Reed Smith In-depth

From 2024, the EU Emissions Trading Scheme (EU ETS) will expand to include emissions produced by maritime transport. “Shipping companies” (as defined in the agreed amendment to the EU ETS Directive) will be required to pay for emissions caused by ships carrying cargo or passengers for commercial purposes. First established in 2005, the EU ETS has for many years applied to aviation. The shipping industry, including owners, charterers and managers, will now need to get to grips with the detail of the EU’s cap and trade system1 in order to ensure compliance with the EU ETS from next year. Those required to comply should keep in mind that EU emissions allowances (EUAs) can be financial instruments under EU/EEA and UK laws. As a result, bidding for, trading in and providing a wide range of services relating to these allowances can give rise to licensing issues under the EU’s Markets in Financial Instrument Directive 2014 (2014/65/EU) (EU MiFID 2). In addition, trading in EUA forwards and cash-settled trades relating to EUAs can require compliance with regulations such as the European Market Infrastructure Regulation2 (EMIR) and its UK onshored version.
Shipping bulk carrier

There is no final draft of the amendments to the EU ETS scheme yet. A draft of the provisional text was published on 8 February 2023. The final text is expected to be adopted shortly.

Under the EU ETS, in relation to each compliance year, shipping companies will be required to surrender EUAs relating to their carbon emissions in that year. Shipping companies will be provided with a free allocation of EUAs. Additional EUAs can then be purchased on the secondary market or bought in auctions arranged by the appointed auction platform (currently EEX). The deadline for surrendering EUAs in respect of a compliance year will be 30 September of the following year.3

The first compliance year for shipping companies will be 2024. In respect of that year, shipping companies will be required to surrender EUAs covering 40% of their intra-EU voyages and 20% of emissions on voyages into or out of the EU. These percentages will increase incrementally over 2024-2026 to reach 100% of emissions on intra-EU voyages and 50% of voyages into or out of the EU.

The introduction of emissions allowances to the shipping industry may be seen as presenting an opportunity. While owners and managers may themselves have primary responsibility for surrendering EUAs, they are likely to want to pass on the costs to charterers. Parties may look to trade in EUAs to turn a profit. Any party considering these approaches also needs to consider the regulatory position under EU MiFID 2. This alert provides a high-level introduction to this area.

Financial regulatory implications: EU MiFID 2


EU MiFID 2 is a cornerstone of EU/EEA financial regulation. Under EU MiFID 2, EU and EEA Member States must require that the provision of investment services and/or the performance of investment activities as a regular occupation or business be subject to prior authorisation.4 Unless they can rely on an exemption under EU MiFID 2, a person acting from the EEA will need authorisation if they carry on an investment service or activity in relation to a “financial instrument” as a regular occupation or business.

Financial instruments

Under EU MiFID 2, EUAs in and of themselves are “financial instruments.”5 Therefore, the spot sale or purchase of an EUA is a trade in a financial instrument.

In addition, options, futures, swaps and other derivatives relating to EUAs, whether they may be settled physically or in cash, are also “financial instruments.”6

While both EUAs themselves and related derivatives are “financial instruments”, whether a particular transaction constitutes a “derivative”7 may have important regulatory consequences. For example, if a transaction relating to EUAs is a derivative then it will fall within the scope of EMIR. EMIR sets obligations relating to the reporting of derivatives contracts as well as obligations relating to the risk mitigation and (where certain conditions are met) clearing or margining of OTC derivatives.

Further, participants in EU emissions markets (both spot and derivative) also need to be cognisant of their obligations under the EU Market Abuse Regulation.8

Investment services and activities

The key investment activities and services covered by EU MiFID 2 are:9

  • Reception and transmission of orders, in relation to one or more financial instruments (which includes bringing together two or more investors, thereby bringing about a transaction between those investors)10
  • Execution of orders on behalf of clients (which, broadly, means acting to conclude agreements to buy or sell one or more financial instruments on behalf of clients)11
  • Dealing on own account (which, broadly, means trading against proprietary capital resulting in the conclusion of transactions in one or more financial instruments)12
  • Portfolio management (which means managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments)13
  • Investment advice (which means the provision of personal recommendations to a client, either upon its request or at the initiative of the investment firm, in respect of one or more transactions relating to financial instruments)14
  • Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis
  • Placing of financial instruments without a firm commitment basis
  • Operation of a multilateral trading facility (MTF)
  • Operation of an organised trading facility (OTF).

The inclusion of EUAs and related derivatives within EU MiFID 2 as financial instruments, and the broad range of the investment services and investments, mean that any person who does any of the following potentially needs to consider their licensing position:

  • Bidding in EUA auctions
  • Buying or selling EUAs (or related derivatives) as principal
  • Buying or selling EUAs (or related derivatives) as agent
  • Arranging transactions in EUAs (or related derivatives)
  • Advising on transactions in EUAs (or related derivatives)