Xeneta analysts Emily Stausbøll and Peter Sand have taken a deep dive into this issue to bring some much-needed clarity on what these regulations are and, most importantly, how they could impact the sector in the future, according to an article published on its website.
What is the EU ETS?
The EU Emission Trading Scheme is nothing new. It has been around since 2005 to drive down harmful emissions across industries, but 2024 is the first time ocean freight shipping will fall within its orbit.
The basic premise of the scheme is that carriers must measure and report each ship’s CO2 emissions and then buy allowances for each tonne of CO2 emitted. The intention is that this will incentivize industry-wide investment in cleaner technologies which in turn makes them comparatively less expensive.
How will the scheme work?
The EU ETS scheme will bring numerous complexities and nuances when it is rolled out next year (more on that later), but the basic principle is straightforward.
Allowances (EUAs) can be bought and sold on the open market to cover the carbon emitted on each journey to or from a defined European port. Carriers will compete with fellow polluters from within their own and other industries to purchase these allowances which will reduce in availability each year.
The reduction in available allowances is part of a roadmap towards the EU’s Fit for 55 target of reducing greenhouse gas emissions by 55% by 2030.
A big bang or a more gentle approach?
The EU ETS will be introduced gradually, starting at 40% of emissions in 2024, rising to 70% in 2025, and then 100% from 2026 onwards.
2026 will also see carriers required to report and buy allowances for methane and nitrous oxide emissions as well as CO2.
The revenue from 20 million of the EUAs bought and surrendered by the ocean shipping sector has been earmarked for investment in the decarbonization of the industry between now and 2030. This is part of the EU ETS overarching strategy across all sectors of pumping money generated from selling EUAs back into climate-related initiatives to drive sustainability.
The scope of the regulations is crucial
Ocean freight shipping is a global endeavor so imposing regulations at a regional level can prove problematic.
Establishing what can, and cannot, be covered by the regulations becomes key to successful implementation.
In this case, the European Union has decided all CO2 emitted on journeys within the EU and wider European Economic Area (EEA), and while at berth at an EU/EEA port, must be covered.
On top of this, half of emissions on journeys in and out of the EU must be covered. In deciding to cover only 50% of emissions on these voyages, the EU has left the door open for other regions around the world to establish their carbon pricing mechanisms without carriers having to pay twice.
Will these regulations last the distance?
Possibly not. The International Maritime Organization (IMO), the UN body that regulates shipping, is also looking at introducing mechanisms to reduce carbon emissions at a global level.
Earlier this year, IMO member states agreed on new emissions targets., including a new carbon pricing mechanism to be adopted by 2025 and come into force by 2027.
Should the IMO be successful in introducing these regulations, the EU has reportedly agreed to join the global mechanism. So, while the EU ETS scheme is working toward the Fit for 55 target in 2030, there is every possibility it will not make it that far.
Who is responsible for reporting and paying for emissions?
The regulations are clear that the responsibility for adhering to requirements lies solely with the carrier, both when it comes to reporting emissions as well as buying and submitting the allowances.
Emissions for EU ETS reporting will be calculated using the existing EU Monitoring, Reporting, and Verification mechanism (MRV). This has been in force since 2018 and applies to all ships calling at an EU port, requiring operators to calculate the annual CO2 emissions at and between EU ports and half of emissions into or out of the EU.
Reporting carbon emissions is therefore nothing new for carriers, but 2024 will be the first time they have to pay for it through regulation in the EU.
Carriers will need to submit verified emissions for 2024 by the end of April 2025 and then have until the end of September of that year to hand over enough allowances to cover their carbon outlay.
They can choose to buy all the allowances right before the deadline in September 2025 or throughout the year as they emit carbon. This is where we begin to see how nuances between carrier strategies could come into play.
No problem – we’ll just dock at the nearest non-EU port
If carriers think they can get around the regulations by simply stopping at the nearest non-EU/EEA port, then that loophole has been closed off.
The EU ETS regulation has a paragraph to specifically address the potential for evasive behavior by container carriers.
It states any stops made at ports within 300 nautical miles of an EU/EEA port, and where more than 65% of containers are transhipped, will not be considered port calls. For example, a carrier could not lower their EU ETS costs by making an extra port call at Tanger Med or Felixstowe.
The really important question – how much is this going to cost?
It may be an important question, but it is not an easy one to answer for several reasons.
Firstly, as already mentioned above, carriers can choose to purchase allowances as they go along starting when the regulation comes into force next year, or they can buy them before the deadline in September 2025.
Carriers can request these surcharges from shippers and forwarding companies (NVOCCs) as they go along, which means there could be huge amounts of money changing hands well in advance of the allowances being purchased.
Secondly, carriers will no doubt take a different approach to calculate these surcharges.
Despite there being nearly two years before carriers must submit the first allowances, Hapag-Lloyd, CMA CGM and Maersk have already published estimates for the surcharges they will add to rates on trades involving the EU – and they vary dramatically.
Let’s take the North Europe to North America trade as an example. CMA CGM estimates surcharges will be EUR 43 per dry TEU, rising to EUR 65 for a 20’ reefer.
Hapag-Lloyd comes in much cheaper at EUR 9 per TEU and EUR 16 for a reefer. Maersk, which estimates based on FEUs, comes in at EUR 81 for dry and EUR 122 for a reefer.
The uncertainty is perfectly demonstrated in the fact CMA CGM and Maersk both explicitly state these surcharges are based on an EUA price of EUR 90, yet their estimates are still wildly different.
The reason for this is found in their different methodologies for applying these surcharges across front haul and backhaul. For the same reason, we see similar variances across carriers for bunker and IMO 2020 surcharges.
The EU ETS in action
Let’s use a real-world example of how the EU ETS will be applied when it comes into force next year.
The containership CMA CGM Lamartine (2010 built, 6 574 TEU) spent the year 2022 sailing on the Ocean Alliance’s Victory Bridge service between North Europe and US East Coast/Gulf ports.
Because this is a transatlantic trade, there is nowhere for carriers to stop and shorten journeys (such as the UK due to the extra 300 nautical mile zone) so it is a good example to estimate the cost of the EU ETS to carriers.
CMA CGM Lamartine made seven round trips during 2022, between Bremerhaven and Charleston on the front and then New Orleans to Le Havre on the backhaul.
From Le Havre, the service heads to Antwerp, Rotterdam, and then Bremerhaven before heading back across the Atlantic. For EU ETS, any journeys made between North American ports have no impact. It is only the first and last stop in North America which impacts EU ETS.
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Source: Xeneta
