View from Brussels: Shipping charts a new green course

A couple of years ago, the Mediterranean Shipping Company (MSC) featured in a top 10 polluters ranking put together by environmental NGOs. Other entrants on the list were exclusively coal power plants.

But the biggest difference between big shipping companies like MSC and mega-polluting plants in Germany and Poland was the carbon market rules that apply to them. That is now going to change.

Currently, big industrial sites and energy producers have to buy emission permits for every tonne of carbon emitted. They get a big chunk of free allowances to help keep European industry productive but still have to pay substantial sums every year.

Earlier this year, permits topped €100 for the first time and although the price has since dropped, it is a far cry from the sub-€20 pricetag that was commonplace in the years after the market was first launched.

Shipping – which globally would be one of the top 10 polluters if the sector were a country – has for a long time been seen as a glaring hole in Europe’s climate policy. Companies could emit as much as they wanted due to the very few checks and balances in place.

According to an agreement brokered this week, the sector will be incorporated into carbon pricing over the next three years, drawing on pollution monitoring that has already been implemented for a number of years.

Shippers will not be offered free allowances – those are due to be phased out anyway, although the timeframe for that is still to be decided – so they will be on the hook for millions of euros every year.

All voyages within the EU will be eligible for carbon pricing, while 50 per cent of inbound and outbound journeys will be charged. The idea is that other regions of the world, such as China or the US, will implement their own systems so the entire voyage is eventually covered.

“The EU has thrown the gauntlet down to other jurisdictions like the US, China, and Japan to make this hugely important first step towards zero-emission shipping,” says Jacob Armstrong, a shipping expert with NGO Transport & Environment.

There are notable exemptions. Ships under 5,000 gross tonnage (GT) will not be included but a review in 2026 might change things. That particular class of ships will have to at least report their emissions as of 2025.

Certain ferries are also off the hook: if they serve islands with populations under 200,000 people or operate on routes that are classed as outermost regions, their obligations will likely be torn up.

Significantly, carbon pricing includes pollutants like methane and nitrous oxide, so ships fuelled by LNG will still be subject to charges.

This means that companies that are actively developing alternative means of propulsion like hydrogen and ammonia or even battery-electric powertrains might see an opportunity to avoid extra financial penalties in the coming decade.

In terms of financing, the agreement includes a commitment of more than €1 billion in green shipping subsidies, fuelled by payments into ETS funds. It will be a welcome boost to R&D budgets and innovation programmes.

After all, this is the point of the EU’s carbon pricing efforts. It becomes too expensive to carry on business-as-usual, so investments have to be made into new technologies like carbon-free cement, green cargo ships and next-gen wind turbines, plus many others.

The maritime sector’s inclusion is part of a wider review of the ETS that is currently ongoing and proving to be controversial between different EU countries.

Industrialised nations want to preserve free allowances, there are disputes about where revenues should be spent and there are concerns that the price per tonne will become unaffordable for poorer countries.

There is also the question of what to do with aviation. Only airlines that operate flights within the EU have to pay ETS charges, while international journeys are excluded. This dates back nearly a decade to when the US demanded changes to the fledgling carbon market.

The current state of play means that 60 per cent of the sector’s emissions are exempt from carbon pricing. A big chunk of free allowances also means that, according to T&E, airlines pay very little to pollute.

There is therefore very little incentive for carriers to clean up their act. The main driving force behind developing more efficient planes has so far been fuel costs, rather than environmental objectives.

Meetings in the coming weeks will prove crucial in establishing what the aviation industry’s fortunes look like. Free allowances are likely to face the chop, albeit with a phaseout period.

A deal on shipping though does suggest that the EU is willing to regulate transport emissions that originate beyond its borders. Especially given that United Nations-led efforts to do the same are achieving very little.

Whether this then translates into companies like Airbus redoubling their R&D efforts to scale up emission-free air travel remains to be seen.