The trailblazing EU policy set to decarbonise the global shipping industry 

The EU ETS will progressively apply the cost of carbon to large ships at EU ports. Credit: Shutterstock

At the end of January, the largest cruise ship ever built set sail on its maiden voyage from Miami. Longer than three football pitches and 20 decks above the waves, Royal Caribbean's Icon of the Seas can accommodate 7,000 passengers and crew, and is set to tour the world for decades to come. Is it also an icon of net-zero shipping? 

The ship runs liquefied natural gas (LNG), not the sector’s traditional heavy fuel oil. LNG was considered by some a viable lower-carbon solution ten years ago when the ship was first planned, but it has raised more and more concerns among environmentalists. Not only does LNG release only a quarter less carbon dioxide (CO₂) emissions than conventional marine fuel when burned, it actually risks having a greater emissions impact than a standard ship due to methane leaks in the natural gas supply chain; methane is a greenhouse gas (GHG) that is around 80 times more potent than CO₂. 

There are a number of other low-carbon solutions that exist and which are gaining industry traction. The International Energy Agency (IEA)’s net-zero pathway – which maps out how to decarbonise the world’s energy system by 2050 – anticipates international shipping fuels moving from 0.1% low-carbon currently to 13.3% low-carbon by 2030. This is based on a combination of blending existing oil products with biofuels; renewable fuels like methanol and ammonia (which are produced by reacting renewable hydrogen with CO₂ and nitrogen, respectively); as well as other energy solutions like hydrogen and electricity. 

Recent years have seen companies begin to seriously invest in these technologies: in 2022, 90 (11% by tonnage) new global shipping orders were for ammonia-ready vessels, 43 (7%) were for methanol-ready vessels and three were for hydrogen-ready vessels, according to Clarksons Research. 

Until this year, however, there had been no binding international policy that would force the shipping industry to accelerate down this decarbonisation pathway. That all changed with the inclusion of the maritime sector in the EU ETS in January 2024. 

The EU blazed a trail in 2005 when it launched the EU ETS as the world’s first large-scale GHG emissions trading scheme. In January 2024, the bloc made history again by being the first region in the world to introduce international shipping into its ETS, as part of a 'Fit for 55' policy package to deliver a 55% GHG emission reduction by 2030, relative to 1990 levels. 

The EU ETS is set to progressively apply the cost of carbon to large ships arriving at and departing from EU ports, covering 40% of applicable emissions this year and building up to 100% by 2026. It will cover all journeys by large ships within the EU and 50% of emissions for international journeys involving an EU port. The EU ETS initially applies to CO₂ only but will be expanded to methane and nitrous oxide when fully implemented in 2026. These other gases must be monitored from 2024. 

Crucially, no free allowances are to be allocated to the maritime sector, and every non-compliant tonne of CO₂ emitted will be subject to a €100 penalty. If a shipping company fails to either reduce its emissions or pay for them in two consecutive years, it is likely to face restrictions at EU ports. 

“All the technology that the shipping industry needs to decarbonise is there, only the industry has so far been unwilling to invest,” says Liudmila Osipova, a senior researcher at non-profit the International Council on Clean Transportation (ICCT). “Ships instead continue to use some of the dirtiest technology in the world, in an industry that enjoys some of the lowest levels of regulation in the world. 

“Finally, we now have a policy mechanism in place which for the first time will ensure that companies actually begin to chart a course to net zero”. 

The inclusion of the maritime sector in the EU ETS is not the first internationally agreed response to the problem of ever-rising global shipping emissions. 

Last year, members of the International Maritime Organization – the UN agency responsible for regulating shipping – reached a landmark agreement to achieve net-zero GHG emissions by 2050. They also agreed to strive to meet “indicative checkpoints”, whereby countries will aim to reduce shipping emissions by 20% by 2030 and 70% by 2040, both relative to 2008 levels. 

While this was a milestone for the global shipping industry, there have been several criticisms from environmentalists over the agreement’s limitations. The ICCT has calculated that the strategy is not compatible with the 1.5°C warming limit considered crucial to avoid the most dangerous effects of climate change (although it is compatible with a 2°C limit). Others have criticised the lack of enforcement mechanisms. 

The EU ETS goes where the IMO did not, creating a legally binding framework that will ensure the shipping industry meets the decarbonisation targets it has set itself. And while, of course, it is ostensibly focused on the EU, the size and reach of the EU market and its regulators should ensure that the ETS has global impact. 

“Global shipping is concentrated in a small number of economic hubs, with Europe at the centre of world trade,” explains Jacob Armstrong, shipping manager at the Brussels-based NGO Transport and Environment (T&E). “Around 40% of ships by number call at European ports in a single year. This makes European regional action hugely powerful. If China were to follow suit by incorporating shipping in its own ETS, 80% of global ships would come into contact with the mechanism and be forced to go green.” 

Osipova adds: “Obviously we are going to eventually need a global framework to ensure shipping decarbonises, but introducing regional frameworks such as in the EU is the first step in the right direction, and other countries are likely to follow suit – just as they have done with other parts of the EU ETS.” 

Given that this is the first time large international ships have been targeted by an international compliance carbon market, there are – understandably – concerns with how the policy might play out in practice. 

One area, though, that experts stress the policy should minimally impact is the costs borne by European businesses and consumers. A T&E study calculates that an average, real-world large container vessel sailing between China and Belgium would likely only see a negligible impact on seaborne transport costs; these would increase by only a handful of percentage points, even in a high-ambition scenario. 

T&E’s Armstrong nonetheless argues that while the ETS will prove “key to reducing the price gap between dirty and clean fuels” it will not function effectively without “ambitious e-fuel mandates, energy efficiency obligations and guided use of subsidies". 

Under the EUʼs FuelEU Maritime regulation, shipping companies will be forced to begin reducing the GHG intensity of the fuels they use from 2025, starting with a 2% reduction that year, to as much as 80% by 2050. The participation of the maritime industry in the ETS is set to catalyse energy efficiency improvements, although the massive value of subsidies given to the fossil fuel industry – €123bn ($133.66bn) in 2022 – remains a major point of concern. 

Javier Godar, a senior research fellow at non-profit the Stockholm Environment Institute, tells Energy Monitor that the limited geographical scope of the EU ETS means there is a major risk that “locations close to the EU will become new proximity hubs” so that shipping companies can avoid the EU’s carbon market. There is also a risk that shipping companies will use their lower-carbon vessels to serve the EU and leave the worst polluters for other routes. “This would not produce a net global benefit and could even lead to more emissions if those other routes are longer,” he warns. 

There also remains a risk, says Godar, that the future traded price of carbon remains too low to encourage sufficient investment for net zero. 

Where things may not work, however, there will be ample opportunity to revise and amend. In 2027, the EU is set to decide whether to expand the scope of the EU ETS to include ships that have a smaller volume than 5,000GT (Gross Tonnage), the current minimum size for inclusion. 

“We have to remember that this is such an innovative product, and there are going to be things that need adapting,” says Osipova. “So far, for example, there have been concerns that the reporting is not working properly, and there is need for new digital expertise.” 

Ultimately, says Osipova, EU policymakers want the EU ETS to drive decarbonisation in Europe and beyond. This is not only to ensure that the bloc meets its net-zero target but also because becoming pioneers in maritime decarbonisation is a major economic opportunity. 

“There is a massive opportunity for EU businesses if the EU drives low-carbon shipping,” says Osipova. “From e-fuel producers to shipping manufacturers, policymakers also need to ensure that companies have the support and subsidies to seize that opportunity."