From 1 January 2024, the European Union’s Emissions Trading System (EU ETS) will be extended to cover ships over 5000 GT transporting within the European Economic Area (EEA). The change will increase the cost of delivering shipping contracts, while there are also monitoring, evaluation and verification requirements placed on the companies responsible for these emissions.
Too many companies are focussed on a far later date – 30 September 2025 – which is the date by which they must surrender sufficient allowances to cover their emissions incurred in 2024. However, there is much to do before this date to ensure that reporting, contracts, and the purchase of allowances are carried out in a correct and cost effective manner.
The penalties for getting this wrong are severe. Companies that fail to surrender allowances are subject to an excess emissions penalty, which is currently €100 per tonne of CO2 equivalent. They are still liable for the surrender of the allowances as well. There is also a reputational risk, as the names of penalised companies are disclosed to the public.
Preparation will also help your company have the correct contracts in place with maritime counterparties, allowing you to renegotiate contracts to include the cost of emission allowances as well as employ strategies to cover the cost of purchasing allowances, which may include derivatives and hedging strategies.
Here are 5 things you should be doing to ensure you are ready for this monumental change:
1. Apply for the right accounts and registrations
Every shipping company that falls under EU ETS from 1 January 2024 – that is those operating ships of over 5000 GT transporting cargo and passengers for commercial purposes with port calls in the EEA – must be registered with an administering authority, and this is where they will need to surrender allowances that correspond to their emissions.
If your company is registered in an EU member state, your administering authority will be the member state where you are registered. If not, it will be the EU member state with the greatest estimated number of port calls in the last four years.
There will be a full list matching shipping companies with administering authorities published by the EU by 1 February 2024.
Once you know your administering authority you will need to complete the operator holding account application in the Union Registry to surrender the allowances.
You must open a holding account within 40 days of the list of administering authorities being published at the beginning of 2024.
You will also need to register for Thetis MRV, as this system will be used to report all emissions regardless of monitoring authority.
2. Prepare for further monitoring and find a verifier
As well as carbon emissions, from January 1 ship owners must monitor and report methane (CH4) and nitrous oxide (N2O) emissions, although they do not have to pay for these emissions until 2026.
This means revising monitoring plans for each ship, and these must be verified by an independent verifier and submitted them to the administering authority by 1 April 2024.
3. Go through existing contracts and incorporate ETS costs into new ones
EU guidance is clear that the shipowner/operator is responsible for ETS, but many companies will want to pass the cost on to their clients, both existing and new. This may mean the renegotiation of existing contracts as well as the need for new contracts to contain clauses about how the increased costs will be borne and at what stage in the process.
Whatever way you choose to pass on costs, you will need to bear in mind that ETS costs will be phased in gradually. From 2024, ship operators will have a liability for 40% of their included emissions. In 2025 this will rise to 70%. In 2026 this will be the full 100%.
4. Consider purchasing and de-risking strategies
Shipping companies will have to purchase EU Allowances (EUAs) to surrender against their CO2 emissions. These are the same type of allowances as used by industry, aviation and the power sector, and there are several ways to buy them.
While you can buy them at a auction cleared price through European Energy Exchange auctions, the most common source of EU Allowances is the secondary markets where the price fluctuates due to supply and demand.
Shipping companies may want to consider several strategies to minimise exposure to fluctuating EUA prices including hedging against predicted rising costs
5. Find a good adviser
Getting ready for this huge change requires a lot of preparation, and advice on carbon pricing, risk management and the financial implications of procuring the required amount of EUAs could help you to negotiate these choppy waters successfully.