SSY Consultancy & Research Ltd’s freight market analyst Luke Ravenscroft looks at the impact of the EU decision to bring shipping into the emissions trading system*
The European Commission announced on 14 July 2021 its proposal to gradually introduce shipping into its Emissions Trading System (ETS), a carbon market that operates in all EU countries (plus Iceland, Liechtenstein and Norway) with the aim of achieving climate neutrality in the EU by 2050.
The system, which already includes industries such as aviation and power, operates under a ’cap and trade’ principle, whereby a cap is set on the amount of emissions that can be emitted, which is then reduced over time.
Carbon emitters are obligated to pay for each tonne of carbon dioxide they generate using EU allowances (EUAs).
Starting in 2023, all vessels above 5,000 gt calling at an EU ports will have to surrender allowances for all intra-EU emissions, as well as 20% of emissions from voyages starting or ending outside of the EU.
Vessels will only have to surrender allowances for a portion of their emissions during the initial phase-in period, reaching 100% (50% from inbound voyages and 50% from outbound voyages) after three years.
The proposal is not restricted to intra-EU trading alone, but instead includes all voyages originating from non-EU ports.
The Commission has accepted that charterers should play “a structural role in shipping’s decarbonisation”, according to Lloyd’s List.
Shipping companies will be unable to trade any surplus allowances during the initial phase of the ETS and will not be given any free allowances, according to Lloyd’s List.
If a company does not surrender allowances at the end of the year, they must pay an additional €100 per tonne fine for any carbon unaccounted for, and their vessels may also be denied future entry to EU member ports.
Based on the current price of EUAs of approximately €53 (US$63), the ETS will likely have on a limited impact on vessel earnings during the system’s infancy.
Indeed, a Kamsar to San Ciprian Panamax dry bulk carrier voyage would cost an estimated additional US$8,000, based on the assumption that the vessel would have to pay for 20% of its emissions in 2023 and assuming current EUA pricing.
However, costs will significantly increase by 2026, with the same voyage having theoretical additional costs of just under $40,000.
The real implications of the ETS for shipping will be dictated by the growth in cost of EUAs over the coming years with Bloomberg quoting EU analyst forecasts of the price of carbon allowances rising as high as €85 (US$100) by the end of the decade.
Japan, along with industry groups such as IMO, have strongly opposed the planned inclusion of shipping in the EU ETS, arguing a global market-based measure would be more difficult to achieve.
Moreover, shipping’s entrance could result in a regionalisation of the shipping industry, with more efficient vessels completing voyages to and from EU ports at higher rates.
Fuel EU Maritime Directive
Shipping’s entry into the EU ETS will be supplemented by a new Renewable Energy Directive from the Fuel EU Maritime regulatory body, entering force in 2025.
The regulation lays down rules to reduce the greenhouse gas (GHG) intensity of ships arriving at, within or departing EU ports. From 2025, a limit will be placed on a vessel’s maximum annual GHG intensity, based on a 2020 baseline.
This maximum limit will then be reduced progressively every five years. Failure to comply with the regulation will result in a penalty to be paid into a Marine Renewable and Low Carbon Fuels Fund.
Additionally, vessels will also have to pay a fixed penalty for each non-compliant port call. The penalty will be calculated by multiplying €250 by MW of power installed on board and hours spent at berth.
*Reproduced from “MONTHLY SHIPPING REVIEW” with the kind permission of SSY Consultancy & Research Ltd.
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