Navigating the regulatory complexities of GHG pricing

Riviera: This year marked the inclusion of the shipping sector in the EU Emissions Trading System (EU ETS). What has changed for shipowners in terms of cost? Who bears the cost under this system and what is the impact on the consumer?

Mr Adams: The EU ETS has created complexities in both the day-to-day monitoring of emissions and companies’ ability to comply. The price of emission allowances (EUAs) is heavily influenced by external factors such as geopolitical events and weather conditions, leading to significant fluctuations. Prices have ranged from as high as €100 in early 2023 to as low as €50 recently.

Our experience with ships fixed in time charters indicates that most charterers accept the charge and provide the EUAs or the corresponding amount under the “polluter pays” principle.

This measure will undoubtedly increase the cost of transporting goods, prompting charterers to pass this extra cost on to the end-consumer, thus contributing to inflationary pressures. The impact will be lower in 2024 due to the gradual implementation of the reform, with only 40% of the allowances required this year, but it will increase over time.

“The EU and the IMO need to converge”

Riviera: The FuelEU Maritime regulation is coming into force soon. Analysts believe that this regulation will be key for the promotion of alternative fuels within the industry. What is your take on this?

Mr Adam: The new regulation appears to be even more burdensome for the daily operation of vessels than the EU ETS. Shipping entities are being asked to spend a considerable amount to continue using conventional fuels.

FuelEU Maritime favors alternative fuels. However, we must consider that fuels with a lower environmental impact are currently not available in sufficient quantities. The necessary infrastructure is not ready, and it will take many years and significant investments to develop. Costly modifications to vessels’ engines and support systems will be needed, and safety remains a concern until crews are equipped to handle the new fuels without harm.

The availability of seafarers will also be a challenge in the near future. Their skills and knowledge-base must be radically upgraded to cope with different types of engines. Safety cannot be compromised for the sake of performance.

Riviera: Do you believe that the gap between the EU and the IMO can be bridged, leading to a single global regulation for the industry?

Achieving convergence is crucial, as the current regulatory environment is chaotic and increasingly complex. Even experts who have been working on the subject for years find it challenging to keep up.

While the EU’s stance - through the EU ETS and FuelEU Maritime - pushes for immediate action within its jurisdiction, IMO seeks global consensus to ensure uniform standards. A concerted effort is required to “unite” these two bodies and align their objectives and methodologies. We are now operating within a framework with divergent goals and similar (but not identical) measurement and monitoring methodologies. Reaching harmonisation requires open dialogue, mutual recognition of the efforts being made, and flexibility.

Europe, being a pioneer in regulating the sector, leaves room for convergence if IMO follows with swift action. As IMO increasingly moves in this direction, I believe the two bodies will eventually come together in the near future.

However, the financial factor and resource management may create barriers in the agreement on a unified regulatory framework. Logic and a focus on common goals should prevail over commercial interests.

Riviera: What is the owners’ strategy towards reducing the environmental footprint of their fleets amid these complex regulatory conditions? Given the ambiguity in the alternative fuel sphere, is it more beneficial for owners to order newbuildings or to improve the energy efficiency of existing vessels? 

Mr Adam: Shipping companies are implementing a multi-faceted strategy to reduce their environmental footprint, balancing investments in new, “greener” vessels with optimising existing tonnage.

We often forget that the core of our operations remains the production of transport work at the lowest possible cost. In other words, our objective is to achieve the least possible fuel consumption and, therefore, the least possible emissions. Owners have always utilised available proven solutions to limit their expenditures. These solutions include enhancing the energy efficiency of existing vessels through technical means, such as specific fuel consumption improvements, advanced hull coatings, or more efficient propellers, as well as adopting operational measures like route optimisation and speed reduction. These solutions are always weighed against efficiency results and the expected ROI, in combination with the vessels’ age profile.

I believe that a mix of renewing the fleet with newbuildings and improving active tonnage with available solutions is the way forward for a shipping entity. In this new "green" era, there is increased interdependency between fund allocation and fleet eco-efficiency. The course of action for an owner to reduce their fleet’s footprint depends on the total final cost and the ability to raise and allocate funds. However, the ability to raise these funds is impacted by the environmental performance of a vessel, as reflected in its GHG rating and adopted ESG practices.

Monitoring new developments is also essential. It comes as no surprise that shipping companies are increasingly creating separate, specialised departments tasked with keeping a close eye on vessels’ performance data and the impact of the regulatory framework on day-to-day operations.