the high seas, three apply to the EEZ, namely
freedom of navigation, overflight and the lying of submarine cables.371 In addition, “articles 88 to 115 and
other pertinent rules of international law relating to the high seas apply to the exclusive economic zone in
so far as they are not incompatible with this Part” (Part V UNCLOS).372
2.1.2. PORT SATE JURISDICTION
Ports are under the territorial sovereignty of the coastal State. Consequently, coastal States may regulate the
entry of foreign vessels into to their ports.373 Furthermore, under customary international law, ships do not
enjoy a general right of entry into ports of foreign States.374 As H. Ringbom (2011) stipulates, “this implies,
a fortiori, a right for the port State to make access to its ports conditional on compliance with specific
requirements”.375 However, in literature there are discussions about which activities a port State can
regulate.
As ports are part of the coastal States’ territory, the port State exercises territorial sovereignty over its ports.
Accordingly, a port State has jurisdiction over activities that occur within its port. However, controversy
exists about port state jurisdiction regarding activities occurring (partly) outside areas with territorial
jurisdiction (the high seas or other States’ coastal waters). This type of jurisdiction cannot be based on the
principle of territoriality and in order to be lawful, it thus needs to rely on other potential sources of law.376
International agreements can provide a source of law for the extra-territorial jurisdiction of port states.377
Under UNCLOS, port States can exercise extra-territorial enforcement jurisdiction concerning pollution
offences. In this regard, article 218(3) UNCLOS stipulates that: “When a vessel is voluntarily within a port
370 H. RINGBOM (2011), Supra note 343, (613)623-624. 371 Article 58(1) UNCLOS. 372 Article 58(2) UNCLOS. 373 See ICJ 27 June 1986, Case concerning the Military and Paramilitary Activities in and against Nicaragua
(Nicaragua v. United States of America), ICJ Reports 1986, 111, §213; States at whose ports vessels call, are called
Port States. (H. RINGBOM, “Introduction: Port State Jurisdiction: Challenges and Potential”, The International
Journal of Marine and Coastal Law 2016, vol. 31, (379)380) 374 Y. TANAKA, The International Law of the Sea, Cambridge University Press, Cambridge, 2015, 80-81. 375 H. RINGBOM (2011), Supra note 343, (613)621; In any case, coastal States are empowered to adopt
requirements for the entry of foreign vessels into their ports in order to prevent pollution from vessels in accordance
with article 211(3) UNCLOS. (Y. TANAKA, The International Law of the Sea, Cambridge University Press,
Cambridge, 2015,81) 376 H. RINGBOM, “Introduction: Port State Jurisdiction: Challenges and Potential”, The International Journal of
Marine and Coastal Law 2016, vol. 31, (379)383. 377 Ibid.
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or at an off-shore terminal of a State, that State may undertake investigations and, where the evidence so
warrants, institute proceedings in respect of any discharge from that vessel outside the internal waters,
territorial sea or exclusive economic zone of that State in violation of applicable international rules and
standards established through the competent international organization or general diplomatic conference”.
This could suggest that, with regard to other activities outside the internal waters, territorial sea or exclusive
economic zone, a port State does not have jurisdiction. However, this opinion is not generally accepted in
literature.378
2.1.3. FLAG STATE JURISDICTION
The Flag State, is the State to which a ship registered. Ships have the nationality of the State whose flag
they are entitled to fly.379 Hence, a ship needs to comply with the regulations and laws of the flag State who
has prescriptive jurisdiction, regardless the location of the ship.380
According to international customary law and UNCLOS, the flag State has exclusive jurisdiction over ships
flying its flag on the high seas.381 Accordingly, flag States have both prescriptive and enforcement
jurisdiction over its ships on the high seas.382
As Y. Tanaka (2015) states, “Considering that the high seas are not subject to any national jurisdiction and
that there is no centralized authority governing the high seas, legal order on the seas can be insured primarily
by the flag State”.383 In addition, article 228 UNCLOS gives the flag State express enforcement jurisdiction
with regard to discharge from its ships that occurred on the high seas. Thus, while article 218 UNCLOS
allows port States to exercise enforcement jurisdiction over ships which present themselves voluntary in
their ports, for any violation occurred on the high seas, flag States can still request to take action. This clearly
restricts port State’s jurisdiction.384
378 C. HERMELING et al. (2015), Supra note 347, (34)44. 379 Article 91(1) UNCLOS. 380 Article 94(1) UNCLOS; C. HERMELING et al. (2015), Supra note 347, (34)43. 381 See PCIJ 7 September 1927, The Case of the S.S. Lotus (France v. Turkey), Series A – No. 10, 25.
http://www.icj-cij.org/files/permanent-court-of-international-justice/serie_A/A_10/30_Lotus_Arret.pdf; article 92(1)
UNCLOS. 382 Y. TANAKA, The International Law of the Sea, Cambridge University Press, Cambridge, 2015, 157. 383 Ibid., 157-158. 384 A. MIOLA et al., Regulating Air Emissions from Ships – The State of the Art on Methodologies, Technologies and
Policy Options, JRC Reference Report, JRC European Commission, 2010, 41.
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.185.4166&rep=rep1&type=pdf.
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2.2. Design options of an EU METS and legal constraints
Due to the jurisdiction rules under UNCLOS and international customary law, as demonstrated in the
previous section, it is possible that the adoption of a regulation to include shipping in the EU ETS would be
in breach of international law. In this section, I will analyse a few possible design options, which differ
according to which emissions from (foreign) ships are covered by the scheme.
Three possible models are: a scheme that covers emissions which are solely produced within the territorial
sea of the EU Member States; a scheme that obliges EU-ships to surrender allowances irrespective of where
the emissions were produced; and a comprehensive scheme, which obliges all ships entering EU ports to
surrender allowances irrespective of where the emissions were produced.385
2.2.1. JURISDICTION FOR EMISSIONS IN THE TERRITORIAL SEA OF EU MEMBER STATES
As explained above, the coastal States exercises full sovereignty over its internal waters and territorial sea.386
However, within the territorial sea, the territorial sovereignty is somewhat limited by the right of innocent
passage, as provided by UNCLOS. Coastal States may not hamper innocent passage. 387An EU METS which
would oblige ships to surrender allowances equivalent to its emissions produced in the territorial sea would
most likely not infringe this right of innocent passage, because only ships calling at EU ports are subject to
this obligation. If, on the contrary, ships merely passing through the territorial sea would also be required to
surrender allowances, this would be presumably restricted by the right of innocent passage.388
Furthermore, port States may regulate the entry of foreign vessels to their ports and make access conditional
on compliance with specific requirements. Although there exists discussion about the territorial scope of its
jurisdiction, there is no doubt that a port State may regulate activities within the territorial sea, over which
the coastal State enjoys territorial sovereignty.389
Given this, the EU could in principle establish an EU METS covering emissions transmitted within the
territorial seas of its Member States, irrespective of the ship’s flag. Although the EU would presumably be
allowed to adopt such a regulation, the environmental effectiveness of such a scheme will be very low,
because with respect to the ship’s voyage, only a small percentage of GHGs is emitted in the territorial
385 The analysis of this section is mainly based on the findings in: C. HERMELING et al. (2015), Supra note 347,
(34)43-46. 386 See Part III, Section 2.1.1. of this master’s dissertation. 387 Article 24 UNCLOS. 388 See article 21, 211(4) UNCLOS. 389 See Part III, Section 2.1.2. of this master’s dissertation.
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waters. According to A. Miola et. al (2011), “it is estimated that, taking into account also intro-EU voyages,
only 12% of total emissions is emitted within the territorial sea zone”.390
2.2.2. JURISDICTION FOR EMISSIONS FROM EU SHIPS
Ships that sail under the flag of an EU Member State fall under the prescriptive jurisdiction of that Member
State. This means that EU Member States can require their ships to comply with Regulations, irrespective
of the ship’s location. On the high seas, the flag State even has exclusive jurisdiction. Therefore, based on
flag State jurisdiction, EU Member States can regulate extra-territorial emissions attributable to ships flying
their flag. This jurisdiction does not cease to exist when a ship sails into the coastal waters of another State.391
The EU thus would have the jurisdiction under international law to adopt a Regulation whereby the personal
scope of an EU METS is limited to EU ships.392 However, as explained earlier, limiting the scope to EU
vessels, would entail a risk of ‘flagging out’, which compromises the environmental effectiveness of the
scheme.393
2.2.3. JURISDICTION FOR EXTRA-TERRITORIAL EMISSIONS FROM ALL SHIPS
The previous two design options which I explained, do not seem to raise any legal concerns. However, the
environmental effectiveness of these schemes will probably be low. Therefore, a comprehensive scheme,
covering emissions from all parts of the sea voyage of vessels arriving at or departing from an EU port
would probably be better to ensure environmental effectiveness. However, such a scheme entails several
legal constraints. An EU METS covering extra-territorial emissions of non-EU vessels could infringe the
principle of exclusive jurisdiction of the flag State on the high seas (flag State principle) and the freedom of
the high seas, which are two sides of the same coin.
According to the flag State principle, the flag state has the exclusive jurisdiction on the high seas over
vessels flying its flag. This implies that no other State can impose obligations on these vessels and regulate
shipping activities.394 According to UNCLOS, exceptions to this principle are only allowed when expressly
provided for in international treaties or in the UNCLOS itself.395 This limited possibility to regulate shipping
activities of foreign vessels on the high seas also applies to the EEZ, since article 58(2) UNCLOS states:
390 A. MIOLA et al. (2011), Supra note 138, (5490)5494. 391 C. HERMELING et al. (2015), Supra note 347, (34)43. 392Ibid. 393 See Part III, Section 1. of this master’s dissertation. 394 C. HERMELING et al. (2015), Supra note 347, (34)44. 395 Article 92(1) UNCLOS.
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“articles 88 to 115 and other pertinent rules of international law relating to the high seas apply to the
exclusive economic zone in so far as they are not incompatible with this Part”.396
Therefore, an EU METS covering emissions from non-EU vessels, which are produced on the high seas or
in the EEZ, could interfere with the flag State principle if it is regarded as a “regulation” of shipping
activities on the high seas.397
If the EU METS is regarded as an extra-territorial regulation of shipping activities, it would also be in breach
of the freedom of the high seas, according to which no State can subject any part of the high seas to its
sovereignty. However, this issue is open to different interpretations. According to C. Hermeling et al. (2011),
“the UNCLOS should be interpreted as not allowing, in principle, any state to generate considerable
economic impacts on navigation on the high sea as an EUMETS purports and would probably have”.398
When the CJEU would be confronted with this issue, it would most probably interpret otherwise, given its
preliminary ruling on the Aviation Directive, extending the EU ETS to all flights which depart or arrive
from an EU airport.399 One of the main complaints, was that the EU exceeded its powers by regulating extra-
territorial aviation activities. However, the CJEU concluded that the Aviation Directive is in conformity
with international law.400 In its reasoning, it stated that aircraft operators that enter the territory of the EU,
are subject to the “unlimited jurisdiction” of that Member State and the EU and thus must comply with EU
legislation.401 Furthermore it argued that, while “flying over the high seas, an aircraft is not subject, in so
far as it does so, to the allowance trading scheme”402.
This judgment faced a lot of criticism, alleging that it disregards the legal duties for monitoring and
reporting, as well as the economic impacts of the system.403 Be as it may, the EU decided to limit the scope
to flights between airports in the European Economic Area, which does not raise any legal concerns.
From the above, it can be concluded that there is no strong legal basis for the EU to exercise extra-territorial
jurisdiction.404 There are some legal concerns, but much depends on how the UNCLOS and principles of
international customary law are interpreted. The risk exists, that when the EU would adopt a regulation to
396 See Part III, Section 2.1.1. of this master’s dissertation. 397 C. HERMELING et al. (2015), Supra note 347, (34)44. 398 C. HERMELING et al. (2015), Supra note 347, (34)45. 399 See Part II, Section 5.2.1. of this master’s dissertation. 400 ATA, Supra note 295, §130. 401 ATA, Supra note 295, §124. 402 ATA, Supra note 295, §125. 403 C. HERMELING et al. (2015), Supra note 347, (34)45. 404 A. MIOLA et al., Regulating Air Emissions from Ships – The State of the Art on Methodologies, Technologies and
Policy Options, JRC Reference Report, JRC European Commission, 2010, 41.
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.185.4166&rep=rep1&type=pdf.
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extend its EU ETS to shipping, covering extra-territorial emissions, this regulation would be challenged by
non-EU States and industry stakeholders. However, a comprehensive EU METS would be more
environmentally effective than an EU METS with a limited geographical or personal scope. Moreover, it
would avoid the risk of ‘flagging out’.
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3. Findings
From a legal point of view, the EU has the possibility to include maritime transport in its EU ETS, but this
is not without limits. An EU METS which includes shipping emissions which are produced in the territorial
seas of EU Member States, or which only includes shipping emissions from EU vessels does not seem to
raise any concerns as to the compatibility with international law. However, a comprehensive EU METS,
which includes extra-territorial emissions from all vessels entering an EU port could be incompatible with
the Flag State Principle and the freedom of the high seas.
Bearing in mind the inclusion of aviation in the EU ETS, it seems likely that when the EU would extend the
EU ETS to maritime transport, the scope will cover a maximum of emissions. The EU attaches high
importance to environmental protection, whereby the CJEU justifies the regulation of commercial activities
- which only take partly place within the territory of the EU - with international environmental law
commitments. It was already made clear by the CJEU in the ATA Case, that it is of the opinion that the EU
has the competence to take wide-reaching regional regulatory measures in response to “global institutional
failings”.405 If the EU would thus include maritime transport in the EU ETS, it will probably be supported
by the CJEU, considering the slow pace of the IMO.
Nevertheless, the legal concerns faced by a regional ETS - an EU ETS in this case - would not be present in
a situation where a global ETS would be adopted under the auspices of the IMO, who is the competent
organization to regulate international shipping.406
Furthermore, a global ETS could limit potential carbon leakage, which is crucial when regulating mobile
entities, such as vessels.407 Also given the global nature of shipping, the majority of the shipping industry
prefers uniform, international measures, instead of unilateral measures. Every measure regulating shipping
activities, whether environmental, safety, or other measures, are regarded as a financial burden by the
shipping sector. Therefore, according to J. van Leeuwen (2015), the shipping sector advocates uniform,
international standards to spread the burden equally over the entire sector.408 S. Koesler et al. (2015)
evaluated the potential impacts of a global ETS on the organisation and operations of shipping companies
from the perspective of ship operators. They conclude that there appears no major reason why a cap-and-
trade approach would not work in the shipping sector in practice.409 However, they also point out that
405 See, Part II, Section 5.2.1. of this master’s dissertation. 406 C. HERMELING et al. (2015), Supra note 347, (34)48. 407 See, Part III, Section 1. of this master’s dissertation. 408 J. VAN LEEUWEN, “The regionalization of maritime governance: Towards a polycentric governance system for
sustainable shipping in the European Union”, Ocean & Coastal Management 2015, vol. 117, (23)25. 409 S. KOESLER, et al., “Course set for a cap? A case study among ship operators on a maritime ETS”, Transport
Policy 2015, vol. 37, (20)29.
83
interviewed ship operators are in favour of a “comprehensive approach to maritime emission trading which
is applied worldwide and makes few exceptions as possible”.410
410 Ibid., (20)28.
84
Conclusion
In this thesis, I have tried to examine to what extent it would be possible to create an emissions trading
system for shipping and, more specifically, whether an EU ETS would be a just solution to reduce GHG
emissions from international shipping. This issue can, however, be analysed from different points of view,
making it difficult to give a comprehensive answer to this question.
For this analysis, I first considered the existing regulations at the international and EU levels and the extent
to which these contribute towards reducing GHG emissions from shipping. As stated in the interim
conclusion, these regulations do not do enough to reduce GHG emissions from shipping in absolute terms.
Although the IMO adopted a roadmap in 2016 which foresees a strategy for reducing GHG emissions from
shipping, no mention was made of a potential global mechanism. Research indicates, however, that further
measures are needed, in addition to the technical and operational measures already adopted, to ensure an
absolute reduction in GHG emissions from shipping. Although global market based measures - which have
the potential to reduce GHG emissions in a cost-effective, flexible manner - were considered under the IMO,
no agreement could be reached.
Based on this, and on the fact that the European Parliament has proposed to include maritime emissions in
the EU ETS, it seems possible that the EU ETS may be extended to maritime transport. To reach a
conclusion on whether such an extension is possible, I examined the already existing EU ETS. Overall, the
EU ETS is a good and, above all, flexible tool to reduce GHG emissions in a cost-effective way. Its potential
benefits are also recognized worldwide, as evidenced by the emergence of a number of ETSs since the
adoption of the EU ETS.
Furthermore, an EU METS would allow the shipping industry to contribute equally towards mitigating
climate change, providing an economic incentive to take technical and operational measures in response to
a carbon price. Notwithstanding the potential benefits of the EU ETS, there seem to be many challenges
facing any regional mechanism to address GHG emissions from international shipping. The shipping
industry is very complex, involving many stakeholders worldwide, which makes it difficult to include
shipping within a regional system. Furthermore, a comprehensive EU METS, including extra-territorial
emissions from all vessels entering an EU port, regardless of the flag, seems incompatible with international
law.
Taking all aspects into consideration, a global solution would certainly be better than a regional solution to
target shipping emissions. All maritime stakeholders, including the EU, have indicated that they are in
85
favour of a global agreement. Moreover, a global agreement would be more environmentally effective, since
it would cover emissions on a global scale.
In the absence of a global MBM, however, a regional MBM such as the EU ETS might provide a good
alternative. An EU METS could also provide a good example for the IMO when creating a global METS.
If the EU were to decide to include maritime emissions in its EU ETS, irrespective of its scope, this approach
would pressure the IMO to adopt a global MBM more quickly. This is what happened after the inclusion of
aviation in the EU ETS. In 2016, a global MBM was adopted under the auspices of the ICAO, which could
provide further useful experience for the IMO.
I have tried to consider the possible inclusion of maritime transport within the EU ETS. However, I cannot
provide a uniform answer to the question whether the EU ETS would be a just solution to reduce GHG
emissions from shipping. As stated, the shipping sector involves many stakeholders and has many specific
features that make it difficult to create a system which is compatible with international law, accepted by all
stakeholders and environmentally effective (which is the main goal of creating an ETS).
Nevertheless, the pace of measures to reduce GHG emissions from shipping needs to be stepped up, so in
the absence of a global agreement the EU extending its EU ETS to shipping would, in my opinion, be a very
good initiative. By doing this the EU could show the international community that action must be taken now
and that we can wait no longer to regulate this constantly growing source of greenhouse gases.
Recommendations
As regards the legal feasibility of the possible inclusion of shipping within the EU ETS, I only examined
whether the EU would have the jurisdiction under UNCLOS and international customary law to adopt such
a scheme. I did not examine the compatibility of a regional ETS for shipping with world trade law, its
economic impacts or its cost-effectiveness. Nevertheless, these important aspects require further research in
order to give a comprehensive answer to the question ‘is the EU ETS a just solution to reduce GHG
emissions from international shipping?’. Furthermore this is a highly politicised issue; the feasibility and
effectiveness of the EU ETS depends not only on legal and economic aspects, but also on the willingness of
many different stakeholders to participate in the scheme.
86
87
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