May 22, 2024

EU ETS in shipping: explanation, strategies, impact & more

The EU Emissions Trading System has evolved considerably, becoming increasingly complex. As of 1 January 2024, the European Parliament implemented significant amendments, including expanding the scheme to encompass maritime transport.

Unlike other sectors, which received free allowances to facilitate a smoother transition, the maritime sector does not enjoy such benefits. This raises numerous questions about the costs involved (and who will bear them) the effect on freight rates, commodity pricing, trade disruptions, and more.

At the core of these inquiries lies a significant challenge—data.

Access to accurate, reliable, and comprehensive emissions data is critical, as ship owners are responsible for reporting their verified emissions data to regulators.

However, the broader market remains in the dark regarding the specifics of emissions allowances transactions, the entities most affected by the regulations, and the impact on trade, market participants, and commodities.

This article will cover the complexities of the EU ETS, its impact, and how different groups are affected.

What is the EU ETS?

The European Union Emissions Trading System (EU ETS) is a system introduced by the European Commission to regulate and incentivize major sources of greenhouse gas (GHG) emissions, commonly called “polluters”, to reduce their emissions footprint in a bid to slow climate change.

The goal is to get companies to focus more on shifting to alternative fuels and renewable energy.

To mitigate the pressure on key industries like the power sector, heavy industry (e.g., steelworks and oil refineries), and aviation, the scheme initially offered these entities “free allowances”.

The free allowance permits a certain level of GHG emissions annually. Exceeding the allowance necessitates purchasing additional emissions credits from the market, while any surplus can be sold.

Notably, the price of EU Allowances (EUAs) has fluctuated dramatically. In February 2023, prices reached a milestone of 100 euros per ton of CO2.

This pricing peak sparked significant discussions about the need for enhanced emissions transparency, which would allow companies to assess their direct and indirect exposure to these regulations.

What is the scope of the EU ETS for shipping and maritime?

After at least two years of deliberations surrounding the establishment of a system for greenhouse gas emission allowance trading within the EU, the European Parliament voted to include the maritime sector in the EU ETS directive.

The EU ETS represents a significant shift in the regulation of shipping emissions, directly impacting shipping companies and the global commodities trading landscape.

Under these new regulations, understanding the intricate relationships and responsibilities between ship owners, managers, controllers, and charterers is crucial to ensuring the correct individuals and groups are accountable for their EU ETS obligations and EUAs.

What is covered by the EU ETS?

The maritime transport sector is the latest addition to the EU ETS, which covers thousands of installations across various sectors and industries, and specific gases resulting from activities like electricity generation.

The directive focuses on measurable emissions that can be easily reported and accurately verified.

The EU ETS applies to all EU member states as well as Iceland, Lichtenstein, and Norway (European Free Trade Association countries). It also applies in Northern Ireland in the electricity sector.

Which sectors are covered by the EU ETS?

At the time of writing, the following sectors are covered:

  • Energy-intensive industries like steelworks, oil refineries, and industries that produce iron, aluminium, cement, paper, acids, bulk organic chemicals, and other materials.
  • Electricity and heat generation
  • Aviation within the European Economic Area (EEA) and flights from or to Switzerland and the United Kingdom.
  • Maritime transport, covering all emissions from voyages between ports in Europe and when ships are docked at EU ports, and 50 per cent of emissions from voyages that start or end outside the EU.

Companies that operate in these sectors are legally obligated to participate in the EU ETS. Still, some leeway is given to smaller companies in certain sectors and sometimes to small installations if governments commit to reducing emissions elsewhere.

Which gases are covered by the EU ETS?

The EU ETS covers three gases:

  • Carbon dioxide (CO2) from all of the industries mentioned above.
  • Nitrous oxide (N2O) from the manufacture of nitric acid (used in the production of fertilisers), adipic acid (used primarily in the production of nylon), and glyoxylic acid (used in the production of pharmaceuticals, herbicides, and cosmetics), as well as glyoxal (used in the production of resins, textiles, and leather).
  • Perfluorocarbons (PFCs) from manufacturing aluminium.
How does the EU ETS influence discussions between ship owners and charterers?

Incorporating the maritime transport sector into the sectors covered by the EU ETS poses a multi-faceted challenge to tracking and allocating emissions allowances because of the industry’s complex, interconnected stakeholder relationships.

This is particularly relevant to the relationship between ship owners and charterers. However, there are strategies that can help to make discussions smoother.

1. Incorporate EUA costs into freight rates

Embedding the cost of EUAs into freight charges lets ship managers simplify compliance and indirectly transfer the responsibility to charterers.

This approach may contribute to streamlining operations, but for it to work, transparent communication is required to ensure fair pricing.

2. Separate EUA surcharge

Negotiating an EUA surcharge as an add-on to freight costs allows for more flexibility and clarity in financial transactions. This method depends on accurate emission-monitoring and forecasting to predict costs.

It also offers a transparent solution that aligns with fluctuating EUA prices.

3. EUA transfer arrangement

Some charterers may prefer handling their EUA obligations directly, opting for an allowance transfer instead of a monetary surcharge.

This is a good approach for entities that can manage EUA portfolios actively and hedge against price volatility. However, it demands a sophisticated, thorough understanding of the EU ETS market and robust emission-tracking capabilities.

What is the impact of EU ETS on shipping and maritime?

Including the maritime sector in the EU ETS brings financial implications for shipowners and shipping companies due to the cost of purchasing EUAs.

Ship operators are required to hold the correct number of EUAs equivalent to every tonne of CO2 emitted. This means shipowners are directly liable for their emissions.

In addition to the cost of allowances, surcharges can be applied to cover additional expenses, which are ultimately passed down the supply chain, increasing operational costs and freight rates.

The financial impact is a complicated web. The expected distribution of EUA obligations among ship owners, controllers/managers, and charterers for 2024 is represented in the diagram below.

What tools can companies use for EU ETS?

The maritime EU ETS introduces a new era of environmental accountability in shipping, with significant implications for the commodities trading sector.

It continues to evolve as directives are refined and EU member states solidify support mechanisms. Staying ahead of the evolution demands that maritime stakeholders have access to accurate, real-time data.

At Kpler, our mission is to illuminate this complex issue. Our maritime product, MarineTraffic, provides our clients with leading AIS data (from the world’s largest AIS network).

Our emissions intelligence platform leverages cutting-edge maritime and cargo intelligence to monitor real-time emissions and identifies those exposed to EU ETS regulations.

This capability is vital for navigating the complexities of compliance, financial planning, and strategic decision-making in the face of evolving legislation.

Using our AIS data, we allow users to access a granular view of different emissions sources and determine due EUAs following the EU ETS methodology based on routes and not flags.

Additionally, our data insights allow ship operators to make proactive decisions regarding port congestion, which helps streamline port calls and contributes to reducing emissions overall.

MarineTraffic empowers our clients to lead in a sustainable and profitable future by providing them with tools and actionable insights.

What will be the next phase of EU ETS?

Administering authorities are looking at GHG emissions from maritime transport. Although it’s in the first implementation phase, the EU ETS will eventually expand to cover more than just CO2 emissions.

Further phases will require the monitoring, reporting and verification (MRV) of methane (CH4) and nitrous oxide (N2O) emissions.

These amendments to the EU ETS will further support and incentivise emissions reductions and decarbonisation policies within the shipping industry.

EU Emissions Trading System - FAQs

Below are some frequently asked questions about the EU ETS and the maritime sector inclusion.

How does the EU ETS work?

The EU ETS is a cap-and-trade system that aims to reduce greenhouse gas emissions across multiple sectors. Companies in these sectors must match emissions with allowances or face fines. The goal is a 62 per cent emission cut by 2030.

Operators are allotted annual emission allowances, which can be traded in auctions and secondary markets, encouraging cost-effective emission reduction.

Who must comply with the EU ETS in shipping?

The party responsible for vessel operation (the owner, manager, or bareboat charterer) referred to as the “shipping company,” must comply with EU ETS regulations.

Which countries are included in the EU ETS?

All EU member states, European Free Trade Association countries (Iceland, Norway, and Lichtenstein), and Northern Ireland are included in the EU ETS.

To which ships does the EU ETS apply?

As of 2024, EU ETS applies to all general cargo vessels, passenger ships, and container ships of or above 5,000 gross tonnage (GT). From 2027, this will be expanded to include offshore ships in the same gross tonnage bracket.

When can shipping companies start buying allowances?

Shipping companies can purchase emissions allowances as of 1 January 2024.  

The policy phase-in means shipping companies will require allowances equivalent to 40 per cent of their emissions for the 2024 reporting period in 2025, 70 per cent of 2025’s emissions in 2026, and 100 per cent of 2026’s emissions in 2027.

It’s recommended that shipping companies begin purchasing allowances immediately to avoid heavy fines.

Who is responsible for surrendering EU allowances?

The shipping company must surrender allowances regardless of any shipping contracts. This means they need to exchange the amount of EUAs equivalent to their emissions for the reporting period.  

If they don’t have enough EUAs to cover their emissions in full, they will be fined for the excess.

The bottom line

The EU ETS has undergone significant changes as it expands to include the maritime transport sector. This move introduces complexities relating to emissions tracking, stakeholder accountability, and financial implications.

Access to accurate data is paramount for compliance and effective, proactive decision-making, especially as future phases aim to reduce emissions even further with the goal of sustainability in the shipping sector.

Schedule a demo with Kpler to learn more about how AIS data and the emissions intelligence platform that provides you access to modeled emissions for thousands of assets can help you navigate these new challenges.

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