European Union: Maritime GHG Emissions: The Paris Agreement, An IMO MRV And ‘Market-Based Measures' – Looking Forward To MEPC 69

Executive Summary Tackling greenhouse gas emissions (GHGs) from international shipping: as the Marine Environmental Protection Committee (MEPC) of the International Maritime Organisation (IMO) gears up for its 69th meeting in London starting 18 April 2016 (MEPC 69), we look at the sector's progress on GHGs to date and likely outcomes of this critical meeting, including the possibility of a global MRV scheme for monitoring, reporting and verifying ship GHG emissions, and possible "market based measures", such as emissions trading.

Introduction On 18 April 2016, the Marine Environmental Protection Committee (MEPC) of the International Maritime Organisation (IMO) will convene in London for its 69th working session (MEPC 69).

A key topic during the four days of meetings will be the discussion of measures to reduce greenhouse gas (GHG) emissions from ships.

Specifically, MEPC 69 will debate a global ship GHG data collection scheme and GHG reduction target and so-called 'market-based measures' to achieve such a target (such as emissions trading and carbon off-setting, as distinct from technical or operational measures).

Tackling the sector's GHG emissions is hardly a new subject for the shipping industry. Maritime GHG emissions have been a matter of intense debate and controversy for at least two decades (as explained further below). However, this MEPC meeting is likely to be somewhat different.

It follows swiftly on the heels of the break-through global climate change agreement concluded by 195 countries in Paris on 12 December 2015 (Paris Agreement).

Expectations are high and the pressure on the IMO to broker a global deal to tackle ship GHG emissions has never been greater.

This article will briefly explain the background that leads up to MEPC 69, the potential significance for owners, charterers, financiers and fuel suppliers of the issues to be debated there and the likely outcome. A follow-up article in April will analyse the outcome of the meeting in detail.

A growing issue While shipping GHG emissions make up only a relatively small proportion of global GHG emissions today, and shipping is arguably one of the most energy efficient modes of transport, it is widely acknowledged that the sector's GHG emissions are growing fast, particularly as a result of economic growth in developing regions.

According to the third IMO GHG study (2014), maritime transport emits around one billion tonnes of CO2 annually and is responsible for about 2.5 per cent of global GHG emissions. Other estimates put this figure at 3 per cent globally, and 4 per cent in the EU, equivalent to more than the total annual emissions of Germany, the EU's biggest emitter.

More importantly, shipping emissions are predicted to increase by between 50 per cent and 250 per cent by 2050, depending on future economic and energy developments.

This rate of growth is seen as incompatible with global targets to keep global warming to below 2oC (which requires global GHG emissions to be at least 50 per cent below 1990 levels by 2050), particularly in the wake of the Paris Agreement.

Exclusion of shipping from the Kyoto Protocol and EU ETS When the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) was adopted in Japan in 1997, the shipping sector (along with aviation) was treated differently from other (i.e. land-based) sources of GHG emissions.

The Kyoto Protocol specifically left it to the IMO in the case of shipping, and its equivalent in the aviation sector, the International Civil Aviation Organisation (ICAO), to pursue measures to reduce GHGs from those sectors.

When, therefore, the European Union enacted its ground-breaking European Union Emissions Trading Scheme (the EU ETS) in 2005, in order to meet the EU's Kyoto Protocol commitments, the shipping and aviation sectors were excluded from its ambit.

The exclusion of both sectors from the EU ETS was controversial at the time and has remained so ever since.

There were, however, cogent practical reasons for treating them differently, and there are a number of parallels between the two sectors (albeit also important distinctions).

Both sectors are truly global and, unlike ground-based emitters such as power stations, both are self-evidently mobile sources of pollution, which gives rise to obvious difficulties of jurisdiction, measurement and enforcement, among other complexities.

These measures were regarded as justifying a global solution, most likely to be found under the auspices of the relevant global associations.

Perhaps inevitably, however, a global solution has so far proved elusive in both cases.

Some readers will be aware that in the case of the aviation sector, the EU ran out of patience in 2009 and enacted an EU Aviation ETS that, controversially, had extra-territorial effect (covering all of the emissions of international flights landing in or taking off from anywhere in the EU, regardless of their non-EU destination/origin).

This provoked a furious legal and political battle, ultimately culminating in the EU climbing down and suspending the non-EU aspects of the aviation ETS until at least the end of 2016 (depending on the outcome of parallel talks taking place within ICAO this year).

Progress at IMO level to date However, to suggest that nothing has been done by the shipping industry to tackle its GHG emissions would be a gross oversimplification. In fact, a great deal has already been done.

In particular, significant technical and operational measures have been implemented in recent years at port, regional and international level, including through the adoption by IMO in July 2011 of the mandatory 'Energy Efficiency Design Index' (EEDI) for new ships, and the 'Ship Energy Efficiency Management Plan' (SEEMP) for all ships, which will both contribute to reducing maritime GHG emissions.

Market-based measures Notwithstanding the progress outlined above, it has been accepted by the MEPC that technical and operational measures alone will not be sufficient to satisfactorily reduce the amount of GHG emissions from international shipping in view of the growth projections of world trade.

At MEPC 59 in July 2009, it was agreed by overwhelming majority that market-based measures (MBM) were needed as part of a comprehensive package of measures for the effective regulation of GHG emissions from international shipping. Accordingly, the committee agreed upon a new work plan for the further consideration of MBM.

Over the next several years, various in-sector and out-of-sector proposals for MBM were submitted to the IMO by governments and other stakeholders for consideration by the MEPC. These ranged from contribution schemes for carbon dioxide (CO2) emissions from international shipping (to be collected and transferred to a fund), to global or regional emissions trading systems, to schemes based on the actual ship's efficiency both by design and operation.

These proposals were subject to some degree of scrutiny between MEPC 60 (March 2010) and MEPC 65 (May 2013).

However, at MEPC 65 it was agreed to suspend discussions on MBM and related issues to a future session and there has been no meaningful consideration of MBM since then.

MEPC 68, May 2015 At MEPC 68 in May 2015, the MEPC considered a submission from the Marshall Islands, calling for the setting of a quantifiable reduction target for GHG emissions from international shipping consistent with keeping global warming below 1.5oC and for an agreement on measures necessary to reach that target.

During the discussion, it was recognised that, despite the measures already taken by the IMO to reduce emissions from ships, more could be done.

However, the committee took the view that it was premature to agree on a reduction target for shipping prior to the conclusion of the COP 21 UNFCCC negotiations in Paris that coming December. Their priority was the finalisation of an industry-wide GHG emissions data collection system from which to determine a 'baseline' for shipping emissions from which a sectoral target could be derived.

The EU MRV Many readers will be aware that the EU adopted a mandatory MRV Regulation on 29 April 2015. This creates an EU-wide legal framework for the monitoring, reporting and verification of CO2 emissions from maritime transport. It was intended by the EU in part to generate momentum for a successful outcome in the wider international discussions.

The EU MRV Regulation requires operators of large ships (only those over 5,000 gross tonnes) calling at EU ports (irrespective of where they are registered) from 1 January 2018 to:

  • Monitor and annually report the verified amount of CO2 emitted on journeys to, from and between EU ports and also when in EU ports
  • Monitor and annually report additional parameters, such as distance, time at sea and cargo carried, to enable the determination of the ships' average energy efficiency
  • Submit to the European Commission an emissions report containing externally verified annual aggregated data, which will then be publicly available

When visiting EU ports, ships will need to carry a document of compliance issued by an accredited MRV verifier. This will confirm that the ship is in compliance with its MRV obligations for its activities during the preceding year for possible inspection by regulatory authorities.

This scheme is controversial both in terms of its operational complexity and mandatory nature.

At MEPC 68 in May 2015, an MEPC working group produced basic draft language for a global data collection system for fuel consumption and this was debated. Compared to the 22 closely typed pages of detailed text in the EU MRV Regulation, this MEPC draft runs to less than two pages of detail.

Almost every state declared its commitment to developing the data collection system as a matter of priority to enable the MEPC to take an informed decision about next steps. However, no decision was taken as to whether the system should be mandatory or voluntary, whether the data collected would be made publically available to create 'transparency', or whether in addition to fuel use data the system should also incorporate the collection of energy efficiency information, such as overall supply chain emissions.

The working group was instructed to consider these and other aspects of the proposed data collection system further and to report back at MEPC 69 in April 2016.

MEPC 69, April 2016 The successful outcome of the international climate change talks in Paris in December 2015 – during which nations agreed to hold global warming at "well below 2°C" – has been reported upon in detail in our client briefing of 12 January 2016, a copy of which can be found here.

Text urging countries to pursue concrete measures to tackle international shipping emissions was withdrawn at a late stage from the Paris Agreement. That agreement says nothing on the subject, not even explicitly deferring responsibility to the IMO to curb the sector's GHG output.

Although this silence has been 'spun' by some as a vote of confidence in the action being taken at IMO and ICAO, it is almost certainly more reflective of the Paris negotiators' desire to avoid derailing the outcome of Paris by trying to tackle the complexities of these potentially toxic subjects, on top of everything else that needed to be agreed in Paris.

Critics allege that the MEPC is a mere talking shop. The EU Commission continues to threaten unilateral action (in relation to both the shipping sector and aviation) if a global solution cannot be achieved. The IMF called in January 2016 for a carbon tax on bunker fuels. Virtually all UNFCCC parties and the IMO member states have made it clear that they expect the shipping industry to deliver more on CO2 reduction.

It is against this backdrop that MEPC 69 convenes from 18 – 22 April in London, for what may finally turn out to be watershed talks on these issues.

Newly-appointed IMO chief Kitack Lim said recently that the IMO is likely to consider a GHG emissions target for the sector at the upcoming session. His predecessor Koji Sekimizu, who last year spoke out against the need for such a measure, has said "I now encourage governments to bring the spirit of the Paris Agreement to IMO".

However, what can realistically be expected as the outcome of MEPC 69 in this regard?

Likely outcome of MEPC 69 It is highly unlikely that a sectoral GHG emission reduction target will be agreed as such and it is certain that no MBM will be agreed immediately either.

What seems more likely – all the more so post-Paris – is the agreement of an expeditious work plan to generate future agreement of an overall GHG emissions reduction target and, as a critical stepping stone towards that, the agreement, at least in outline, of a global mandatory MRV (data collection) system.

A paper submitted to the MEPC on 12 February 2016 by Belgium, France, Germany, the Marshall Islands and the Solomon Islands, calls for the development at MEPC 69 of a work plan to define the international shipping community's "fair share" of efforts to curb GHG emissions, which they say should address methodology, types of GHGs covered and reference (i.e. baseline) years.

A paper submitted on 26 February 2016 by the World Shipping Council, Cruise Lines International Association, INTERTANKO and the International Parcel Tankers Association adopts broadly the same position, but also demands proportionality (taking into account the efforts of other transport modes, the importance of shipping to world trade and economic development and other factors) and a more considered (i.e. slower) process towards developing an overall target than is advocated by some.

A further paper submitted by the NGO, Clean Shipping Coalition (CSC), also on 26 February 2016, endorses the call for a work plan to derive the sector's "fair share" of effort, and also calls for adoption of a global MRV system and an "agreement to advance consideration of measures... including MBMs".

One critical point to be aware of is the fact that the below 2oC target agreed in Paris is not technically a legally binding target. Instead – as explained in our Paris Agreement  briefing – and in contrast to the controversial top-down emissions capping approach of Kyoto, the Paris Agreement adopts a bottom-up approach of non-binding individual country (note: not sectoral) emissions reduction targets (known as 'Intended Nationally Determined Commitments', or INDCs) supported by an administrative process of transparent, ongoing peer review of progress.

Accordingly, one cannot realistically expect the shipping sector to take a more rigorous approach and impose legally binding caps on itself through IMO/MEPC channels, and this point has already been made by many stakeholders.

The International Chamber of Shipping (ICS) has, for example, tabled on 12 February 2016 an agenda item for MEPC 69 which proposes the development of an "Intended IMO Determined Contribution" to CO2 reduction for international shipping, echoing the INDC language of the Paris Agreement.

It is also highly likely that any progress towards the agreement of a sectoral GHG emissions cap made at MEPC 69 will mirror the Paris Agreement in allowing for different (i.e. less developed) parts of the global shipping community to decarbonise at different speeds.

The most likely outcome of MEPC 69 in this area is rapid finalisation of an IMO MRV (monitoring, reporting and verification of emissions) system. This is likely to carry the same exemption for ships below 5,000 GT exemption as adopted by the EU MRV and to initially apply only to CO2 emissions.

Key questions to be determined on MRV at MEPC 69 that will have a significant bearing on the burden the sector will face and how the wider international community will react to it are:

  • When the scheme will start (likely 2018)
  • Whether the scheme will be mandatory or voluntary (likely mandatory)
  • Whether MRV data will be made public
  • What information will need to be collected beyond mere fuel use, and the extent to which the scheme applies differently depending on ship type, cargo, weather conditions, etc.
  • Methodology for data collection/calculation
  • Responsibility (ship owner/operator)
  • Enforcement/penalties for non-compliance

The outcome of these decisions will potentially impact residual ship values and influence future ship investment and finance decisions (for example, based on the insight they provide as to individual ship performance and operating costs). They may also translate into pressures on bunker suppliers to supply additional information to customers and offer alternative low carbon fuels, such as biofuels and LNG. It will also be interesting to see what impact all of this may have on the future of the EU MRV Regulation. We will report on these and other outcomes of MEPC 69 in April.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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