EU ETS Reshapes the Maritime Trade

In a groundbreaking move set to reshape the maritime industry, the European Union’s Emissions Trading System (EU ETS) will extend its reach to include shipping from January 1, 2024. This marks a historic shift as carbon pricing is introduced to the maritime sector, with the consequential carbon tax becoming an integral component of voyage expenses, thereby affecting the entire maritime value chain by increasing the costs of doing business. 

Key to preparing for this transformative change is understanding how EU ETS will reverberate across the spectrum of stakeholders. According to EU regulations, the burden of compliance falls on the shoulders of the Shipping Company, which is obligated to surrender the applicable European Union Allowances (EUA) for the year 2024 latest by September 30, 2025. However, the EU stipulates that these shipping companies can claim reimbursement for incurred costs under the Polluter Pays principle, placing the responsibility on entities making decisions that impact the CO2 emissions of the ships. 

To illustrate the practical implications, let’s consider a hypothetical voyage from an EU port, Le Havre, to a non-EU port, Mina Abdulla, and then back to the same EU port, undertaken by a standard Eco LR2 vessel. Assuming an average speed and specific port conditions, the distribution of EUAs and their associated costs becomes a critical consideration. 

The total taxable EUAs based on an average EUA price of 90 euros, EUA costs amount to a substantial 90,450 euros. This cost burden is shared among the charterer, commercial operators, and the vessel owner (typically during off-hire conditions). Recurring costs stemming from EU voyages pose a considerable challenge for all involved parties. The allocation of EUA costs is contingent on the terms agreed upon in the Charter Party (CP), which may range from the more restrictive “Laden only costs on Charterers” to the more standardised “World Scale Round Trip.” 

Furthermore, any additional voyage claims arising from charterers’ instructions will trigger additional EU ETS EUA claims. In the new landscape shaped by EU-ETS, the question of ownership regarding the EUAs to be submitted by the shipping company emerges as a pivotal element. However, what remains evident is the obligation to reasonably allocate EUA costs across the voyage stakeholders is crucial to ensure that owners are duly reimbursed for the costs incurred during EU voyages. 

The inclusion of shipping in the EU Emissions Trading System (EU ETS) has brought about significant challenges for the maritime sector. Key roadblocks include the need for quality Emission Voyage Data, a robust carbon accounting system, and managing EUA price and timeframe risks. 

Owners are under constant pressure to recover EUAs promptly to reduce the risk of counterparty default. Contrary to expectations, the BIMCO ETS clause has faced criticism for its vague directive on charterers to “provide and pay,” lacking clarity on the payment process and price determination. 

Complicating matters, bureaucratic hurdles hinder shipping companies registered outside the EU from opening EU registry accounts, causing a scramble for essential information for ETS implementation. 

As the maritime industry navigates these uncharted waters, a strategic understanding of the implications of EU ETS becomes paramount for all stakeholders involved. The careful balance of meeting compliance requirements, Emission cost allocation and reimbursement within stakeholders and smart EUA procurement strategies will define the success of this new era in carbon pricing for the shipping sector. 

Getting ahead of the Emissions Curve 

As ships approach the EU under the ETS, effective management is crucial, but the ultimate goal is reducing emissions and transitioning to sustainable fuels for long-term cost reduction and alignment with maritime decarbonization. 

To stay ahead of the emissions curve, the industry seeks assurance through an emission service ensuring ETS compliance for stakeholders. Geoserve DMCC is currently at the forefront of the emission monitoring, and by integrating Voyage Performance and Emissions Services, provides an end-to-end Emission Management program. This involves precise emission monitoring, Charter Party based EUA distribution, and smart procurement strategies which are essential for mitigating EUA exposure and meeting emission management targets. 

In summary, the journey to EU ETS compliance in the maritime industry is complex. Streamlining processes and fostering collaboration among stakeholders are essential to successfully navigate the challenges presented by the EU ETS framework.