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Extension of the European Union’s emission trading system will bring massive change to the shipping industry and there is a long to-do list for companies, says Friederike Hesse, co-founder and managing director of the German CO2 management startup zero44. The EU ETS will require shipping companies to surrender allowances for 40% of verified emissions for 2024; 70% for 2025; and 100% for 2026 and beyond. As part of the ETS, all emissions emitted by vessels calling at an EU port for voyages within the EU, as well as 50% of emissions from voyages that start or end outside the EU, and all emissions at berth in EU ports, will be included. According to Hesse, emission trading entails a slew of responsibilities. Affected shipping companies need to open a compliance account within the Union Registry (the European Commission’s official accounting structure for the ETS - a subsection of the Kyoto Protocol’s global CO2 registry). They need to link this account to their MRV-verifiers account and then make sure that it holds the number of allowances matching the emissions reported by the end of 2024, according to the preliminary agreement. To acquire the allowances, companies must either collect them from their charterers (as BIMCO has proposed in their time charter proposal for the ETS) or buy them via an intermediary at EEX (the Leipzig based stock exchange that handles the official ETS auctions) or find a trading partner to acquire them on the secondary market. Hesse finds that each of these options comes with challenges: When a shipping company receives allowances from its charterer and the emission data has not been verified yet, this is a problem because neither the charterer nor the shipping company can know the right number of allowances. Another challenge is to keep an overview of the charterers who have already submitted allowances.When buying allowances at an EEX auction, timing is crucial. Prices have fluctuated between €60 and €100 this year and are expected to rise significantly in the future. Which raises the question for shipping companies as to when exactly they should start buying. Now, or rather later?Timing is also important when it comes to looking for trading partners: Shipping companies should start to screen the options now. The variety of potential trading providers is large: banks, brokers, commodity traders, technical managers and other service providers are currently preparing their offerings. All come with different service levels and price points. Hesse stresses that these challenges need to be addressed fast; otherwise, the EU ETS will be a serious financial threat to companies. "Apply an average market price of EUR 80 per ton of CO2 to a handysized bulker, 10 years old, with average annual emissions of 16,000 tons CO2: that is €1.3m of additional costs. Even 40% of that in the first year is still a lot of money," she points out. Managing EU ETS will require shipping companies to make smart business decisions like which vessels to send to Europe from 2024 on, or whether to avoid EU waters altogether, Hesse asserts, adding that companies must also find out if their current charter agreements allow for these kinds of decisions. Zero44 was set up in January of this year as a third spinoff of Flagship Founders, the Berlin-based founding partner for startups focused on maritime technologies, logistics and shipping. The software company, meanwhile, secured investment from Innoport, the venture capital unit of the Schulte Group, and is providing its software solutions to Oslo-listed boxship owner, MPC Container Ships. Hesse, who studied economics at the University of St. Gallen in Switzerland and also holds a Master of Public Business Administration from Harvard University, previously served as COO at German real estate firm Homeday, where she was responsible for building up the sales organisation and digital customer service processes, and was thus able to gain extensive experience in the digitalisation of a previously rather traditional industry. For her, the shipping industry has made a lot of progress with digitisation recently but EU ETS calls for another significant leap forward since emission data needs to be tracked digitally and shared automatically with charterers. Moreover, the purchase and transfer of allowances should be observed and transferred with dashboards, and voyages, their emissions and ETS need to be predicted - in order to compare vessel deployment options and to agree on cost splitting in the charter agreement. She believes digital tools can help commercial teams handle the new complexity and understand the EU emissions before they occur and while the business is adapting to the new regulation. Zero44’s software includes an EU ETS trading and compliance package that is said to offer companies the tools to manage the upcoming compliance challenges from trading the EU’s carbon credits. The company has also developed a CII tool that enables commercial teams to assess the impact of a chartering decision on the CII rating with a smart voyage calculator. Commenting on its recent investment in zero44, Bernhard Schulte Innoport said: "We believe that zero44 is going to play an important role in allowing smaller and medium-sized companies to comply with CII and EU ETS. While the very large market players can make use of existing organisational structures to decrease their financial and compliance burden, small and medium-sized players will depend on smart all-in-one solutions like zero44."

Digital solutions for shipping’s EU ETS challenge

Shipowners will need to get their heads around complex European emissions rules coming in soon.

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