EUROPEAN COMMISSION Brussels, 14.7.2021 SWD(2021) 635 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the Proposal for a Regulation of the European Parliament and of the Council on the use of renewable and low-carbon fuels in maritime transport {COM(2021) 562 final} - {SEC(2021) 562 final} - {SWD(2021) 636 final}



Table of contents 1.Introduction: Political and legal context 1.1Overall political context 1.2Interaction between policy tools to address maritime CO2 emissions: the ‘basket of measures’ 1.3EU approach to alternative fuels in maritime transport 1.4International context 1.5Trajectories for renewable and low carbon fuels 2.Problem definition 2.1What is the problem? 2.2What are the problem drivers? 2.2.1 Lack of predictability of the regulatory framework and high risk of investment choices (high risk of stranded assets) 2.2.2 Low maturity of new renewable and low-carbon fuels/technologies with high risk for first movers 2.2.3 Higher costs of alternatives compared to fossil fuels (also due to insufficient economies of scale) 2.2.4 High interdependency with supply and distribution (chicken-and-egg situation) 2.2.5 Possibility of bunkering outside EU (risk of carbon leakage) 2.3How will the problem evolve? 3.Why should the EU act? 3.1Legal basis 3.2Subsidiarity: Necessity of EU action

3.3Subsidiarity: Added value of EU action 4.Objectives: What is to be achieved? 4.1General objectives 4.2Specific objectives 5.What are the available policy options? 5.1What is the baseline from which options are assessed? 5.2Description of the policy options 5.2.1 Possible policy measures and preliminary screening of options 5.2.2 Identification of the general policy approach and the choice of main policy options 5.2.3 Specific aspects of policy design 5.2.4 Additional elements of policy intervention 5.3Options discarded at an early stage or identified as complementary measures 5.3.1 Carbon pricing measures (ETS and ETD) and impact on the penetration rate for RLF 5.3.2 A standard for carbon intensity of maritime operations (limit for CO2 emissions per tonne-nautical mile) 5.3.3 Revision of other relevant and existing legal instruments (AFID and RED II) 5.4Feasibility of alternative pathways for the uptake of RLF 6.What are the impacts of the policy options? 6.1Economic impacts 6.1.1 Impacts on ship operators 6.1.2 Impacts on RLF prices, feedstock and renewable electricity needs for e-fuels

6.1.3 Regulatory and administrative costs related to businesses 6.1.4 Enforcement costs 6.1.5 Impact on ports to provide the necessary infrastructure 6.1.6 Impact on innovation 6.1.7 Impact on the competitiveness of other parts of the EU maritime cluster 6.1.8 Impact on third countries 6.2Social impacts 6.2.1 Impact on jobs in the different parts of the EU maritime cluster 6.2.2 Impact on freight rates and connectivity of remote islands and peripheral regions 6.2.3 Public health 6.3Environmental impacts 6.3.1 Fossil fuels savings 6.3.2 Impacts on GHG emissions and air quality 6.3.3 Carbon leakage 7.How do the options compare? 7.1Effectiveness 7.2Efficiency 7.3Coherence 7.4Proportionality and subsidiarity 7.5Stakeholder’s views on the options

7.6Summary on the comparison of options 8.Preferred option 9.How will actual impacts be monitored and evaluated? Annex 1: Procedural information 1.Lead DG, Decide Planning/CWP references 2.Organisation and timing 3.Consultation of the RSB 4.Evidence, sources and quality Annex 2: Stakeholder consultation 1.Introduction 2.Feedback on the Inception Impact Assessment 3.Methodology 4.Analysis of results of the stakeholder consultation 5.Conclusion Annex 3: Who is affected and how? 1.Practical implications of the initiative 1.1.Outlook of the preferred option implementation 1.2.Implications on market operators and public authorities 2.Summary of costs and benefits Annex 4: Analytical methods

1.Description of the modelling tools used 2.Baseline scenario 3.Methodological approach for modelling Policy Options 4.Impact on biomass feedstock and renewable electricity needs 5.Methodological approach for regulatory and administrative costs related to businesses, and for enforcement costs 6.Methodological approach for port investments 7.Methodological approach and results of the risk of carbon leakage analysis Annex 5: Current maritime fuel mix and overview of available alternative fuels for maritime transport and their maturity Annex 6: Methodology followed for the definition of the policy options 5.Full list of identified policy measures Annex 7: Overview of the monitoring and evaluation framework Glossary Term or acronym Meaning or definition AFID Alternative Fuels Infrastructure Directive (2014/94/EU) CAPEX Capital expenditure CO2 Carbon dioxide CH4 Methane CTP Climate Target Plan, COM(2020) 562 final Drop-in fuels Fuel options that are functionally equivalent to the fossil fuels currently in use and fully compatible with the distribution infrastructure and the on-board machinery / engines EEA European Economic Area EEDI Energy Efficiency Design Index EGD European Green Deal EMSA European Maritime Safety Agency EPF European Ports Forum ESSF European Sustainable Shipping Forum GHG Greenhouse gases HFO Heavy fuel oil IMO International Maritime Organization Ktoe Kilo-tonnes of oil equivalent LNG Liquefied Natural Gas LPG Liquefied Petroleum Gas MDO Marine diesel oil MGO Marine gas oil MBM Market-based measure MARPOL International Convention for the Prevention of Pollution from Ships Methane slip Release of methane in the atmosphere while using gaseous fuels due, for instance, to the possible incomplete combustion of the fuel MOVE Directorate Directorate-General for Mobility and Transport MRV Monitoring Reporting and Verification (in the meaning of Regulation (EU) 2015/757 as amended) N2O Nitrous oxide (greenhouse gas) Nm Nautical mile NOx Nitrogen Oxides (air pollutant emissions to air) NMVOCs Non-methane volatile organic compounds (air pollutant emissions to air) OPC Open public consultation OPEX Operating expenditure OPS On-shore power supply PM Particulate matter (air pollutant emissions to air) PO Policy option PSC Port State Control RED II Renewable Energy Directive (Directive (EU) 2018/2001) RFNBO Renewable fuels of non-biological origin RLF Renewable and low-carbon fuels R&I Research and Innovation SO Specific objective SOx Sulphur Oxides (air pollutant emissions to air) STCW International Convention on Standards on Training, Certification and Watchkeeping for Seafarers Sulphur Directive Codified Directive (EU) 2016/802 regulating the sulphur content in marine fuels (adopted in 2012 and codified in 2016) Tank-to-wake Method for calculating emissions that takes into account the greenhouse gas impact of combustion of a specific source of energy TC Targeted consultation TEN-T Trans-European Network of Transport TRL Technology readiness level Well-to-wake Method for calculating emissions that takes into account the greenhouse gas impact of energy production, transport, distribution (“upstream emissions”) and use on-board, including during combustion



1.Introduction: Political and legal context 1.1Overall political context This Impact Assessment accompanies a legislative proposal – hereby ‘FuelEU Maritime’ – aimed at increasing the demand of renewable and low-carbon fuels (RLF) in the maritime transport sector. These include liquid biofuels, e-liquids, decarbonised gas (including bio-LNG and e-gas), decarbonised hydrogen, decarbonised hydrogen-derived fuels (including methanol, and ammonia) and electricity. 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, and fulfil an important role in safeguarding the connectivity of islands and peripheral maritime regions with the rest of the internal market.

While maritime transport constitutes arguably the most energy efficient way of moving large quantities of cargo, it nevertheless has a noticeable impact on the environment, notably in terms of air pollution, emissions of GHG and marine pollution. In 2018, CO2 emissions from international shipping in the EU27 were still around 36% above 1990 levels, despite their 18% reduction between 2008 and 2018. This is driven by the growth in transport activity not sufficiently compensated by corresponding improvements in energy efficiency, and exacerbated by slow implementation of emission reduction measures and heavy reliance on fossil fuels. The European Green Deal (EGD) Communication of December 2019 emphasised the need to accelerate the transition to a climate-neutral economy and a toxic-free environment, also by shifting to sustainable and smart mobility. The EU is committed to implement the Paris Agreement, which calls for reaching carbon neutrality in the second half of this century, and has adopted a long-term vision to become carbon neutral by 2050. Furthermore, the European Commission has proposed to translate the political commitment into a legal obligation as part of the Climate Law, which also integrates the target of reducing GHG emissions by at least 55% below 1990 levels by 2030. On 11 December 2020, the European Council endorsed the binding EU target of a net domestic reduction of at least 55% in GHG emissions by 2030 compared to 1990. The 2030 Climate Target Plan (CTP) adopted in September 2020sets out in more detail the steps towards climate-neutrality by 2050. The Commission has already indicated in the EGD and 2030 CTP that it will propose to deploy various complementary policy instruments (‘basket of measures’) to ensure that maritime transport fairly contributes to the increased EU climate effort, along with the measures agreed at global level within the International Maritime Organization (IMO). The interaction between these policy instruments in described in details in Section 1.2. The Commission strategy for sustainable and smart mobility defines a framework of EU measures for the transport sector in line with the political ambitions of the EGD and of the 2030 CTP, and in synergy with zero pollution efforts. This strategy sets the course of action for each mode of transport to decrease its carbon footprint in line with the objective of cutting GHG emissions by at least 55% by 2030 and reaching EU climate neutrality by 2050. It also sets a number of milestones for the transport sector, drawing on the common analytical work underpinning the 2030 Climate Target Plan and the Sustainable and Smart Mobility Strategy, while considering deploying a broad mix of policy instruments, including carbon pricing and a moderate increase in the energy and transport sectoral regulatory policy ambition. Furthermore, the strategy acknowledges the severe effects that the COVID-19 pandemic has had on the entire transport sector including maritime. The public support mobilized to help the economy recover should create a leap forward to a sustainable and smarter future by accelerating the decarbonisation and modernisation of maritime transport, reducing its negative impact on the environment while safeguarding safety and competitiveness. As part of the ‘Fit for 55 package’, the Commission aims at proposing a package of initiatives (e.g. the revision of the EU Emissions Trading System, an amendment to the Renewable Energy Directive, the revision of the Energy Tax Directive, the revision of the Directive on deployment of alternative fuels infrastructure, etc.) that together with the ‘ReFuelEU Aviation’ and ‘FuelEU Maritime’ initiatives, will deliver on the increased ambition to cut economy-wide GHG emissions by at least 55% by 2030. 1.2Interaction between policy tools to address maritime CO2 emissions: the ‘basket of measures’ The interaction and expected contribution of the basket of measures to the overall carbon neutrality objective has been assessed in details as part of the CTP impact assessment, which involved contributions from all relevant initiatives to reach the 55% increased ambition and, ultimately, the carbon neutrality target by 2050. All the policy scenarios of the Climate Target Plan impact assessment include a combination of a pricing mechanism in maritime as well as a fuel-specific measures to ensure minimum uptake and deployment of renewable and low carbon fuels. The unsatisfactory progress in the reduction of emissions from shipping 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 – including negative externalities; interdependencies between supply, distribution and demand of fuels; split incentives; lack of information on future regulatory requirements; long life span of assets (vessels and bunkering infrastructure); and insufficient access to finance – partly cause and reinforce these problems. A basket of measures is considered necessary to address these various and distinct market failures hindering the deployment of mitigation actions in the sector. Beside the FuelEU Maritime initiative that aims at increasing the demand of RLF a proposal to extend the European emissions trading system (ETS) to maritime and a proposal to review the Energy Taxation Directive (ETD) are part of the ‘Fit for 55’ package. These two initiatives should ensure that the price of transport reflects the impact it has on the environment, health and energy security. In addition, the basket of measures includes the review of several other directives, including the Alternative Fuels Infrastructure Directive (AFID) and the Renewable Energy Directive (RED II), part of the ‘Fit for 55’ package. Next to these revised legislations, 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. It will also revise the Guidelines on State aid for environmental protection and energy in line with the policy objectives of the EGD, which should allow adequate funding of the sector’s green transformation (including for deployment of on-shore charging infrastructures), while avoiding any distortion of competition. Looking more specifically at proposed actions, there is currently no mechanism, neither at the IMO level nor in the EU, to correct for the presence of negative externalities 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’ (MBMs). The Commission proposes to give an increasing role to ETS because it has proven to be an effective tool in reducing GHG emissions. The implementation of carbon pricing policies in the maritime transport sector is subject to another comprehensive impact assessment presented in the framework of the ‘Fit for 55’ package. In general, emissions trading can achieve GHG emissions reductions cost‑effectively and provides a correct price signal that influences decisions of operators, investors and consumers. However, carbon pricing does not address all barriers to the deployment of low and zero emissions solutions. Additional policy actions are necessary to ensure that other obstacles to investments in clean energy technologies and infrastructure are removed, thereby reducing abatement costs and complementing the action of the 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. Achieving significant reductions in CO2 emissions of international maritime transport by 2050, would require using both less energy (increasing energy efficiency) and a cleaner type of energy (using RLF). While a carbon price is likely to further drive energy efficiency improvements and narrow the price gap between conventional and low-emission technologies, its ability to support the deployment of RLF technologies in the maritime sector would strongly depend on its actual price level, which is unlikely to reach sufficient levels for this purpose in the short to medium term. These aspects are further examined and presented in greater detail in Section 5.3.1. 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 is not be able to address the high risk of fuel bunkering outside the EU for the shipping sector. Further considerations on this issue are presented in Section 5.3.3. This impact assessment report looks specifically at how to address the specific market barriers preventing the deployment of RLF in the maritime transport sector, in the context of the overall approach to maritime transport sustainability. Summing up, the proposed approach is to deploy various complementary policy instruments (‘basket of measures’) to address various and distinct market failures. In this context, the impact assessment accompanying the EU’s 2030 CTP has looked at the interaction between measures focusing on fuels obligations and carbon pricing. 1.3EU approach to alternative fuels in maritime transport The importance of developing and introducing alternative and cleaner fuels in maritime transport is present in several policy documents adopted by the Commission in recent years, such as the European Strategy for Low-Emission Mobility of 2016; the Commission Communication of 2013 on integrating maritime transport emissions in EU’s GHG reduction policies; and the 2016 Implementation report of the EU Maritime Transport Strategy. The June 2020 Council Conclusions on “EU Waterborne Transport Sector – Future outlook: Towards a carbon-neutral, zero accidents, automated and competitive EU Waterborne Transport Sector” also stress the need to support the development of alternative fuels for use in all segments of waterborne transport. The document presents a vision for green and carbon-neutral ports and coastal areas that includes the use of liquefied natural gas (LNG) as a transitional fuel and the provision of onshore power supply and alternative fuels. The Council Conclusions also emphasize the need to ensure sufficient financial support through Horizon Europe.

There is currently no regulatory framework in the EU specifically addressing the use of RLF in maritime transport. However, the EU acquis already contains a number of legal requirements related to this initiative, notably: ·The AFID establishes requirements for the deployment of an appropriate number of LNG bunkering points in the ports of the TEN-T Core Network by 31 December 2025 and those of the TEN-T Comprehensive Network by 31 December 2030. The Directive provides also for the installation of shore-side electricity supply as a priority in ports of the TEN-T Core Network, and in other ports, by 31 December 2025, unless there is no demand and the costs are disproportionate to the benefits, including environmental benefits. ·The RED II establishes an obligation on fuel suppliers to ensure a minimum mandatory share of 14% of renewable energy within the final consumption of energy in the transport sector by 2030. Although this provision targets mainly the fuels used in road and rail transport, the renewable fuels supplied to the maritime sector (except those produced from food and feed crops) may also be considered for compliance, and would count 1.2 times their energy content. ·The Monitoring, Reporting and Verification Regulation (MRV) establishes the system to monitor and report CO2 emissions from ships above 5000 gross tonnes sailing to or from ports of the EEA. It contains methods for calculating CO2 emissions which rely on applying CO2 emission factors to data on fuel consumption. The MRV already contains default values for emission factors of fuels other than the traditional liquid marine fuels (such as Liquefied Petroleum Gas, LNG, methanol and ethanol) and it provides that “appropriate emission factors shall be applied for biofuels, alternative non-fossil fuels and other fuels for which no default values are specified”. ·The Sulphur Directive sets the maximum sulphur content for the fuels used by ships in Europe to protect the health of coastal citizens and their environment from the impacts of SOx emissions. It also encourages compliance beyond EU legislation through the use of alternative fuels and on-shore power supply (OPS) for ships at berth as alternative emission abatement methods. Furthermore, it allows the use of mixtures of heavy fuel oil (HFO) and boil-off liquefied natural gas to comply with the stricter sulphur requirement at berth or in SOx-Emission Control Area (SECA) or the use of biofuels and their mixture with HFO. On 8 July 2020, the Commission also adopted a new dedicated Strategy on hydrogen in Europe, in parallel with the Strategy on energy system integration. These strategies bring together different strands of action, from R&I over production and infrastructure to the international dimension. For waterborne transport, the importance of hydrogen is highlighted as a stepping stone to the production of derived fuels such as methanol or ammonia and synthetic “drop-in” fuels, which can be used with existing technology and infrastructure. The importance of biofuels is also recognised in particular for “hard-to-decarbonise” sectors, such as aviation and maritime transport. The 2030 CTP, adopted in September 2020, mentions 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.” 1.4International context Given the strong international nature of maritime transport, the sector is also subject to international rules and conventions adopted by the IMO. The IMO is the specialised United Nations’ agency acting as the global standard-setting authority for the safety, security and environmental performance of international shipping. The main set of international rules on the environmental performance of ships is contained in the International Convention for the Prevention of Pollution from Ships (MARPOL). While MARPOL does not contain explicit mandatory requirements on the use of alternative fuels from ships, it sets a series of rules regarding emissions to air, which may provide an incentive for the use of alternative energy sources. The IMO has adopted in 2011 the Energy Efficiency Design Index (EEDI), which sets mandatory energy efficiency standards for all new built ships, and in 2018 the Initial Strategy on the reduction of GHG emissions from ships. Discussions are ongoing on the implementation of the 2018 IMO’s Initial Strategy on the reduction of GHG emissions from ships, starting with energy efficiency standards to set minimum improvement thresholds both in terms of technical and operational carbon intensity of existing ships. The strategy recognises that the “global introduction of alternative fuels and/or energy sources for international shipping will be integral to achieve the overall ambition”. Within the list of identified candidate short-term measures (meant to enter into force before 2023), the IMO includes the promotion of uptake of alternative low-carbon and zero-carbon fuels and the provision of shore-side electricity. It also calls for the development of robust lifecycle GHG/carbon intensity guidelines for all types of fuels, to prepare a programme for effective uptake of alternative low-carbon and zero-carbon fuels. The discussion on the uptake of alternative fuels as well as on market-based measures (MBM) is expected to start at IMO in the course of 2021, also based on the EU proposal on fuel lifecycle guidelines based on sustainability and GHG emissions saving criteria. The International Code of Safety for Ships using Gases or other Low-flashpoint Fuels (IGF Code) also entered into force on 1 January 2017, along with new training requirements for seafarers working on those ships. These rules contain mandatory provisions for the arrangement, installation, control and monitoring of machinery, equipment and systems using low-flashpoint fuels, focusing initially on LNG. 1.5Trajectories for renewable and low carbon fuels The European Green Deal has set the key objective to deliver a 90% reduction in transport-related greenhouse gas emissions by 2050, drawing on the in-depth analysis underpinning the 2050 long-term strategy. The common scenarios underpinning the Impact Assessment accompanying the 2030 Climate Target Plan and the Staff Working Document accompanying the Sustainable and Smart Mobility Strategy confirmed that for achieving climate neutrality by 2050 transport emissions (including intra-EU aviation and intra-EU maritime) would need to decrease by 95-96% by 2050 relative to 2015 (94-96% relative to 1990). When considering all intra-EU and extra-EU maritime transport, the emissions reductions are projected at around 91-92% relative to 2015 (89-90% relative to 1990). The lower emissions reductions in transport relative to other sectors like for example power generation is in recognition of the fact that emissions in some transport modes, in particular aviation and maritime, are more difficult to abate. The EU’s pathway towards climate neutrality, covering all sectors of the economy, is provided in Figure 1 . Source: COM(2020) 562 final. Commission Communication “Stepping up Europe’s 2030 climate ambition Investing in a climate-neutral future for the benefit our people Among the transport modes, road and rail transport would need to be almost fully decarbonised by 2050. Lower emissions reductions are projected in aviation and maritime, due to the more limited technological options available for these sectors. Nevertheless, air transport sector would need to achieve emissions reductions of at least 52-59% by 2050 relative to 2015 (equivalent to 14-25% reduction relative to 1990) and international maritime of at least 84-86% (equivalent to 80-82% emissions reductions relative to 1990).

The common economic assessment underpinning the 2030 Climate Target Plan and the Sustainable and Smart Mobility Strategy, looked at a range of pathways/scenarios to explore the delivery of the increased ambition of cutting the economy-wide GHG emissions by at least 55% by 2030 and achieving climate neutrality by 2050. These pathways/scenarios were constructed around a set of specific policies for all sectors of the economy that either focus on carbon pricing or focus on regulatory measures, or combine the two types of instruments. For the maritime transport, the same policy instruments (including ‘FuelEU Maritime’ initiative) were included in all scenario configurations. The staff working document accompanying the Sustainable and Smart Mobility Strategy describes the trajectories for renewable and low carbon fuels in more detail, drawing on the common economic analysis underpinning the 2030 Climate Target Plan and the Sustainable and Smart Mobility Strategy. These trajectories are derived in a way that enables kick starting the scale-up of renewable and low carbon fuels in the maritime sector from 2025 onwards and their large scale deployment by 2050, while ensuring the consistency with the required overall GHG emissions reductions by 2030 and 2050, preserving the competitiveness of the sector, promoting innovation, and ensuring feedstock availability for renewable and low carbon fuels in all energy and transport sectors in the transition towards a climate neutral economy. The pathways/scenarios delivering a reduction in the EU GHG emissions by at least 55% by 2030 and climate neutrality by 2050 show that renewable and low carbon fuels should represent 6 to 9% of the energy used in the international maritime sector in 2030 and 86 to 88% by 2050,. When considering a pathway/scenario that strengthens and further expands the carbon pricing to the road transport and buildings sectors, be it via EU ETS or other carbon pricing instruments, in combination with low intensification of transport policies and no intensification of energy efficiency and renewables policies, the analysis shows that renewable and low carbon fuels should represent at least 6% of the energy used in the international maritime sector in 2030 and 86% by 2050. When considering a pathway/scenario that assumes high increase of the ambition of energy efficiency, renewables and transport policies, while keeping the EU ETS scope unchanged, renewable and low carbon fuels should represent close to 9% of the energy used in the international maritime sector in 2030 and 88% by 2050. Finally, the pathway/scenario focusing on a combination of carbon pricing and medium intensification of regulatory measures in all sectors of the economy shows that renewable and low carbon fuels should represent 7.5% of the energy used in the international maritime sector in 2030 and 86% by 2050. All the pathways described above are consistent with the increased ambition of cutting the economy-wide GHG emissions by at least 55% by 2030 and achieving climate neutrality by 2050. They all deliver a 90% reduction in transport emissions by 2050, in line with the European Green Deal Communication and the Sustainable and Smart Mobility Strategy, and 80-82% emissions reductions in the international shipping sector by 2050 relative to 1990 (equivalent to 88-89% emissions reductions relative to 2008). In addition, the impact assessment underpinning the 2030 Climate Target Plan noted particular benefits in deploying a broad mix of policy instruments, including carbon pricing and increased energy and transport sectoral regulatory policy ambition, and clearly suggested that there is no single policy instrument being capable of achieving all the objectives considered in the assessment alone. This impact assessment takes as starting point the pathway for renewable and low carbon fuels that represent 7.5% of the energy used in the international maritime sector by 2030 and 86% by 2050 in the scenario focusing on a combination of carbon pricing and medium intensification of regulatory measures in all sectors of the economy, while additionally considering the contribution of the on-shore power supply. It ensures consistency with the 2030 Climate Target Plan and with the other initiatives of the ‘Fit for 55’ package by delivering the necessary contribution in terms of emissions reductions to the increased ambition of cutting the economy-wide GHG emissions by at least 55% by 2030 and achieving climate neutrality by 2050. The impact assessment focuses on the specific design of the policy option that would best allow to reach this contribution. A qualitative assessment of the implications of lower/higher trajectory for the renewable and low carbon fuels is however provided in Sections 5.4 and 6.1.2. An update of the pathway/scenario focusing on a combination of carbon pricing and medium intensification of regulatory measures in all sectors of the economy for the purpose of the ‘Fit for 55’ package, while also reflecting the COVID-19 pandemics, the National Energy and Climate Plans and refining the policy design of the initiatives, confirms that maritime transport effectively contributes to the EU climate goals while considering the central trajectory for the renewable and low carbon fuels. 2.Problem definition 2.1What is the problem? Currently, the fuel mix in the maritime sector relies entirely on fossil fuels. The vast majority of the 44 million tonnes of fuel consumed and reported by ships within MRV in 2018 concerned liquid fossil fuels. The use of LNG was only 3% of the total amount of fuel consumed (mostly by LNG and gas carriers) and other alternatives, in particular renewable fuels, were negligible. According to the fourth IMO GHG study, 98.4% of all engines used in the fleet in 2018 were conventional fuel oil engines and 0.52% were LNG engines (including dual-fuel engines). The ship traffic monitored under the MRV accounted for more than 138 million tonnes of CO2 emissions in 2018. This represents around 11% of all EU transport CO2 emissions and 3-4% of total EU CO2 emissions. EU international shipping CO2 emissions are projected to grow by over 30% between 2015 and 2050 under current trends and policies, also considering the impacts of the COVID-19 pandemic,. Since emissions had fallen between 2008 and 2015, this implies a stabilisation of CO2 emissions by 2050 relative to 2008 levels. This development is however not in line with the climate neutrality objective. Emissions occurring when the ships were at berth (anchored or navigating in EEA ports) amounted to around 6% of the total CO2 emissions as reported under the MRV. In addition, emissions of sulphur oxides (SOx), nitrogen oxides (NOx), and particulate matter (PM) significantly contributed to air pollution in coastal areas and port cities, where ship engines are still being used to produce the necessary power during the port visit. There are hotspot areas in Europe where the contribution of shipping to air pollutant emissions can be up to 80% for NOx and SO2 and up to 25% for primary PM2.5. While the situation is improving with the use of cleaner fuels resulting from the introduction of the Sulphur Directive and the establishment of ECAs in Northern Europe, as confirmed by the 2018 Commission report on the implementation of the Sulphur Directive, air quality remains an important area of concern for port cities. This is also clearly recognised by the industry; in the past five years, air quality ranked first among the top 10 environmental priorities of the port sector as illustrated in the environmental report from the European Sea Ports Organisation (ESPO). While the use of on-shore power supply (OPS) for ships at berth would allow removing these emissions, its uptake has so far remained negligible. The almost exclusive reliance on fossil fuels constitutes an important risk to the sector’s ability to contribute effectively to the carbon neutrality objectives in the long term. As explained in Section 1.5, RLF should provide 6-9% of the international maritime transport fuel mix in 2030 and 86-88% by 2050 to contribute to the EU economy-wide GHG emissions reduction targets. This, in combination with carbon pricing and other operational and technical measures would allow the sector to reduce its CO2 emissions by 22% by 2030 and 88-89% by 2050 compared to 2008 levels (equivalent to 80-82% reduction relative to 1990). In the same vein, the IMO estimates that about 64% of the total amount of CO2 reduction in 2050 would result from the use of alternative fuels. In addition, the slow uptake of RLF in the maritime sector is an issue to be addressed in the short term because the adoption of new fuels in the sector takes time. LNG provides a good illustration of the time necessary for adoption of new fuels in the sector; while LNG was primarily used already as fuel in Norway in 2000, it took 13 years for it to spread outside Norway. Still today, LNG powered ships represent a minor fraction of the fleet, despite the competitive fuel price and the attractiveness of this option to meet the existing requirements on SOx and NOx emissions. In the open public consultation (OPC), 95% (129/136) of the respondents confirmed that it is ‘very relevant’ or ‘relevant’ to promote the uptake of sustainable alternative fuels and diversify the fuel mix of maritime transport to accelerate the decarbonisation of shipping. Without action at EU level, 59% (19/32) of the respondents to the targeted consultation (TC) think that by 2030, the use of RLF will remain the same as today for ships in navigation. For ships at berth, the share of TC respondents is 44% (14/32). The main problems that this initiative will address therefore concern: (1) the low uptake of RLF by ships calling EU ports and (2) and the low uptake of zero-pollution fuels by ships at berth in EU ports. Although closely resembling, and sharing most of the problem drivers, these are assessed as distinct problems because of two important aspects that differentiate them. The first relates to the consequence of the (non)use of RLF: while the climate effect does not change with respect to the place of emission, the impact of air pollution is considerably higher for ships at berth. This might justify a different and more ambitious policy in terms of type and use of RLF in ports. Indeed, fuels that perform well in terms of both GHG and local pollutants (NOx or PM), such as electricity or hydrogen, are much preferable for use at berth than fuels that perform well on GHG but less so on local pollutants, as is the case of, for example, advanced biofuels and e-fuels. The second aspect relates to the availability of additional technologies for use in ports, where energy can be drawn from shore and use of fuels with low energy density is less problematic. Also this aspect might justify a different approach for ships at berth. These two problems need to be addressed because they hamper the sector’s ability to effectively decarbonise in the long term, while also reducing the air pollution emissions in the ports. Ensuring a higher penetration of RLF, along with energy efficiency improvements is critical to bring maritime transport in line with the European ambition of climate-neutrality by 2050 and reduce air pollution from ships in ports and coastal cities. 2.2What are the problem drivers?

Several drivers underpin these problems and result from significant technological, market or regulatory barriers. They consist in the lack of predictability of the regulatory environment and the resulting high risk for investments; the uncertainty over alternative technologies and the risk for first movers; the higher costs of low-carbon technologies in the absence of significant levels of production; the interdependency between demand, supply and distribution aspects; and sector specific issues related to the possibility of bunkering outside the EU. These issues are summarised in Figure 2 : 2.2.1Lack of predictability of the regulatory framework and high risk of investment choices (high risk of stranded assets) Ships are costly and long-lived assets; in accordance with data from UNCTAD, the average age of the world merchant fleet in 2019 was around 21 years, even though differences can be observed across different market segments. The age distribution of ships monitored in 2018 under the MRV system indicate that that the age of vessels operating in Europe is usually lower than the global average as ships are either relocated or sold on the second-hand market. Given this, it is important for ship-owners to anticipate the framework conditions that could impact the economic value of the investment and lead to assets being stranded. This applies both to the operating life of the vessels and to their potential value on the second-hand market. Assets would be stranded when they lose economic value well ahead of their anticipated useful life. The main risk factors resulting in ships becoming stranded assets can be associated with ship specifications no longer meeting needs of demand or regulatory requirements (e.g. possible introduction of new standards). In this context, a predictable regulatory environment is very important for investment decisions. Climate policy can reinforce the risk of stranded assets. This is mainly related to evolving standards, such as the increased level of energy efficiency that cannot be sustained by older equipment. The importance of this driver was also confirmed by the public consultation. After the higher price of RLF, the high risk of investment in vessels technology and port infrastructure was the second most important barrier identified by the respondents. In addition, 61.5% (83/136) of the respondents indicated that the lack of predictability of the regulatory framework was either an important or the most important barrier to the deployment of RLF in maritime transport. In the absence of clear-cut technological choices (see Section 2.2.2) and of a defined regulatory path setting clear provisions for the decarbonisation of the future fuel mix, it is difficult for operators to build a business case and make long-term investment decisions. Given the potential investment risks, a wait-and-see approach is likely to prevail and defer deployment of new technologies and hence of RLF. 2.2.2Low maturity of new renewable and low-carbon fuels/technologies with high risk for first movers The uncertainty caused by the unpredictable regulatory environment is compounded by the absence of a clear substitute to fossil fuels. No technological solution has yet emerged as a preferred choice among various alternatives. Most of the alternative technologies are at a low level of maturity and the market has not yet started a process of deployment and selection. The difficulty for the market to converge on the choice of alternative technologies is also due to the operating conditions of the sector, which reflect the specific needs and constraints of market operators. The maritime sector is not uniform and important differences can be observed between market segments. A first differentiation can be made between short-sea and deep-sea shipping. In the EU, short-sea shipping is defined usually as maritime transport between ports situated in geographical Europe, as well as on the Mediterranean and Black seas. This type of traffic typically consists of relatively short routes with frequent port calls and can include fixed-schedule routes. In comparison, deep-sea shipping is mainly characterised by vessels covering long routes, without necessarily a regular schedule (with the exception of liners). In practical terms, this differentiation affects the operators’ needs in terms of quantity of fuel carried, energy density (energy per unit volume) and global availability of fuels. On shorter distances and in ports, lower energy density is sufficient, already opening additional decarbonisation and zero-pollution pathways (e.g. hydrogen and electrification). However, currently, these solutions remain limited to experimental vessels and very specific market segments (e.g. short-distance ferries) with relatively low power requirements and the possibility to bunker or recharge frequently. An additional element concerns the compatibility of the new fuel options with the existing machinery (no or minor needs to retrofit the ship) and infrastructure. The performance of the different fuel options in terms of air pollutant reduction can also be considered, even though these emissions (e.g. NOx or PM) may be addressed by technical means such as engine management and exhaust gas treatment. This is particularly relevant for the second problem (low uptake of zero pollution fuels by ships at berth), which as mentioned in Section 2.1 is important in these areas. Biofuels, biomethane and drop-in e-fuels are compatible with the existing assets and infrastructure (liquid or gaseous) and can therefore be deployed immediately in existing oil- or LNG-fuelled vessels. However, the supply of this type of fuels to the maritime sector is very limited and their GHG reduction potential depends on whether they can be produced and used sustainably at scale (availability of feedstocks, etc.). LNG is a technologically mature solution that substantially contributes to air pollution reduction, but its contribution towards GHG reduction can be limited, particularly taking into account methane slip, and depends on the engine technology. Other RLF may be deployable within existing vessels as a retrofit, but these options are at an early stage of development. Regarding OPS, the technology can be considered to be at a mature stage. Based on information by the European Alternative Fuels Observatory (EAFO), ports in Europe have started the first steps in using these installations as of the 1990’s, and an increased trend in their installation is recorded since 2010. Ports now have experience with such installations for different vessel types. The feedback received from the consultation activities in preparation of this initiative confirmed that market actors expect using a variety of fuels still in 2050 with no dominant source of energy. The respondents of the targeted consultation survey indicated also their expectation on fuels most likely to be used in 2030 and 2050, both during navigation and at berth. Concerning 2030, biofuels are perceived as most promising for use in navigation, followed by batteries. Looking at 2050, the expectations are different: the categories ‘other decarbonised hydrogen-derived fuels (including ammonia)’ and ‘Decarbonized hydrogen (including fuel cells)’ received the highest scores. For emissions at berth, the alternative fuel option that stands out in being promising both for 2030 and 2050 is OPS. The ‘wait and see’ attitude of market operators can therefore be explained with the uncertainty on both the right timing of investments – also in connection with regulatory requirements (see also 2.2.1) – and on the choice of technologies; all in a context of long-lived and costly assets (vessels) and different needs in different business segments. 2.2.3Higher costs of alternatives compared to fossil fuels (also due to insufficient economies of scale) In response to the public consultation carried out in the context of this initiative 47.8% of the respondents (65/136) indicated the higher price of RLF as a very relevant barrier to their uptake, which made this barrier score the highest. This problem driver is particularly critical as the costs of fuel is the single most important item determining the voyage costs of a ship, accounting for 47% of the total. The cost of RLF is generally higher than that of fossil fuels. Increasing the production volumes can be expected to reduce production cost due to learning effects and economies of scales, but the lack of current profitability and of significant volumes of expected demand forms a major barrier to investment. While existing literature confirms the price gap between RLF and conventional fuels, it also shows that the production cost ranges of biofuels and e-fuels are larger than those of fossil fuels. To some extent, this is caused by the fact that production systems for biofuels and e-fuels are newer and subject of uncertainties and on-going research. For biofuels, this also relates to the variety of biomass feedstocks and feedstock prices and the variety of production technologies in existence. For e-fuels the wide ranges also relate to the uncertainty about renewable electricity costs, which are linked to electricity market price developments and which form a major part of the production costs of e-fuels. This is a similar challenge for the uptake of OPS. The energy price at the grid (including taxes) must be comparable to the bunkering price of the conventional fuel for the OPS to be economically attractive for use on a vessel. The price gap is an element that stakeholders like the European Sea Ports Organisation (ESPO), are considering as reducing the demand for OPS.

These prices are expected to fall as technology matures. In this respect, the EU Hydrogen Strategy already notes that costs for renewable hydrogen are going down quickly. For instance, the costs for electrolysers, which are necessary for the production of renewable hydrogen, have already been reduced by 60% in the last ten years, and are expected to halve in 2030 compared to today with economies of scale. In regions where renewable electricity is cheap and available, electrolysers may be able to compete with fossil-based hydrogen already in 2030. On the other hand, in the medium to long term the competition for biomass feedstocks with other energy and transport sectors in the transition towards a climate neutral economy is expected to push the feedstock prices upwards. This is fully taken into account in the analysis and further explained in Section 5.4. The fragmentation of the sector and the high level of customisation of vessels represent a barrier to reach critical mass for the deployment of new technologies, unless a significant number of operators takes action. The lack of sufficient production levels contribute to the higher cost of RLF compared to conventional fossil fuels, which remains a barrier to their uptake. MBMs, such as ETS or ETD, may help bridging the gap, but the price difference is likely to remain too high until the production of sustainable fuels and technologies achieves sufficient economies of scale. A price of emission allowances of at least €200/tCO2 would be necessary to make RLF economically interesting, which is unlikely in the short- or medium-term. 2.2.4High interdependency with supply and distribution (chicken-and-egg situation) The introduction of new fuels does not only require the development of appropriate vessel technologies (see 2.2.2) or the willingness of users to adopt a new source of energy; it also necessitates sufficient availability of fuels in terms of production (type and quantity of fuel produced), supply and distribution through an adequate bunkering infrastructure. The global nature of the maritime business means that many vessels need to be able to operate and refuel across the world. Therefore, an alternative technology to fossil fuels would require the availability of sufficient production of the energy carrier, vessels capable of using it, and an infrastructure for its distribution in ports around the world. Although the situation differs depending on the technology, in all cases there is a strong need for coordination between supply and demand. Investments in production are not made, and economies of scale are not reached, without enough demand; conversely, there is not enough demand without a reasonable priced supply (‘chicken-and-egg’ situation). This is a clear case of interdependency of business decisions by market actors on the side of demand (ship operators and ship owners) and supply (fuel production, supply and infrastructure). At present, the EU regulatory framework focusses on the supply, infrastructure and distribution of fuels, but puts no obligations on their use. AFID establishes rules on the deployment of alternative fuels infrastructure for transport, including provisions for equipment of ports on the Trans-European Transport Network (TEN-T) for the supply of LNG and OPS. While the Directive was expected to create sufficient conditions for the use of alternative fuels, the very low demand for alternative fuels or connections to the electric grid while at berth gave grounds to ports to delay investments in the relevant infrastructure. AFID is due to be reviewed. Indeed, data compiled by the European Alternative Fuels Observatory (EAFO) show that the deployment of OPS has been slower than initially expected – in December 2020, 41 maritime and inland waterway EU ports had at least one berth equipped with OPS. However, depending on the location within the port and the power provided at each OPS, only specific vessels can be supplied with power while at berth. For example, an OPS located at a container terminal can only supply container vessels but not passenger vessels. Concentrating the regulatory approach solely on the provision of infrastructure may therefore not be sufficient to break the “chicken-and-egg” situation. The development of the LNG-fuelled fleet and the LNG bunkering infrastructure is a case in point. LNG requires ships with special tanks, piping and engines. It is most cost-effective to supply LNG to these ships with a bunker vessel, but this requires a significant investment which can only be earned back when there is sufficient demand. It has taken about half a decade before the increase in the number of LNG-fuelled ships resulted in the deployment of LNG bunker vessels in ports. Note that, even though the use of LNG required an upfront investment (in particular in vessels’ technologies and the development of the bunkering infrastructure), LNG was cheaper than HFO per unit of energy, throughout the 2010-2020 period in all years except 2016 (DNVGL (2020), Alternative Fuels Insight) and significantly cheaper than marine gas oil (MGO) for the entire period. Besides the provision of adequate distribution infrastructure, there is an additional interdependency with the production of fuels. Alternative fuels are not put in production unless there is a demand, or at least market prospects; but without guaranteed availability of fuels, operators do not invest in alternative fuel vessels and do not generate demand. The RED II supports the supply of RLF for the land (road and rail) transport sectors and indirectly for the aviation and maritime transport sector, via the use of multipliers. The Directive must be transposed by the Member States into national legislation by 30 June 2021. Its impact on the use of RLF in maritime remains still uncertain at this stage. The revision of the REDII Directive is also part of the ‘Fit for 55’ package. This should provide further incentives for the supply of RLF to the maritime transport sector. 2.2.5Possibility of bunkering outside EU (risk of carbon leakage) Being an international sector by nature, maritime transport is highly prone to carbon leakage. If rules were to apply to fuels sold in Europe without obligations for their use, it would be possible for many vessels active in both deep sea and short sea trades to bunker fuel outside the EU. Due to their large tank capacities, most ships are able to undertake long voyages on a single bunkering. Estimations made in the framework of the support study for this impact assessment (Ecorys / CE Delft, forthcoming) indicate that bulk carriers can sail more than 30,000 nautical miles (nm) on average on full tanks, containerships up to 50,000 nm and tankers between 10,000 nm and 30,000 nm on average. To put this into perspective, a transatlantic journey from Europe would cover around 6,000-7,000 nm and a journey to South-East Asia around 10,000 nm. A number of important bunkering hubs are located in the EU, in particular the ports of Rotterdam, Antwerp and Algeciras, which rank among the world’s ten largest ports for bunkering (in terms of volume). Overall, in 2017, European countries (including the UK) supplied a little less than 20% of the international maritime bunker fuels. The study carried out in 2011 in support for the impact assessment of a proposal to address maritime transport GHG emissions, notes that the possible introduction of taxes on fuel supplied is likely to be circumvented by bunkering outside the scheme (either in ports outside the EU, or by using offshore bunkering facilities). Addressing only the EU supply of RLF would, in principle, not be sufficient to provide the expected results in terms of higher penetration of these fuels in the maritime fuel mix. The possibility of bunkering outside the EU also calls for requirements that do not distort the level playing field between fuel distributors and producers within and outside the EU. 2.3How will the problem evolve? It is unlikely that the situation will evolve towards a significantly greater penetration of RLF in shipping without further policy intervention. The uptake is likely to remain anecdotal, driven by pioneers in the sector. The baseline scenario, showing developments under current trends and policies, projects a limited uptake of biofuels in international maritime by 2050 (0.1% in 2030 and 1.3% in 2050). Electricity use at berth is also projected to remain limited at around 0.1% of the total fuel mix by 2050. No other type of RLF is foreseen to enter the international maritime fuel mix by 2050 without further intervention. As a result, tank to wake CO2 emissions are projected to increase by 14% by 2030 and by over 30% by 2050 relative to 2015. By 2050 this would imply a stabilisation of CO2 emissions to their 2008 levels, which is however not in line with the climate neutrality objectives. Well to wake GHG emissions would grow slightly faster at 15% during 2015-2030 and over 35% for 2015-2050. The increase in emissions is driven by the sustained growth projected for transport activity (20% during 2015-2030 and 50% for 2015-2050), even when accounting for the impact of the COVID-19 pandemic, and despite the projected significant improvements in energy efficiency. More details on the baseline scenario are provided in Annex 4. It is also worth noting that the existing provisions of EU legislation (in particular the Sulphur Directive or the AFID), which could have encouraged the uptake of alternative fuels, in particular LNG and OPS, have not produced yet any significant uptake of new sources of energy in maritime transport. However, by 2050 LNG is projected to represent around 19% of the international maritime fuel mix, mainly as a result of more stringent requirements on air pollution control (in particular SOx and NOx emissions). Even though the GHG benefits of fossil LNG remain modest (in particular due to possible methane slip) and insufficient to meet EU GHG reduction targets; this fuel provides a good solution to air pollution issues, allowing reductions in SOx and NOx emissions and, as a result, it represented an attractive compliance option to the Sulphur Directive and MARPOL Annex VI. In the longer term, LNG can pave the way to the use of bio-LNG or e-gas, which would also offer climate-related benefits. The feedback received in the context of the public consultation confirms that, without policy intervention, the uptake of RLF in maritime transport is unlikely to happen to a significant extent before 2040.

Breaking this deadlock would require some external development, such as a significant technological breakthrough on the side of research and development (including lowering the cost and upscaling maturing technology solutions), a strong push from public authorities towards the use of certain technologies, or the imposition of performance requirements that would force operators to choose low carbon technologies and kick-start a process of transition. Whereas a breakthrough in research providing a superior technology that the market would spontaneously adopt cannot be excluded, there is no certainty of this happening in time to reduce maritime emissions by the desired amount by 2050. To reduce maritime emissions in a timely fashion, additional policy intervention is required, as also indicated by respondents to the public consultation. As explained in Sections 1.5 and 2.1, maritime transport should reduce its CO2 emissions by at least 22% by 2030 and 88-89% by 2050 compared to 2008, to be in line with the EU climate objectives. Existing literature suggests that with current technologies, at best, a vessel can improve the energy efficiency of its operations by roughly further 20 to 30% compared to current levels. Moreover, individual energy savings are likely to be partially offset by an increase in the volume of maritime activity. As a result, a large part of the emission savings would need to also be achieved via use of RLF already within the next couple of decades. It is therefore clear that a specific approach dedicated to the uptake of RLF is essential for the sector to effectively contribute to the post-2030 climate targets. As explained in Section 1.5, RLF should provide 6-9% of the international maritime transport fuel mix in 2030 and 86-88% by 2050. The scenario assessing a combination of carbon pricing and medium intensification of regulatory measures underpinning the impact assessment accompanying the 2030 Climate Target Plan and the staff working document accompanying the Sustainable and Smart Mobility Strategy projects a share of 7.5% for 2030 and 86% by 2050. Achieving 2050 emission reduction targets in maritime transport is highly unlikely, as shown by the Baseline scenario projections, if the production of sustainable fuels, the testing and certification for maritime use, the deployment of the necessary infrastructure in ports, and the renewal of the fleet do not start as soon as possible, particularly in the case of technologies that require dedicated infrastructure, retrofit solutions as well as new vessels and engine design. RLF that can be blended with the fossil fuels currently in use (drop-in fuels) can be deployed much more rapidly, but even in their case production needs to be scaled up and production costs reduced. These considerations suggest that a scenario in which a new dominant technology replaces rapidly the current one is not very likely. The most probable scenario is that various technologies, possibly used in different segments of the market, will coexist for a prolonged period of time. This tends to indicate that the process of decarbonisation of the energy used in the sector must start promptly and develop in parallel with the improvements in energy efficiency. In addition, it is important to stress that increasing the penetration of alternative fuels in maritime transport is a long and complicated process, requiring cooperation and coordination among different market actors. Availability of technology (including the technical means to use it), sufficient supply of fuels (in terms of production and bunkering/charging infrastructure) as well as sufficient conditions to sustain the use of the technology by market operators is critical. Without a regulatory framework providing a clearly identified pathway for decarbonising the maritime fuel mix and for the necessary technology developments, the uptake of new fuels is likely to remain marginal and the costs for their introduction will solely fall upon first movers (even though these may not receive any competitive advantage as a result). The review of the Renewable Energy Directive is expected to drive scaling up the production of renewable and low carbon fuels in the EU. However, as explained in section 2.2.4, and given the possibility of ships to bunker internationally and carry long journeys on a single bunkering, any requirements relying solely on supply may be easily circumvented in the context of maritime and would not ensure their uptake in the sector. On the other hand, the current initiative complements the review of the Renewable Energy Directive by securing the demand for these fuels in the maritime sector and thus reinforcing the delivery of renewable energy in the transport sector. In this regard, it should be highlighted that this initiative intends to fully match the definitions and sustainability criteria of the Renewable Energy Directive. In fact, in the absence of RLF supply in the EU, maritime would rely exclusively on imports or bunkering such fuels in third countries. Further insights in related policy instruments governing the supply and infrastructure of RLF are provided in Section 5.3.1. The revision of the Energy Taxation Directive revisits the tax exemptions for conventional fossil fuels used in shipping. This will however not be able to address problem drivers 1, 2, 4 and 5 of the present initiative. Finally, as explained above, for the EU ETS to make RLF economically interesting for the maritime sector, a price of CO2 emission allowances of at least €200 would be necessary. By comparison, the impact assessment accompanying the 2030 Climate Target Plan projected carbon prices for the ETS sector (including the maritime sector) in the range of 32 to 65 €/tCO2, to cut the economy-wide GHG emissions by at least 55% by 2030. The EU ETS is therefore unlikely, by itself, to drive RLF uptake in the medium-term. More details are provided in Section 5.3.3. 3.Why should the EU act? 3.1Legal basis The legal basis giving the EU the right to act is Article 100(2) of the Treaty on the Functioning of the European Union. In accordance with Article 4(2) of the Treaty, shared competence between the EU and the Member applies in the area of transport. 3.2Subsidiarity: Necessity of EU action Maritime transport is an international sector by nature. In Europe, approximately 75% of the voyages reported under the MRV are within the 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 Member State). The cross-border dimension of the sector is therefore essential and calls for coordinated action at European level. Without action at EU level, the risk is the establishment of a patchwork of regional or national requirements across Members States, which would trigger the development of technical solutions that may not necessarily be compatible with each other. Several Member States are already developing national maritime strategies that include specific approaches to ship emissions and in particular the uptake of alternative fuels. As the problem drivers identified in Section 2.2 do not fundamentally differ from one 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 for the development of future measures to accelerate the uptake of alternative fuels at global level. Previous EU action on GHG issues has already stimulated a corresponding response from the IMO, notably by the adoption of the EU Regulation on Monitoring, Reporting and Verification of GHG emissions from ships that led shortly afterwards to IMO adopting a similar mandatory global GHG Data Collection System. A coordinated approach by EU Member States 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. 3.3Subsidiarity: Added value of EU action The implementation of this initiative at European level is necessary to achieve the economies of scale in the uptake of RLF 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 RLF could divert traffic to competing ports of other MSs 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). 4.Objectives: What is to be achieved? 4.1General objectives This initiative aims at increasing the uptake of RLF in EU maritime transport with a view to reducing emissions from the sector, both in navigation and at berth and thereby contribute to achieving EU and international climate objectives. Ensuring a more diverse fuel mix and higher penetration of RLF is critical to ensure the sector’s contribution to the European ambition of climate-neutrality by 2050. At the same time, a differentiated approach to the use of RLF in navigation and in ports is important to account for different implications on air pollution (more relevant for ships in ports) and different availability of technologies (more options for ships in ports). The initiative aims at setting a harmonised regulatory framework in the EU with a view to increase the share of RLF in the fuel mix of international maritime transport, including: liquid biofuels, e-liquids, decarbonised gas (including bio-LNG and e-gas), decarbonised hydrogen, decarbonised hydrogen-derived fuels (including methanol, and ammonia) and electricity. The present intervention is focused on demand-side aspects (the use of fuels, in this case RLF) and will complement the existing EU regulatory framework related to supply and infrastructure. It will also provide synergies with pollution reduction initiatives.

4.2Specific objectives This initiative is designed to effectively address the existing barriers that hamper the further deployment of RLF. The specific objectives (SOs) and their correspondence with the problem drivers are presented in Figure 4 : The initiative will contribute to the achievement of the general objective by pursuing the following SOs: ·Enhance predictability through the setting of a clear regulatory environment concerning the use of RLF in maritime transport. The establishment of clear and mandatory targets for decarbonising the marine fuel mix to be used on-board will provide certainty on future obligations, facilitate planning of investments, and counteract a ‘wait-and-see’ attitude of operators. Setting a clear pathway for decarbonising the marine fuel mix, with progressively more stringent requirements, will also help understanding which technologies are more ‘future proof’ than others. ·Stimulate technology development. Establishing minimum levels of demand for RLF in the maritime sector is expected to stimulate the process of their selection and deployment, as well as of gradual technological improvement of yet immature solutions. It is expected to speed-up the deployment of more performant propulsion systems (energy converters) that can be used with specific fuels (e.g. fuel cells to be used with hydrogen and hydrogen-based fuels). It would also ensure that the development and deployment costs are spread more evenly across the sector and not only on first movers, who may not gain any competitive advantage in return. It is also important that the chosen intervention, while encouraging a more rapid deployment of the more mature options (e.g. drop-in fuels) in the medium-term, does not prevent additional progress on the most environmentally sound, but yet immature, technologies that are needed in the longer term. ·Stimulate production on a larger scale of RLF with sufficient high technology readiness level (TRLs) and reduce the price gap with current fuels and technologies. By triggering demand of RLF by maritime operators, this initiative would create the conditions for higher volumes of production and attainment of economies of scale. This could contribute towards reducing the existing price gap with respect to conventional fuels. ·Create demand from ship operators to bunker RLF or connect to the electric grid while at berth. At the moment, the EU legislative framework is solely focussed on fuel supply and provision of infrastructure. However, in the absence of sufficient and predictable levels of demand, investments in production and infrastructure remain unprofitable and extremely limited in practice (as explained in Section 2.2.4). In order to address this interdependency issue, this initiative should complement measures taken on the supply and distribution side with a corresponding demand-side intervention (i.e. the use of fuels). ·Avoid carbon leakage. This initiative should help avoiding the carbon leakage that would derive from bunkering fuels outside the EU. This would be achieved by setting specific performance requirements on the fuel used by ships, regardless of where the fuel is acquired. The intervention should also be designed with a view to avoid any possible distortion of competition and regulatory advantage derived from ships belonging to different jurisdictions. These objectives are consistent with the objectives of other Commission initiatives currently being pursued as part of the overall basket of measures to address GHG emissions from maritime transport, in line with the renewed EU climate ambition. 5.What are the available policy options? 5.1What is the baseline from which options are assessed? The baseline scenario reflects developments under current trends and adopted policies as described in Section 2, and without further EU-level intervention. It builds on the baseline scenario underpinning the impact assessment accompanying the 2030 Climate Target Plan and the staff working document accompanying the Sustainable and Smart Mobility Strategy, but it additionally considers the impacts of the COVID-19 pandemic and the National Energy and Climate Plans. In this scenario, the penetration of RLF would continue to remain extremely limited (1.4% of the fuel mix by 2050, of which 1.3% biofuels and 0.1% electricity use at berth). No other type of RLF is foreseen to enter the international maritime fuel mix by 2050 without further intervention. A series of independent, and potentially diverging, company-based approaches would characterise the development and deployment of alternative fuel solutions. While ship operators are currently making different assumptions on the type of energy to be used in their market segment in the future, the uptake of RLF in the baseline scenario is expected to principally concentrate on the most mature and currently available option for maritime transport, which is biofuels. In this scenario, LNG uptake will continue growing, as the result of the application of more stringent requirements on air pollution control in the maritime sector (in particular SOx and NOx emissions). LNG is projected to represent 19% of the fuel mix by 2050 without further EU-level intervention. This is explained by the maturity of the technology, the gradual availability of infrastructure and considerations on fuel supply (bearing also in mind the limited competition for feedstock for LNG compared to other potential fuel options). The lack of sector-wide coordination and harmonised approach at EU level regarding the type and emission footprint of fuels, the limited geographical scope of application as well as the timeframe for their deployment is likely to lead to sub-optimal results and overall insufficient penetration on RLF to meet the EU climate objectives set out in the EGD and the 2030 CTP. Tank to wake CO2 emissions from international shipping are projected to increase by 14% by 2030 and by over 30% by 2050 relative to 2015. By 2050 this would imply a stabilisation of CO2 emissions to their 2008 levels, which is however not in line with the climate neutrality objectives. Well to wake GHG emissions would grow slightly faster at 15% during 2015-2030 and over 35% for 2015-2050. The increase in emissions is driven by the sustained growth projected for transport activity, even when accounting for the impact of the COVID-19 pandemic, and despite the projected significant improvements in energy efficiency. More details on the baseline scenario are provided in Annex 4. The baseline scenario does not include the other ‘Fit for 55’ initiatives. This ensures a consistent approach with the impact assessments accompanying the other ‘Fit for 55’ initiatives. However, a qualitative assessment of their possible impact on how the problem will evolve is provided in Section 2.3. In addition, as explained in Section 1.5, the trajectory of the RLF uptake from 2025 to 2050 in the policy options is based on the common economic assessment underpinning the 2030 Climate Target Plan and the Sustainable and Smart Mobility Strategy, while considering a combination of carbon pricing and medium intensification of regulatory measures in all sectors of the economy. This ensures a consistent approach for delivering the EU climate ambition by 2030 and 2050, while at the same time identifying the impacts of the design of the policy option that would best allow to reach this contribution. A qualitative assessment of the implications of lower/higher trajectory for the renewable and low carbon fuels is however provided in Section 5.4.

5.2Description of the policy options 5.2.1Possible policy measures and preliminary screening of options As a first step, a comprehensive list of possible policy measures was established after extensive consultations with stakeholders, expert meetings, independent research and the Commission’s own analysis. This initial list is presented in Annex 6. This list was subsequently screened based on the likely effectiveness, efficiency and proportionality of the proposed measures in relation to the given objectives, as well as their legal, political and technical feasibility. As a result of this analysis, several measures were not retained in the main policy options, although, in some cases, their important role as complementary measures, supporting the climate objective for the maritime transport sector, is fully recognised. The non-retained options are discussed in greater detail in Section 5.3. 5.2.2Identification of the general policy approach and the choice of main policy options The screening of the initial list of possible policy measures was accompanied by a reflection on what type of approaches would be needed to address each of the SOs identified in Section 4. The list of suitable approaches related to each of the SOs is presented in Figure 5 : Following this analysis, it appears that all policy approaches potentially capable of fulfilling the given objectives would need to share two principal characteristics: ·They should provide certainty on the future short to long-term policy targets for the carbon intensity of the energy used by ships. Such targets should preferably be mandatory and enforceable, thus providing legal certainty. ·They should address the demand side component, by incentivising or prescribing minimum performance requirements of the marine energy mix. This is necessary for complementing existing supply-side measures and solving the interdependency issue, as well as for avoiding carbon leakage. Policy approaches could, however, differ on the way that the required level of performance is achieved. This could either be done by prescribing the use of certain technologies/fuels or by setting certain goals that operators could meet with technologies/fuels of their choice. As a result, this aspect was considered to be the main factor differentiating the suitable policy options (POs) to be analysed for this initiative. In the next step, the retained policy measures were classified according to their approach and characteristics in relation to three areas of policy intervention: i) improve the penetration rate of RLF, ii) stimulate the introduction of zero-emissions energy solutions, and iii) certification, reporting and enforcement. The correspondence between the SOs and the areas of policy intervention are illustrated in Figure 6 : As explained in Section 5.2.1, the full list of identified policy measures is presented in Table 69 in Annex 6. It clearly indicates if these measures have been retained or are considered as flanking measures or complementary measures. Only retained measures have been included in policy options and were subject to a thorough analysis. The correspondence between the specific policy objectives, the retained policy measures grouped in accordance with the three areas of policy intervention and links to the different POs is shown in Table 1 . Retained policy measure Driver / Specific objective Policy options PO1 PO2 PO3 Field of policy intervention 1: Improve the penetration rate of RLF 1 Establish minimum share (in volume terms) of selected RLF for ships in navigation calling EU ports (blending mandate) SO1, SO2, SO3, SO4, SO5 ✓ - - 2 Set maximum targets on the GHG intensity (meaning the GHG emissions per unit of energy) of the energy used by vessels (the fuel / energy emissions per MJ). SO1, SO2, SO3, SO4, SO5 - ✓ ✓ 3 Mandate the use of OPS (or equally performant alternatives e.g. batteries, zero-pollution energy sources like hydrogen) for the most polluting ships in ports SO1, SO2, SO3, SO4 ✓ ✓ ✓ 4 Provide guidance to facilitate uptake of technology, including on the deployment of the necessary supply infrastucture SO2, SO3, SO4 ✓ ✓ ✓ Field of policy intervention 2: Stimulate the introduction of zero-emissions energy solutions 5 Adopt additional incentives to stimulate the introduction of zero-emission energy solutions, avoid fuel technology lock-in and reward over-achievers SO2, SO3, SO4 - - ✓ 6 Increase awareness raising, exchange of experience, encouragement and promotion of industry-led programmes in support of the uptake of alternative fuels SO2, SO3, SO4 ✓ ✓ ✓ Field of policy intervention 3: Certification, reporting and enforcement 7 Establish an EU-wide methodology to certify the well-to-wake performance of fuels, reflecting all relevant GHG emissions and define the related documents to certify compliance SO1, SO2, SO5 ✓ ✓ ✓ 8 Establish requirements for certification and acceptance of bunkering supplied in third countries SO5 ✓ ✓ ✓ 9 Establish a set of rules to follow for monitoring, reporting and verification of consumption of alternative fuels in the context of the EU MRV SO1, SO5 ✓ ✓ ✓ 10 Establish Port State Control procedures for the use of RLF (including upskilling and training of PSC officers) SO1, SO5 ✓ ✓ ✓

The three policy options can be summarised as follows: ·In PO1, demand obligations would be identified by the regulator and defined in terms of share of RLF in the total maritime fuel mix to be used from 2025 onwards; ·In PO2, maritime operators would be required to achieve a certain goal in terms of carbon intensity of the energy used from 2025 onwards, but would retain freedom on the choice of fuels (and technologies); ·PO3, represents a mixed approach whereby obligations would remain ‘goal-based’ from 2025 onwards, but a system of incentives would be put in place to favour adoption of certain technologies identified by the regulator. These differences would apply only to ships in navigation, while the three options would share the same approach for ships at berth. The reasoning for selecting a single approach for the ships at berth is based on a number of considerations. First of all, there is a strong case for advocating, in ports, the use of fuels that have minimal emissions of both GHG and local pollutants (zero emission fuels). Use of zero emission fuels generates considerably higher health benefits for ships at berth than for ships at sea. This ‘double dividend’ on climate and health justifies not only a preference for zero emission fuels, but also a higher level of ambition in terms of emission abatement for ships at berth. Indeed, other things equal, the same reduction in the use of fossil fuels will produce greater benefits when occurring in ports than in navigation. For this reason, and considering that the cost of abating emission is not higher in ports, it makes sense to set a target of zero emissions for ships at berth. In addition, there is a strong convergence on the promotion and use of OPS for ships at berth. OPS is a technology that allows for zero emissions of both GHG and air pollutants. It is a tried and tested solution, in application for more than two decades, mandated in certain parts of the world (e.g. the state of California) and increasingly deployed in other (e.g. China). In the EU, the Sulphur Directive encourages the use of OPS and the AFID requires deployment of OPS when demand conditions justify it. In view of these considerations, the proposed intervention at berth focussed primarily on the use of OPS, but it does not exclude other zero GHG and air pollutants technologies, like batteries or hydrogen, which can be available in the medium to long term. As a result, maritime operators keep the possibility to use alternative zero-emission solution and the policy approach remains technology neutral. With regard to possible variations of the option in terms of timing or scope, it should be noted that: a)Timing: the use of OPS is highly dependent on the deployment of the required infrastructure (currently still immature), the proposed intervention at berth would start from 2030 onwards and first focus on the most polluting ships in ports. b)Scope: The most polluting ship categories have been identified on the basis of MRV data from 2018, and consists of containerships, passenger ships and ro-pax ships. These three ship categories represent roughly 40% of the emissions at berth, have among the highest levels of emissions per ship in port and belong to the first movers in the use of OPS. It also ensures alignment with the decisions regarding vessels in navigation. In conclusion, with respect to use of fuels at berth, the proposed approach of requiring use of OPS, or equivalent solution, by the main emitters, did not apper to have a credible alternative which would retain the same level of ambition while remaining technically possible. Each of the policy options is presented in more details below. Policy Option 1 : Prescriptive approach on the choice of technologies Improve the penetration rate of RLF In PO1, improvement of the penetration rate is expected to be delivered by requiring shares of specific RLF to be used in navigation (x% of the fuel used by ships during the journeys in scope). The type of fuels and the corresponding shares would be established ex-ante in line with technology maturity and GHG saving potential. The minimum share would increase over time. The types of fuels included in this option would be regularly extended once more advanced options become mature. The indicative trajectory is provided in the table below. As explained in Section 1.5, this trajectory has been derived in a way that enables kick starting the scale-up of renewable and low carbon fuels in the maritime sector from 2025 onwards and their large scale deployment by 2050, while ensuring the consistency with the required overall GHG emissions reductions by 2030 and 2050, preserving the competitiveness of the sector, promoting innovation, and ensuring feedstock availability for renewable and low carbon fuels in all energy and transport sectors in the transition towards a climate neutral economy. Shares in the fuel mix (%) 2025 2030 2035 2040 2045 2050 Total RLF shares 2.9% 7.4% 15.6% 30.0% 68.8% 85.9% Biofuels and bio-LNG 2.9% 7.2% 12.5% 22.8% 46.4% 53.3% Renewable fuels of non-biological origin 0.0% 0.2% 2.8% 6.8% 21.7% 31.5% Electricity 0.0% 0.1% 0.2% 0.4% 0.7% 1.1% The category renewable fuels of non-biological origin, in the meaning of Article 2(63) of the Renewable Energy Directive, covers here e-liquids, e-gas, hydrogen and other hydrogen-derived fuels like ammonia and methanol. At berth, the use of OPS will be mandated from 2030 onwards for the most polluting ships in ports, which have been identified on the basis of MRV data from 2018, i.e. containerships, passenger ships and ro-pax ships, unless they can prove the use of equally performant alternative (e.g. batteries). The shares of electricity use at berth due to the OPS requirements comes in addition to the trajectory illustrated above and is a result of the assessment presented in Section 6.1.1. A phased-in implementation could gradually extend the requirements to the entire fleet (subject to a review clause and an impact assessment in the future). The Commission, assisted by EMSA, will continue to support Member States in exchanging best practices in line with international developments and the latest technological / scientific knowledge, and to facilitate the uptake of technology, including the deployment of the necessary supply infrastucture. These could take place in the framework of the expert groups from the Commission such as the European Sustainable Shipping Forum (ESSF) or the European Ports Forum (EPF). In the past, EMSA has already delivered LNG bunkering guidance and is currently working on developping OPS guidelines to facilitate the deployment of on-shore power connection in European Ports. The main purpose here is to facilitate planning and / or the development of local rules for the safe use / handling of fuels. Stimulate the introduction of zero-emissions energy solutions As specific technological choices are prescribed under this option and considering technological progress over time, there is a risk that the choice made in year x may not be an optimal solution in year z. For this reason, the list of selected fuels would be updated on a regular basis and reflect the technology developments. The Commission will continue to foster awareness raising, exchange of experience, innovation, encouragement and promotion of industry-led programmes in support of the uptake of RLF. Certification, reporting and enforcement In order to document compliance with the regulatory obligations, an EU-wide methodology to establish the GHG emissions performance / sustainability of fuels for maritime transport would be based on the RED II Directive and EU MRV Regulation, both of which would be cross-referenced in this initiative. As regards the latter, it is also proposed to include the non-CO2 emissions and alternative sources of power. Requirements for the certification of fuel suppliers (including in third countries) and documentation to report performance would be necessary and as above it would be also based on RED II requirements. In this PO, the performance of fuel is established ex-ante and demonstrating sufficient blending levels would be necessary to prove compliance. Compliance needs to be documented on annual basis for the total energy generated on-board. Additional rules should be established for this purpose, including for monitoring, reporting and verification of consumption of alternative fuels in the context of the EU MRV and to harmonise Port State Control (PSC) procedures. Policy Option 2 : Goal-based approach on technologies Improve the penetration rate of RLF In PO2, improvement of the penetration rate of RLF is expected to be delivered by a goal-based approach requiring fuels used in navigation and at berth to meet maximum GHG intensity targets. A maximum limit on the GHG content of energy used by ships in navigation (e.g. CO2eq/MJ) is identified to deliver comparable GHG emissions reductions on the well to wake basis as in PO1. This target will be made more stringent over time, which would require operators to shift to increase the overall share of RLF in their fuel mix (including thorugh the inclusion of more innovative solutions such as hydroen-based fuels of electricity). The reduction in the well to wake GHG intensity relative to the base period (2015) is provided in the table below. Well to wake GHG intensity reduction (in %) 2025 2030 2035 2040 2045 2050 Resulting from the use of RLF -2% -7% -14% -26% -59% -74% Concerning emissions at berth, the approach is the same as for PO1. Stimulate the introduction of zero-emissions energy solutions As no technology choice is made in this PO, the risk of technology lock-in is reduced as the market operators are likely to maximise the use of existing and developing infrastructure and on-board equipment to meet the targets. They also may decide to comply with more performant and advanced technology (i.e. battery, fuel cell), in terms of GHG reductions, than fuel blends. The target could also be set in a way that reflects the uptake of energy sources such as wind propulsion. Also, since all fuels consumed onboard are accounted to meet the same target, ship operators may decide to comply by averaging very performant technology for ancillary power (e.g. renewable hydrogen) with more conventional fuels used for propulsion. The Commission will continue to foster awareness raising, exchange of experience, innovation, encouragement and promotion of industry-led programmes in support of the uptake of alternative fuel, similarly to what is described for PO1. Certification, reporting and enforcement In order to document compliance with the regulatory obligations, an EU-wide methodology to establish the performance / sustainability of fuels for maritime transport be based on the RED II Directive and EU MRV Regulation, both of which would be cross-referenced in this initiative. As regards the latter, it is also proposed to include the non-CO2 emissions and alternative sources of power. Requirements for the certification of fuel suppliers (incl. in third countries) and documentation to report performance would be necessary and as above it would be also based on RED II requirements. In PO2, the performance of the fuel is not established on-board but needs to be document on annual basis for the total energy generated on-board. Similarly to PO1, additional rules should be established for this purpose, including for monitoring, reporting and verification of consumption of alternative fuels in the context of the EU MRV and to harmonise PSC procedures. Policy Option 3 : Goal-based approach on technology and reward mechanisms for overachievers Improve the penetration rate of RLF In PO3, improvement of the penetration rate of RLF is expected to be delivered by a goal-based approach requiring fuels used in navigation and at berth to meet maximum GHG intensity targets. A maximum limit on the GHG content of energy used by ships (e.g. CO2eq/MJ) is identified in the same manner as for PO2 to deliver GHG emissions reductions that are comparable on a well-to-wake basis across all three policy options. The reduction in the well to wake GHG intensity relative to the base period (2015) is provided in the table below. This table does not account for the “multipliers for zero-emission options”, explained below, in order to show the true reduction in the well to wake GHG intensity of fuels. Well to wake GHG intensity reduction (in %) 2025 2030 2035 2040 2045 2050 Resulting from the use of RLF -2% -7% -14% -26% -60% -75% Concerning emissions at berth, the approach is the same as for PO1 and PO2. Stimulate the introduction of zero-emissions energy solutions The requirements in this option are similar to PO2 as they are based on a goal-based approach. However, this PO also integrates specific additional measures to foster over-achievement and encourage the development of more advanced, zero-emissions technologies. Two aspects will be assessed as part of the mechanism to foster over-achivements. These concern specifically higher weight attributed to zero-emission solutions when establishing the ship’s performance in achieving the yearly target (“multipliers for zero-emission options”) as well as the possibility to not only average compliance on a yearly basis (as in PO2) but also pool compliance with other ships / operators via a mechanism for voluntary transfer and compensation of balances. This mechanism does not represent an additional regulatory obligation, but it offers operators more flexibility and an additional means of compliance with the requirements, allowing them to optimise the investments at the ship level. In practice, it will allow operators using more performant technologies to exchange “excess compliance points” with less perfomant ships / operators, provided that the minimum targets are met on average. A specific module will be added to the existing MRV system to track compliance and, where necessary trace the transfer of balance. Balances would be generated automatically and there would be no need for a system of auctioning or attribution. Also, as the mechanism remains voluntary, the transfer of balance will not be subject to specific conditions but be governed by private-law agreements between the concerned operators. In practice, most of the transfers are likely to take place within the same firm or group (representing de facto a solution to pool compliance at company level), but will not be limited to it and would offert the possibiltiy to also provide transfers between different companies. Alternatively, a possible link with upcoming revision of the ETS to reward overachievers could be also envisaged (e.g. through the provision of additional free allowances) but it is not expected to signifcantly affect the likely impacts of the instrument. The Commission will continue to foster awareness raising, exchange of experience, innovation, encouragement and promotion of industry-led programmes in support of the uptake of alternative fuels, similarly to what is described for PO1 and PO2. Certification, reporting and enforcement In order to document compliance with the regulatory obligations, an EU-wide methodology to establish the performance / sustainability of fuels for maritime transport be based on the RED II Directive and EU MRV Regulation, both of which would be cross-referenced in this initiative. As regards the latter, it is also proposed to include the non-CO2 emissions and alternative sources of power. Requirements for the certification of fuel suppliers (incl. in third countries) and documentation to report performance would be necessary and as above it would be also based on RED II requirements. In PO3, the performance of the fuel is not established on-board but needs to be documented on annual basis for the total energy generated on-board. A specific mechanism to account for possible pooled compliance and transfer of balances needs to be established. Additional rules should be established for this purpose, including for monitoring, reporting and verification of consumption of alternative fuels in the context of the EU MRV and to harmonise PSC procedures. 5.2.3Specific aspects of policy design

Concerning the more specific characteristics of the proposed policy intervention, the following aspects have also been considered and assessed in the same way for all POs. Targets (volumes or GHG intensity) are set and gradually increase over time to deliver higher RLF penetration rates (and the related emissions reductions until 2050). All POs are designed to deliver similar GHG emission reductions pathways. Targets are specified up to 2050 to provide operators and investors with sufficient clarity and predictability. The analysis made in support of this impact assessment also include increased shares of electricity covering the growing uptake of OPS by ships at berth; this was not available at the time of the work on the common economic assessment underpinning the 2030 Climate Target Plan and the Sustainable and Smart Mobility Strategy. The GHG performance of fuels is assessed on a well-to-wake basis, taking into account the impacts of production, transport, distribution and use on board. This is to incentivise technologies and production pathways that provide real benefits compared to the existing conventional fuels. This approach is also supported by the open public consultation (OPC) results. The emission factors reflect the characteristics of the different fuels and are provided in Annex 4. With regards to the type of emissions, the proposed intervention is not limited to CO2, but also include other GHG emissions such as CH4 and N2O emissions. Even though the volume of these emissions is lower than CO2 only, their global warming potential is stronger, in partic