Explanatory Memorandum to COM(2021)562 - Use of renewable and low-carbon fuels in maritime transport

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1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

By contributing to around 75% of EU external trade volumes and 31% of EU internal trade volumes, maritime transport is an essential component of Europe’s transport system and plays a critical role for the European economy. Every year, around 400 million passengers embark or disembark in EU ports, including around 14 million on cruise ships. Maritime transport fulfils an important role in safeguarding the connectivity of islands and peripheral maritime regions with the rest of the single market 1 . Efficient maritime transport connections are essential to the mobility of EU citizens, in developing EU regions and to the EU economy as a whole.

The maritime transport sector operates in an environment of open markets and international competition. Maritime transport services within the EU are open to all EU shipowners, maritime transport services between EU Member States, and between EU Member States and third countries (non-EU countries), can be provided by operators of all nationalities. A level playing field for ship operators and shipping companies is critical to a well-functioning EU market for maritime transport.

In September 2020, the Commission adopted a proposal to cut greenhouse gas emissions by at least 55% by 2030 2 and put the EU on a responsible path to becoming climate neutral by 2050. To achieve climate neutrality, a 90% reduction in transport emissions is needed by 2050. All transport modes, including maritime transport, will have to contribute to the reduction efforts.

Achieving significant reductions in CO2 emissions of international maritime transport requires using both less energy (increasing energy efficiency) and cleaner types of energy (using renewable and low-carbon fuels). The Communication on the 2030 Climate Target Plan 3 explains that: “Both the aviation and maritime sectors will need to scale up efforts to improve the efficiency of aircraft, ships and their operations and to increase the use of sustainably produced renewable and low-carbon fuels. This will be assessed in greater detail in the context of the ReFuelEU Aviation and FuelEU Maritime initiatives that aim to increase the production and the uptake of sustainable alternative fuels for these sectors. The necessary technology development and deployment has to happen already by 2030 to prepare for much more rapid change thereafter.”

Depending on the policy scenarios assessed in the framework of the 2030 Climate Target Plan (CTP) and in support of the Sustainable and Smart Mobility Strategy, renewable and low-carbon fuels should represent between 6% and 9% of the international maritime transport fuel mix in 2030 and between 86% and 88% by 2050 to contribute to the EU economy-wide GHG emissions reduction targets 4 .

The CTP notes that the renewables share in the transport sector has to increase through the development of electrification, advanced biofuels and other renewable and low carbon fuels as part of a holistic and integrated approach, and that hydrogen based synthetic fuels will be crucial for the decarbonisation in particular in the aviation and maritime sector.

The push for the maritime transport sector to use cleaner fuels is also present at international level. In 2018, the International Maritime Organisation (IMO) has adopted its initial strategy on the reduction of GHG emissions from ships. In the list of identified candidate short-term measures, the IMO includes promoting the uptake of alternative low-carbon and zero-carbon fuels and providing shore-side electricity.

Currently, the fuel mix in the maritime sector relies entirely on fossil fuels. This can be explained by insufficient incentives for operators to cut emissions and by the lack of mature, affordable, and globally utilisable technological alternatives to fossil fuels in the sector. A number of market failures partly cause and reinforce these problems. These include:

–interdependencies between supply, distribution and demand of fuels;

–lack of information on future regulatory requirements;

–long life span of assets (vessels and bunkering infrastructure).

The FuelEU Maritime initiative proposes a common EU regulatory framework to increase the share of renewable and low-carbon fuels in the fuel mix of international maritime transport without creating barriers to the single market.

Considerations on possible obstacles to the single market, distortion of competition between operators and diversion of trade routes are particularly relevant to fuel requirements, since fuel costs make up a substantial share of ship operators’ costs. The proportion of fuel costs in the operating costs of ships can range from around 35% of the freight rate of a small tanker to around 53% for container/bulk vessels. Therefore, variations in marine fuel prices may impact significantly the economic performance of ship operators.

At the same time, the price differential between conventional marine fuels of fossil origin and renewable low-carbon fuels remains high. To maintain competitiveness while still steering the sector towards the fuel transition that it must inevitably undertake, clear and uniform obligations are needed on ships’ use of renewable low-carbon fuels.

An increased predictability of the regulatory framework is expected to stimulate technology development and fuel production and help the sector unlock the existing chicken-and-egg situation between demand and supply of renewable and low-carbon fuels. Clear and uniform obligations on ship’s use of energy is necessary to mitigate the risk of carbon leakage, which maritime transport is prone to due to its international nature and the possibility to bunker fuel outside the EU. Owing to the cross-border and global dimension of maritime transport, a common maritime Regulation is preferred, over a legal framework requiring EU Member States to turn EU legislation into national law. The latter could result in a patchwork of national measures with differing requirements and targets.

•Consistency with existing policy provisions in the policy area

The FuelEU Maritime is part of the ‘basket of measures’ designed to address emissions from maritime transport while maintaining a level playing field. It is fully consistent with other measures presented as part of the ‘Fit for 55’ package and builds on existing policy tools such as Regulation (EU) 2015/757 of the European Parliament and of the Council 5 , which establishes an EU system to monitor, report and verify (MRV) CO2 emissions and other relevant information from large ships using EU ports.

A basket of measures is considered necessary to address various and distinct market failures hindering the deployment of mitigation actions in the maritime sector. Beside the FuelEU Maritime initiative that aims at increasing the demand for renewable and low-carbon fuels (RLF), the Commission proposes to extend the European Emissions Trading System (ETS) 6 to the maritime sector and to review the Energy Taxation Directive (ETD) 7 . These two initiatives should ensure cost-effective emission reductions in the sector and that the price of transport reflects the impact it has on the environment, health and energy security.

In addition, the basket of measures will include the review of several other directives, including:

–the Alternative Fuels Infrastructure Directive (AFID) 8 ; and

–the Renewable Energy Directive (RED II) 9 .

Next to these revised laws, the Commission will address the need for additional research and innovation (R&I) activities, in particular through the co-programmed Zero Emissions Waterborne Transport partnership proposed by the Waterborne Technology Platform under Horizon Europe 10 . It will also revise the Guidelines on State aid for environmental protection and energy 11 in line with the policy objectives of the European Green Deal, which should allow sufficient funding of the sector’s green transformation (including for deployment of on-shore charging infrastructure), while avoiding distortion of competition.

Looking in more detail at the proposed actions, there is currently no mechanism, either at the IMO level or at EU level, to correct for the presence of negative externalities (the indirect costs of emissions that are otherwise not considered) in the sector. This prevents operators from taking into account, in their operational and investment choices, the social cost of their activity in terms of climate change and air pollution. The economic literature indicates pricing mechanisms as the instruments of choice to ‘internalise’ external costs. The main examples would be a tax fixed at the level of the external cost, or a ‘cap and trade’ instrument, such as the EU Emission Trading System (ETS), that sets a limit to the overall emissions and lets the market determine their appropriate price. Both are described as ‘market-based measures’.

However, while emissions trading can achieve GHG emissions reductions cost‑effectively and provides a uniform price signal that influences decisions of operators, investors and consumers, it does not sufficiently address all barriers to the deployment of low and zero-emissions solutions.

Additional policy actions are needed to ensure that the level playing field in maintained while removing obstacles to investments in clean energy technologies and infrastructure, in turn reducing abatement costs and complementing the action of the EU ETS. This is particularly relevant to support mitigation measures – such as the use of RLF in the maritime transport sector – that have a high potential to reduce emissions in the future but which, presently, face high abatement costs as well as specific market barriers.

While extending the EU ETS to the maritime sector will further drive energy efficiency improvements and narrow the price gap between conventional and low-emission technologies, its ability to support the rapid deployment of RLF technologies in the maritime sector strongly depends on its actual price level, which is unlikely to reach sufficient levels for this purpose in the short to medium term.

Similarly, legislation dealing with fuel supply (RED II) and infrastructure (AFID) has not had a significant impact on the uptake of RLF in the maritime sector and needs to be complemented by measures that are capable of creating a demand for RLF. In addition, the review of the RED II would not be able to address the high risk of fuel bunkering outside the EU for the shipping sector.

There is currently no EU regulatory framework specifically addressing the use of RLF in maritime transport. This initiative intends to fill this gap by increasing the demand for RLF in maritime transport while maintaining a level playing field and a well-functioning EU market for marine fuels and maritime transport.

•Consistency with other Union policies

This initiative aims at increasing the uptake of RLFs in EU maritime transport while maintaining a level playing field, both at sea and at berth, and contribute to achieving EU and international climate and environmental objectives. Ensuring a more diverse fuel mix and higher penetration of RLFs is critical to ensure the sector’s contribution to the European ambition of climate-neutrality by 2050 as laid out in the European Green Deal. At the same time, a differentiated approach to the use of RLFs in navigation and in ports is important to account for different implications on air pollution with more stringent requirements for ships in ports and different availability of technologies (more options for ships in ports).

2.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY


•Legal basis

This initiative aims at maintaining high levels of connectivity, and preserving industry competitiveness in the maritime sector while stepping up its sustainability. Article 100 i of the Treaty on the Functioning of the European Union (TFEU) empowers the Union to lay down appropriate provisions in sea transport.

•Subsidiarity (for non-exclusive competence)

Maritime transport is an international sector by nature. In Europe, approximately 75% of the voyages reported under the MRV are within the European Economic Area (EEA) (and could therefore be a proxy for intra-EU traffic) and only around 9% of the traffic is estimated to be domestic voyages (between ports within the same EU Member State). The cross-border dimension of the sector is therefore essential and calls for coordinated action at EU level.

Without action at EU level, a patchwork of regional or national requirements across EU Members States would risk triggering the development of technical solutions that may not necessarily be compatible with each other. Several EU Member States are already developing national maritime strategies that include specific approaches to ship emissions and in particular the uptake of alternative fuels 12 with possible unintended effects and market distortions. As the problem drivers identified in the context of this proposal do not fundamentally differ from one EU Member State to another, and given the cross-border dimension of sector’s activities, these issues can be best addressed at EU level. EU action can also inspire and pave the way to develop future measures accelerating the uptake of alternative fuels at global level 13 .

Previous EU action on GHG issues has already stimulated a corresponding response from the IMO, notably the EU adopting the Regulation on Monitoring, Reporting and Verification of GHG emissions from ships led shortly afterwards to the IMO adopting a similar mandatory global GHG Data Collection System. A coordinated approach by EU Member States in responding to developments in GHG emission reduction at IMO has more recently ensured that mandatory operational energy efficiency measures are included within IMO’s short term actions to reduce GHG. Projecting a common viewpoint from a considerable group of IMO Member States within the IMO fora means that the EU can have a significant impact on the direction and outcome of IMO discussions.

•Proportionality

The implementation of this initiative at the EU level is needed to achieve the economies of scale in the uptake of RLFs in maritime transport as well as avoiding carbon leakage, and ensuring level playing field between operators calling in EU ports and between the EU ports themselves. To give an example, obligations established at national level on the use of RLFs could divert traffic to competing ports of other Member States and distort competition. Accordingly, harmonisation at EU level is necessary to ensure a level playing field for all actors of the maritime cluster (in particular, operators, ports and fuel suppliers).

•Choice of the instrument

The impact assessment established that binding, regulatory measures are necessary to achieve the objectives. A regulation is the most appropriate instrument to ensure common implementation of the measures envisaged, while reducing the risk of distortion within the single market, which could result from differences in how EU Member States turn the requirements in national law. As the transition to RLFs requires significant investments from fuel suppliers, fuel distribution and a strong and clear demand push, it is vital that the regulatory framework provides a single, long-term and robust set of rules to all investors EU-wide. In particular, it is important to avoid creating a patchwork of differing measures at national level, which would be the case if implemented under a cross-sectoral directive.

The proposal is highly technical in nature, and there is a high likelihood that it will have to be regularly amended to reflect technical and legal developments. To respond to this, a number of implementing measures are also planned. These will focus particularly on the technical specifications to implement the functional requirements.

3.

3.RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS


•Ex-post evaluations/fitness checks of existing legislation

As this is a new proposal, no evaluations or fitness check have been carried out.

•Stakeholder consultations

The Commission actively engaged with stakeholders and conducted comprehensive consultations throughout the impact assessment process. Stakeholders’ views started to be collected in response to the publication of the inception impact assessment (March and April 2020). A total of 81 replies were received, which informed the drafting process and helped to refine the approach and better identify the barriers that hamper the current use of RLFs in the maritime sector.

As part of preparing the proposal, other consultation activities included:

–An open public consultation, organised by the Commission, running from 2 July 2020 to 10 September 2020. A total of 136 responses were received, covering a variety of stakeholder groups. The responses came from ship owning and ship management (40), energy producers and fuel supply (37), short sea shipping (25), national public authorities (15), interest organizations (14), ports management and administrators (13), port terminal operator or other port services provider (13), academia research and innovation (12), inland waterways sector (11), shipbuilding and marine equipment manufacturers (10), regional or local public authorities (9), logistics suppliers, shippers and cargo owners (9), technical standardization bodies and class societies i, investment and financing i, and other (17) 14 ;

–A targeted stakeholders consultation organised by the consultant responsible for the impact assessment support study, running from 18 August 2020 to 18 September 2020 and directed at experts from the European Sustainable Shipping Forum (ESSF). The consultant also conducted a series of interviews with stakeholders, including industry representatives and national authorities, between 10 July 2020 and 1 December 2020;

–A stakeholders roundtable, organised by the Commission on 18 September 2020 with members of European Sustainable Shipping Forum 15 (ESSF) and the European Ports Forum 16 (EPF);

–Regular expert group meetings, in the framework of the ESSF sub-group on sustainable alternative power for shipping.

The information provided by stakeholders was key in allowing the Commission to refine the design of the policy options as well as to assess their economic, social and environmental impacts, compare them and determine which policy option is likely to maximize the benefits/costs ratio for the society.

The consultations showed that there is consensus among all stakeholder groups on the importance of addressing the uptake of RLFs in maritime transport as well as the specific problems identified by the impact assessment.

The consultations confirmed that all five drivers identified in the framework of the impact assessment of the proposal are relevant. The results suggest that the different stakeholders agree that high fuel and investment costs together with uncertainty for investors are the most important barriers. In terms of policy objectives, ‘providing more certainty on the climate and environmental requirements for ships in operation’ appears to be the most important policy objective in view of stakeholders.

All stakeholder groups also expressed a preference for goal-based over prescriptive policy, which also concurs with another requirement for the policy voiced by most stakeholders, the technology neutrality. On policy measures, setting a clear regulatory pathway for decarbonising the current marine fuel received the highest scores from the stakeholders. On geographical scope, there was no obvious preference on the right geographical scope for the measures. In terms of measuring environmental performance and how emissions should be included in the policy framework, most stakeholders prefer a “well-to-wake” approach as that it takes into account not only emissions from the combustion of fuel on board the ship, but also upstream emissions from production, transport, and distribution of fuels. On ships at berth, requirements on the use of on-shore power supply are found to be relevant and necessary for achieving the decarbonisation objectives by most stakeholders.

•Collection and use of expertise

A study was conducted by an external contractor to support the impact assessment underpinning the proposal. This study was launched in July 2020 and was concluded in March 2021. The study provided valuable insights to the Commission services notably to design the policy options, assess some of the expected impacts, and collect the views of the directly impacted stakeholders. The Commission services also relied on the support from the European Maritime Safety Agency (EMSA) on technical aspects related to the present initiative.

•Impact assessment

The policy measures included in this proposal are informed by the results of an impact assessment. The impact assessment report [SWD(2021)635] received a positive opinion from the Commission Regulatory Scrutiny Board [SEC(2021)562]. In its opinion, the Board provided a number of recommendations about the presentation of the arguments in the impact assessment report. These recommendations have been addressed; Annex 1 to the impact assessment report provides a summary outline of how this was done.

Three policy options have been considered in the context of the impact assessment to achieve the identified objectives. These three options all share two main characteristics:

(1)the regulatory nature to provide legal certainty; and

(2)the focus on demand-side aspects to stimulate production and uptake of RLFs, address the chicken-and-egg situation and avoid carbon leakage.

Policy options provided different ways to design the obligation and differed in particular on their approach to technology choice and the way the required performance is achieved.

Policy option 1 is designed as a prescriptive approach, requiring share of specific fuels / fuel types to be used. It implies a technology selection by the regulator. Both policy options 2 and 3 are goal-based approaches, requiring a maximum yearly average GHG intensity limit to be met for the energy used on-board. This leaves the choice of technology to market operators. In addition, policy option 3 contains also mechanisms to reward over-achievers to encourage the development of more advanced, zero-emissions technologies (pooling and multipliers for zero-emission technologies) reducing both air pollutants and greenhouse gases. All options require the most polluting ships in ports (containerships, and passenger ships) to use on-shore power supply (or equivalent zero-emission technology).

Following the assessment, policy option 3 is identified as the preferred option as it strikes the best balance between the objectives and the overall implementation costs. It not only answers the needs for flexibility, which have been stressed by stakeholders during the consultation activities (in particular operators and ports), but also reduces the risk of technology lock-in [and incentivises the early adoption of most advanced technologies].

The increased penetration of RLFs in the maritime fuel mix will translate into significant reduction of greenhouse gas emissions and air pollution emissions. The related savings in external costs have been estimated at EUR 10bn for air pollution and EUR 138.6bn for climate change, relative to the baseline and expressed as present value for 2021-2050 period. These have been calculated in the impact assessement based on the modelled projected penetration of renewable and low carbon fuels. Savings in the order of EUR 2.3bn are expected to be realised by ship operators due to reduced operating costs (maintenance, crew, etc.). This reduction will be driven by somewhat lower maritime transport activity relative to the baseline. An additional noticeable impact concerned the use of advanced fuels and propulsion technologies, and indirectly the impact it has on innovation. The initiative is expected to boost the penetration of fuel cell-powered vessels (18.9%) in the fleet as well as electric propulsion (5.4%) by 2050 (compared to no penetration of these technologies in the baseline).

The main cost resulting from the proposed intervention is borne by ship operators and amounts to EUR €89.7bn. It results from increased capital costs (EUR 25.8bn) and fuel costs (EUR 63.9bn). Indirect costs for the ports will relate to the provision of the necessary bunkering infrastructure and are estimated at EUR 5.7bn. Administrative costs for ship operators are estimated at EUR 521.7m resulting from data collection, submission and verification of the compliance plans and the annual energy report, cooperation during audits and inspections as well as crew training. Additional EUR 1.8m have been identified for the establishment of guidelines by ports to guarantee the safe handling of RLFs. Specific costs related to fuel certification could not be quantified. Enforcement costs for public authorities are expected to be limited (EUR 1.5m) and focus on the provision of the necessary IT reporting tools. The preferred option thus provides net benefits amounting to EUR 58.4bn over the time horizon of the initiative.

•Fundamental rights

The proposal has no implications on the protection of fundamental rights.

Contents

1.

BUDGETARY IMPLICATIONS



The preferred option will have budgetary implications for the Commission. The expected costs of IT services and IT system development are up to EUR 0.5m. This is based on the cost of THETIS-MRV and experience with existing THETIS-EU modules supporting various pieces of EU legislation, such IT-developments costs are estimated at EUR 300,000. The preferred policy option would also need an additional functionality to support the pooling of ships for compliance. This additional tool is estimated to cost EUR 200,000. IT development and procurement choices will be subject to pre-approval by the European Commission Information Technology and Cybersecurity Board.

4.

5.OTHER ELEMENTS


•Implementation plans and monitoring, evaluation and reporting arrangements

The Commission will follow the progress, impacts and results of this proposal through a set of monitoring/evaluation mechanisms. The Commission will measure progress towards achieving the specific objectives of the proposal, in particular through the data collected annually as part of the EU Monitoring, Reporting and Evaluation (MRV) system.

Requests for information (reports, survey replies) will be carefully balanced so as not to put an additional burden on stakeholders by creating disproportionate new reporting requests.

Five years after the end of the implementation date of the legal proposal, the Commission will evaluate the rules to check whether the initiative’s objectives have been reached. The evaluation will inform future decision-making processes to ensure the necessary adjustments for reaching the set objectives.

•Detailed explanation of the specific provisions of the proposal

Article 1 describes the subject matter of the proposed Regulation, which lays down rules to reduce the greenhouse gas intensity of energy used on-board by ships arriving at, within or departing from ports under the jurisdiction of a EU Member State, to promote the harmonious development and consistent use of renewable and low-carbon fuels across the Union, without introducing barriers to the single market to promote the reduction of greenhouse gas emissions from maritime transport.

Article 2 lays down the scope.

Article 3 sets out several definitions.

Article 4 establishes the limit to the yearly greenhouse gas intensity of the energy used on-board by a ship.

Article 5 establishes requirements for the use of on-shore power supply or zero-emission energy at berth for specific ship types and lists possible exceptions.

Article 6 lays down the common principles for monitoring compliance.

Article 7 establishes what should be included in the monitoring plans.

Article 8 lists the situations in which the monitoring plan should be amended.

Article 9 establishes the principles related to the certification of biofuels, biogas, renewable fuels of non-biological origin and recycled carbon fuels.

Article 10 lays down the scope of the verification activities to be performed by verifiers.

Article 11 sets the general obligations and principles for the verifiers.

Article 12 sets out the main principles to be respected during the verification procedures.

Article 13 lays down the rules on accreditations of the verifiers for the activities to be performed under the scope of this Regulation.

Article 14 defines the parameters that companies should monitor and record to demonstrate compliance.

Article 15 sets out the task for the verifiers in relation to the information provided by the companies.

Article 16 establishes the compliance database and lays down the main parameters for reporting.

Article 17 establishes flexibility provisions, allowing operators to bank or borrow, within a certain limit, a compliance surplus to enable compliance.

Article 18 sets out the main principles and procedures for possible pooling of compliance balances.

Article 19 lays down the conditions to the issue a FuelEU certificate of compliance.

Article 20 establishes the penalties to be incurred if compliance has not been achieved.

Article 21 establishes the principles for the allocation of penalties to to support renewable and low-carbon fuels in the maritime sector.

Article 22 establishes the obligation for ships to carry a valid FuelEU certificate of compliance.

Article 23 lays down the rules for ship inspections.

Article 24 establishes the right to review the decisions affecting companies.

Article 25 requires the designation of competent authorities responsible for the application and enforcement of this Regulation.

Article 26 establishes the conditions conferring delegated powers to the Commission under this Regulation.

Article 27 establishes the committee procedure for the exercise by the Commission of the power to adopt implementing acts.

Article 28 requires the Commission to report to the European Parliament and the Council on the application of this Regulation, at least every five years.

Article 29 amends Directive 2009/16/EC to add the FuelEU certificate of compliance to its Annex IV.

Article 30 sets the date of entry into force and application of this Regulation.

Annex I defines the formulas and methodology for establishing the yearly average greenhouse gas intensity of the energy used on-board by a ship.

Annex II provides the list of default values that can be used in determining the emission factors used in the formula described in Annex I.

Annex III provides the list of zero-emission technologies that can be used in alternative to the connection to on-shore power supply at berth, as well as, specific criteria for their use.

Annex IV defines the minium elements of the certificates to be issued by the managing body of the port in cases where ships cannot make use of on-shore power supply for justified reasons.

Annex V defines the formulas for establishing the ship’s compliance balance and the penalty in case of non-compliance.