The European Union’s Emissions Trading Scheme (EU ETS) is setting a course towards a greener future for one of the oldest modes of transport - maritime shipping. The EU's requirement for ships in its waters to surrender EU Allowances to cover their relevant emissions will, for the first time, give a clear financial incentive for sustainable shipping practices on a level playing field. In this blog post, we will consider the who, what, why and when as well as discuss the implications of these changes and the potential challenges and opportunities that lie ahead.
At a glance
- Who? Shipowners or any other organisation or person, such as the manager or the bareboat charterer, that assumes the responsibility for the operation of the ship will become liable for the surrender of EU Allowances (EUAs).
- What? CO2 emissions from all ships of 5 000 gross tonnage and above will be covered by the surrender obligation. The rules require 50% of emissions from international voyages and 100% of intra-EU voyages and emissions in port to be covered.
- Why? Ships entering EU ports are required to account for their impact on climate change via the Greenhouse Gases that they are responsible for.
- When? Inclusion in the ETS will be gradual. 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%. EU Allowances will have to be surrendered by ship owners starting from September 30th 2025 in a number equal to the tonnes of CO2 from their ships that are included in the EU ETS (subject to % adjustment as set out above).
The Context
Maritime shipping has long been recognized as one of the major contributors to global greenhouse gas (GHG) emissions, accounting for about 1 billion tonnes, around 2.9% of the global total.1 The International Maritime Organization (IMO) forecasts that these emissions could grow from 2008’s level by up to 130% by 2050 if no targets are adopted. In the EU the maritime sector produced 124 million tonnes of CO2 in 2021 which represents between 3 and 4% of the EU’s total Greenhouse Gas (GHG) emissions.
Given the urgency of the climate crisis, the decision to include maritime shipping in the EU ETS is a significant move towards global pricing of GHG emissions due to shipping’s international nature. However, while many hail this as a crucial step to incentivise a sustainable maritime industry, it has also sparked concerns about competitiveness, implementation difficulties, and potential trade-offs.
Something about the EU ETS
The EU ETS is one of the most extensive greenhouse gas emissions trading systems globally, capping the emissions of more than 11,000 energy intensive installations in power generation and manufacturing industry. The EU ETS also covers all domestic flights in the EU as well as half of emissions between the EU and UK. Incorporating the maritime sector into this system signals a turning point. From 2024, ship owners and operators will be required to buy carbon permits that cover their CO2 emissions, creating a strong and clear economic incentive to reduce these emissions.
It is expected that this development will stimulate innovative technologies and practices, leading to improved energy efficiency, new technologies and the adoption of cleaner and renewable fuels, as it has done in the other covered sectors. It could also create new market opportunities for shipbuilders, equipment manufacturers, and technology firms that can offer fuel-efficient and low-emission vessels and systems.
The risks and costs
The path to a sustainable maritime industry is not without challenges. A total of nearly 12,000 ships had carbon emissions in EU waters in 2022, so in terms of individual emitters, it is a big increase in coverage of the EU ETS. Critics have pointed out that incorporating shipping into the ETS will lead to an increase in shipping costs, this is undeniable. Moreover, there's a potential for carbon leakage, where less efficient ships simply move to regions with less stringent regulations, or ships take less efficient routes to avoid Europe, thus undermining the overall emissions reduction effort.
The technical challenges of decarbonising ships, the lack of alternative fuels, and the long lifespan of vessels slow the pace of change. Therefore, alongside market-based measures like the ETS, supportive policies and R&D investments will be necessary to overcome these barriers. According to the European Commission, 20 million allowances (i.e. about €1.6 billion at a price of €80 per allowance) should be deployed up to 2030 via the Innovation Fund to support the decarbonisation of the sector.
The EU's decision to include maritime shipping in the ETS is a bold move towards mitigating the climate impact of this essential industry. It also sends a clear message to other regions and industries that GHG emissions reduction is a shared responsibility. On the plus side, by incentivising sustainable shipping via the EU ETS, the EU has actually sparked a race to the top that allows the shipping industry to play a crucial role in our global effort to combat climate change.
What ship operators will need to do
Most importantly, starting from 2024, shipping companies will be required to purchase carbon permits for their carbon emissions. The high level rules are as follows:
- Who? The shipowner or any other organisation or person, such as the manager or the bareboat charterer, that has assumed the responsibility for the operation of the ship.
- What? CO2 emissions from all ships of 5 000 gross tonnage and above. This means 50% of emissions from international voyages and 100% of intra-EU voyages and emissions in port.
- Why? Ships entering EU ports need to account for their impact on the environment.
- When? Inclusion in the ETS will be gradual. In 2024, ship operators will have a liability for 40% of emissions. In 2025 this will rise to 70%. In 2026 this will be the full 100%. EU Allowances will have to be surrendered by ship owners starting from September 30th 2025 in a number equal to every covered ship’s emissions (subject to % adjustment as set out above).
The most significant challenge faced by the industry as a whole is the cost of complying with the EU ETS. The main component of this cost is EUAs, the price of which can and does vary dramatically for a host of reasons ranging from further EU ETS regulatory changes to the relative cost of different carbon intensity fuels in the whole of the EU (i.e. not just in the shipping sector). Some of these changes are predictable, whilst others such as the war in Ukraine’s impact on gas prices are less so.
A second challenge is modelling emissions for any given route and procuring the right number of allowances to manage the risk. Some charterers are anxious that ship owners receive EUAs directly from them, and at the last minute before the compliance deadline, others just want to pay a fixed price for the additional cost, usually in US dollars, to be included in the overall charter cost. EUAs trade in Euros. Finding a competitive price for sometimes small numbers of EUAs (relative to typical transaction sizes in the wholesale EUA markets) can be another challenge.
One way out is to transition to low-carbon technologies and fuels to mitigate the cost of EUAs but it is a capital-intensive process and will take time.
Digital technologies and data analytics can help optimize vessel routes and speeds, significantly reducing fuel consumption and emissions. There are also a number of tools available to predict a given voyage’s emissions to assist with risk management, typically before a voyage is undertaken. The development and use of alternative fuels like hydrogen, ammonia, and biofuels can also substantially decrease the carbon footprint of ships but these are not currently widely available and not necessarily cheaper than buying EUAs. Use of directly connected electricity in ports is another way to reduce emissions, but this may not always be cheaper than burning fuel and buying carbon credits.
Another option is to start to manage the cost now, well-ahead of the first compliance deadline. A de minimis risk management strategy is to seek to understand the factors that influence EUA prices. This opens up the opportunity to buy ahead of need when a market opportunity arises. The EU’s carbon cap is on a trajectory to hit zero in 2050 which means that by buying EU Allowances now, companies can get ahead of price rises that are already forecast in the coming years.
Conclusion
With just a month to go, the maritime industry is now in a race against time to adapt to the new EU ETS regulations. This change is not just about compliance. It's about survival, growth, and reputation. Companies that effectively adapt to these changes will be more competitive, resilient, and better positioned to attract investment and customers. Choosing the right partner to guide you through the change can save time and money.
About Redshaw Advisors
Our team of experts have weathered every storm in the EU ETS, and there have been many over the last 20 years that we’ve been involved in carbon markets. As they say in the world of seafaring, a smooth sea doesn’t make a skilled sailor. Please get in touch to find out how we empower companies with the tools and knowledge to manage their environmental market risks.
1 Figure represents 2018’s emissions
