Cyprus introduced tax cuts in January to incentivise shipping companies towards energy efficiency and use of alternative fuel, ultimately aiming for Green House Gases reduction. The measures are part of a wider debate juxtaposing international and local decarbonisation regulation.
Decarbonisation, the reduction of Green House Gases (GHG) in an effort to combat climate change, is considered by many as the shipping industry’s ultimate challenge for decades to come. Cyprus, an island state with a proud maritime history going back millennia, has recently taken actions which reveal it intends to play a lead role in shipping’s transition to a greener future.
Decarbonising shipping is a complicated task, with a projected cost of cost up to $1.65 trillion by 2050. It is set within the general context of the Paris Agreement, which aims for GHG emissions neutrality in the second half of the current century (though strictly speaking the Paris Agreement does not regulate shipping), and emissions targets provisionally introduced by the International Maritime Organization (IMO) to reduce C02 emissions 40% by 2030, and GHG emissions 50% by 2050.
Achieving these objectives is no easy task, and research suggests operational and efficiency measures will not suffice to meet the 50% reduction target by 2050. Alternative fuel then comes into play, such as Liquefied Natural Gas (LNG), Liquefied Petroleum Gas (LPG), methanol, biomethane, hydrogen and ammonia, as well as hybrid powering options such as batteries and wind-assisted propulsion (WAP). Clearly, shipping companies need to devise short to longer-term strategies factoring in CAPEX and OPEX, if they are to survive and thrive. Ultimately, what sets them on the path to transition is regulation, as admitted by various stakeholders in the industry and revealed by multiple surveys (for a detailed analysis of the interplay between decarbonisation and regulation please refer to our recent article on ‘Decarbonising Shipping: A Review of IMO and EU Regulation’).
However, shipping decarbonisation regulation is for the better part in nascent form, which brings uncertainty to shipping companies, hesitant to invest in new ships that may be rendered obsolete, or R&D which may be proven futile. Meanwhile, a debate is raging in the industry on whether regulation should be at IMO level exclusively, thus applying internationally, or should also be implemented at local level, such as that of the EU or individual countries. IMO regulation is thought of as slow to emerge, while local regulation is seen as creating an uneven playing field. Such local regulation includes the EU’s ongoing push to include shipping in the EU Emissions Trading System (ETS), a move that further divides the industry.
Cyprus takes the initiative
Cyprus features the 3rd largest merchant fleet in Europe and 11th largest fleet globally, along with the largest third-party ship management centre in the EU, managing 20% of the world’s fleet. As a member of the IMO Council since 1987, of the EU since 2004, and a signatory to over 25 merchant shipping bilateral agreements, Cyprus enjoys prominence in the shipping world. It came therefore as no surprise when the Cyprus Shipping Deputy Ministry took the initiative to organise a virtual international debate in December on the EU ETS push titled ‘ETS in Shipping: Elixir or Threat to Sustainability?’, ahead of the EU Commission’s consultation.
The debate featured diverse stakeholders from the European Community Shipowners’ Associations (ECSA), the Cyprus Shipping Chamber (CSC), regulators’ representatives from the EU Commission and Parliament, as well as various NGOs. The CSC provisionally concluded that:
- There was no certainty the EU ETS inclusion would reduce GHG beyond IMO’s regulations, while the EU system would lead to carbon leakage;
- The EU ETS would undermine the viability of small to medium sized shipping enterprises; and
- Any EU system introduced should be IMO compatible.
Cyprus introduces tonnage tax cuts
Cyprus moved swiftly from words to regulatory actions in January, by introducing environmental incentives through cuts based on the tonnage tax system up to 30% ‘for owners of Cyprus and Community flagged ships that use mechanisms for the environmental preservation of the marine environment and the reduction of the effects of climate change’.
The incentives apply at three different levels: (i) the Energy Efficiency Design Index (EEDI); (ii) the IMO Data Collection System (DCS); and (iii) the use of alternative fuels.
The incentives are cumulative and subject to a 30% maximum, as well as to a ship not having been detained under Port State Control for environmental deficiencies, and/or not having violated any environmental regulation/EU Directives, and/or not having been in laid-up condition (warm or cold) during the calendar year the shipping company applied for the incentive. They apply from fiscal 2021 onwards.
With decarbonisation now firmly in the agenda of the global shipping community, Cyprus demonstrates, through dialogue and actions alike, it intends to play a lead role suitable to its eminent position in the maritime industry. The recently announced tax incentives are exactly that, a practical way to incentivise shipping companies to operate in a manner that protects the environment, and to invest in environmentally sustainable solutions through alternative fuel. The Cyprus government also expects such incentives may lead to increased competitiveness and growth through new green technologies coupled with job creation.