Starting on January 1, 2024, the EU Emissions Trading System (ETS) will include shipping, marking a significant step towards reducing greenhouse gas emissions in the maritime industry. This system requires ship operators to monitor and report their emissions, purchasing allowances for every ton of CO2 emitted. The goal is to incentivize the reduction of greenhouse gas emissions and promote sustainable practices in the maritime industry.
Role of New Ships
New ships are set to play a pivotal role in the EU Emissions Trading System (ETS) by adopting greener technologies and fuels to minimize emissions. Innovations such as energy-efficient designs, alternative fuels like hydrogen or ammonia, and advanced emission control systems will be essential. These measures not only help in reducing the carbon footprint but also in complying with ETS regulations, potentially lowering the cost of carbon allowances.
The current containership orderbook is the largest ever in terms of TEU capacity, highlighting the industry’s commitment to fleet renewal and sustainability. The top 10 ocean carriers have 431 container ships on order, totaling over 5.9 million TEU. This surge in newbuilds, driven by record LNG carrier orders, has impacted shipyard capacities across Asia, pushing out tankers and dry bulk orders. Despite the significant growth in the global container fleet, nearly half of the new ships ordered by the top 10 liners will replace aging vessels, with 683 ships aged 20 years or older still in operation. This replacement strategy underscores the industry’s focus on modernizing fleets to meet environmental standards and improve efficiency.
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 obliged 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.
- 100% of emissions from voyages between EU ports.
- 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 transshipment activities moving outside the EU. To mitigate this, the law specifically targets non-EU ports near the EU with a high share of transshipment. 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 represents a notable change in the regulatory landscape for the maritime industry. It introduces financial mechanisms aimed at reducing greenhouse gas emissions and encouraging 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, this requirement will increase, continuing to phase in until full compliance is achieved.
Average Cost
The cost of compliance with the EU ETS will vary based on the market price of carbon allowances. As of October 2024, the price of carbon allowances under the EU Emissions Trading System (EU ETS) is approximately $63 per ton of CO2.
The cost of compliance with the EU ETS will indeed vary based on the market price of these allowances, which can fluctuate due to various factors such as market demand, regulatory changes, and economic conditions
Shipping companies will likely pass these costs on to customers through a surcharge known as the “Emissions Surcharge.”
To understand the impact on individual customers, let’s consider a hypothetical scenario. If a shipping company emits 1,000 tons of CO2 for a particular voyage, the cost of carbon allowances at $63 per ton would be $63,000. If this cost is distributed among 1,000 customers, each customer would incur an additional $63 surcharge. As the price of carbon allowances increases to $116 per ton by 2030, the same voyage would cost $116,000, resulting in a surcharge of $116 per customer. This simplified example illustrates how the cost of carbon allowances can directly affect shipping costs for consumers.
The EU Emissions Trading System (EU ETS) is unlikely to be rolled back entirely due to competition concerns. However, adjustments are being made to address economic needs and protect industries from carbon leakage, where businesses transfer production to countries with less stringent climate policies. These adjustments aim to maintain the EU’s climate ambitions while mitigating the economic impact on its industries.