Will the EU ETS reshape the shipping industry?

ABS’ Georgios Plevrakis handles the numbers on what owners will have to pay in Brussels by ship type once new EU emissions legislation comes into force.

If, as expected, the European Council votes to formally extend the European Emissions Trading Scheme (ETS) to maritime transport from 2023, then the maritime industry will have a first glimpse of what an economy will look like. low carbon.

Although a regional regulation, the EU ETS will have a significant impact on international shipping to the EU as well as intra-EU trade. This will initially drive up costs for shipowners and usher in a carbon market that could partly reshape ship financing and operations.

While the long-term effects should be positive for the environment, the establishment of a carbon market in the maritime sector creates as many challenges as opportunities. Despite its seemingly European orientation, the ETS should not be ignored.

Applicable to all ships of 5,000 gross tons and above, the EU ETS will put a price on carbon and lower the cap on emissions each year. Part of the EU’s ‘Fit for 55’ package, its aim is to bring the ETS in line with the bloc’s ambition to achieve a legally binding net emissions reduction target of 55% by 2030.

Shipping is about to get its first glimpse of what a low-carbon economy will look like

The ETS makes the party responsible for operating the vessel under the ISM code responsible for its CO2 emissions. The scope of the ETS extension includes 50% of emissions from ships arriving and departing from EU ports on international voyages.

Maritime transport will be gradually integrated into the ETS from 2023, with fuller inclusion by 2025. During the first three years of operation, carbon will not be traded; the ETS will effectively be a tax on ship emissions. In year one, the owner will have to surrender allowances equivalent to one-third of verified emissions, rising to two-thirds in year two and 100% by 2025.

Penalties include fines and blacklisting of vessels imposed on shipping companies for non-compliance.

To understand the impact of the ETS, ABS modeled a representative kamsarmax bulk carrier, calculating the direct impact of carbon emissions, fuel carbon intensity and consumption for domestic voyages, outside and inside European ports as part of the phased adoption from 2023 to 2025.

For this vessel using conventional marine fuel, the owner would be required to surrender allowances equivalent to EUR 330,000 ($364,000) in the three years to 2025. In the absence of carbon trading, emissions are a calculation simple based on MRV data rather than a variable amount.

The obvious challenge is that shipowners, especially operators of small fleets less able to implement energy efficiency measures or consolidate or aggregate a fleet’s emissions, may see their operating costs rise sharply.

For an operator of a CII high-performance VLCC using conventional fuel, the ABS analysis estimates that owners could be called upon to return EUR 340,000 by 2025, a level similar to that of a large LNG carrier. The operator of a CII high-performance 14,000 TEU container ship could be liable for €0.7 million in allowances by the end of 2026.

The situation is further complicated by the closely related program FuelEU Maritime. Designed to accelerate the decarbonisation of the maritime industry through renewable and low-carbon fuels and technologies, it will apply a reduction in GHG energy intensity based on targets from 2025.

An additional complication has been created in that FuelEU Maritime uses a sink-to-wake or life-cycle assessment methodology to measure the carbon intensity of fuels from production to consumption, whereas the EU ETS uses currently the “wake tank” currently used by IMO.

Under FuelEU Maritime, the previously modeled kamsarmax, if fueled with methanol or HFO, would start incurring penalties immediately, but only from 2035 if it used dual fuel/LNG. If the VLCC is similarly powered by dual-fuel/LNG, it would only start incurring penalties around 2035, while dual-fuel methanol and HFO would fall into the deficit range. Similar performance is expected for the 14,000 teu container ship powered by dual-fuel/LNG.

Fines due under Fuel EU represent a GHG intensity limit that tightens over time and could represent significant additional investment costs; failure to meet Fuel EU requirements could result in up to €1.5 million in penalties by 2040. However, FuelEU Maritime allows for carbon intensity pooling, which means owners can average a fleet’s emissions and protect themselves by borrowing next year’s intensity allowances to offset shortages.

For larger fleet operators, each year of overspending is an opportunity to offset their larger carbon footprint, pool efforts across their entire fleet, or even consolidate operations with smaller owners for whom the regulatory burden is too onerous.

Cash-rich homeowners have already invested in renewables to provide similar income and offset opportunities. Once the EU ETS becomes fully tradable, new opportunities will open up in financial markets and ship financing, as well as in the new carbon and hydrogen markets that will develop as regulation and market forces will drive the decarbonized maritime economy.