In recent years, the global concern over climate change and its environmental impact has grown significantly. Among the industries contributing to greenhouse gas emissions, the shipping industry has faced increased scrutiny and the need for effective measures to reduce its environmental footprint.
The European Union (EU) Emissions Trading System (ETS) was initially established in 2005 as a market-based mechanism to tackle greenhouse gas emissions within the European Union. While it primarily targeted energy-intensive sectors like power generation and manufacturing, there have been recent developments to include shipping in the EU ETS.
In December 2022, political negotiators reached a provisional agreement to extend the EU ETS to include shipping. This agreement was subsequently adopted and finalized on 16 May 2023, and published in the Official Journal of the European Union, which communicates new laws and regulations adopted by EU institutions.
As of 2024, the ETS will encompass shipping activities within the European Economic Area (EEA), consisting of EU member states, Iceland, Liechtenstein, and Norway. As a result of this, ship operators will be required to monitor and report their emissions and surrender allowances for every ton of CO2e they emit.
Carbon pricing and extraterritorial application
Under the new law, carbon pricing in the EU ETS is determined based on vessels rather than cargo. Alongside introducing carbon pricing for vessels traveling between EU countries, the law also has extraterritorial application.
This means that if a vessel sails between an EU port and a non-EU port, half of the emissions from the voyage will be subject to the EU ETS. Shipping companies are obligated to purchase allowances for the following emissions, 50% of emissions from voyages departing from an EU port to a non-EU port and vice versa. Moreover, 100% of emissions from voyages between EU ports and 100% of emissions from ships docked at an EU port.
As the extension of the ETS to maritime transport activities increases shipping costs, negotiators are concerned about the risk of evasion and transhipment activities moving outside the EU. To mitigate this, the law specifically targets non-EU ports near the EU with a high share of transhipment. For these ports, the ETS effectively extends the length of voyages to address concerns about carbon leakage.
Start of carbon pricing and inclusion of additional greenhouse gases
The inclusion of shipping in the EU ETS is a significant milestone in combating climate change. It aims to create financial incentives for reducing greenhouse gas emissions and promoting a transition to more sustainable practices. With the new law adopted, there will be a phased implementation of carbon pricing for shipping.
This means that shipping companies will be required to submit allowances equivalent to a portion of their emissions according to the following schedule,
In 2024, companies must submit allowances for 40% of their verified emissions. In 2025, companies must submit allowances for 70% of their verified emissions. From 2026 onwards, companies must submit allowances for all their verified emissions.
Furthermore, starting from 1 January, 2026, the ETS regulations will expand to include emissions of two additional greenhouse gases, nitrous oxide and methane. Although the immediate impact of this expansion is limited, it sends an important signal to encourage the use of renewable fuels in the future. This step-by-step approach will gradually increase the carbon price per ton of CO2e for shipping leading up to the year 2026.
What does this mean for customers?
For every 1 ton of reported CO2, 1 European Union Allowance (EUA) must be purchased and submitted to the EU each year. This applies to all shipping companies, who are responsible for buying EUAs. EUAs can be purchased on exchanges such as ICE, EEX and Nasdaq, and on the over-the-counter market.
EU ETS introduces carbon pricing for shipping from 2024. The cost of compliance is expected to significant and will keep increasing with the phased implementation. It will be passed on in the form of a standalone surcharge known as ‘Emissions Surcharge’ applied to all bookings on the voyage that will be subject to the EU ETS. ECO Delivery bookings will not be subject to the ‘Emission Surcharge’.
Choosing ECO Delivery means we replace fossil fuels with green fuels. This investment reduces green-house-gas emissions of your bookings and decarbonizes your supply chain. Learn more about ECO Delivery.
It is expected that the volatility of the European Union Allowance (EUA) traded in ETS may increase due to supply and demand factors. Therefore, the emissions surcharge will be updated every quarter to align with the changes in EUA price. To ensure transparency, we will refer to a public index for the EUA price.
Below are the estimates of the first quarter of 2024 emissions surcharge (in EUR) per FFE for applicable bookings in following trades. CO2 emissions obligation is 40% for 2024 and the price of the European Union Allowance (EUA) is considered be around EUR 90 for the purpose of calculating estimates. We shall publish actual Emissions surcharge with minimum 30 days of advance notice prior effective date of implementation.
This article has been written by Ratish Rajan, Maersk's senior product manager of Energy Products.