⊗

The European Union is taking matters into its own hands when it comes to shipping decarbonisation, tired of waiting for global regulator, the International Maritime Organization (IMO), to get its act together. To achieve its 2030 goal of reducing emissions by at least 55%, the European bloc is revising its climate, energy and transport legislation under the so-called Fit for 55 package. The proposed reforms include several shipping measures, ranging from a sustainable fuel mandate within the EU to the inclusion of maritime emissions in the bloc’s emissions trading scheme (ETS) which is the largest multi-country, multi-sector greenhouse gas emissions trading system in the world. The specifics of the new rules The EU plan will include shipping emissions in the bloc’s ETS from 2023 for all ships above 5,000 gt. When the measure comes into force, shipowners, regardless of the flag they fly, will have to buy carbon allowances to cover all emissions during voyages in the EU and half of those generated by international voyages that start or finish at an EU port. Unlike previously included sectors, shipping would receive no free allowances, but, instead, would have a three-year phase-in period in which not all emissions would have to be covered by allowances. During the first three years of operation, carbon will not be traded; the ETS will effectively be a tax on vessel emissions. The first year will require the owner to surrender allowances equivalent to one-third of verified emissions, increasing to two-thirds in the second year and 100% by 2025. Smaller shipowners may find their operational costs increase sharply Despite being a regional regulation, the EU ETS will have a far reaching impact on international shipping sailing to the EU as well as on intra-EU trade. The geographic scope covers 100% of emissions from intra-EU voyages and time spent at berth in an EU port, as well as 50% of emissions from both inbound and outbound voyages to and from the EU. According to France’s Vertis Environmental Finance, the new rules will impact around 11,500 ships and cover around 140m tonnes of CO2. The EU ETS will cover 10-15% of international shipping emissions, according to Transport & Environment, a Brussels-based thinktank. The costs involved Georgios Plevrakis, vice president of global sustainability at US class society ABS, says the impending EU ETS will be the shipping’s “first taste” of what a low carbon economy will look like. It will initially see costs rise for shipowners and will usher in a carbon market that could partly re-shape vessel financing and operations, Plevrakis reckons. The ETS makes the party responsible for the operation of the ship under the ISM Code liable for its CO2 emissions. Penalties include fines and blacklisting of vessels levied against shipping companies for non-compliance. Emission allowances - often abbreviated as EUAs - are extremely volatile and failure to surrender allowances will result in a penalty of EUR100 per tonne of CO2 increased by inflation. To understand the impact of the ETS, ABS modelled a representative kamsarmax bulk carrier, calculating the direct impact of carbon emissions, fuel carbon intensity and consumption for voyages in, out and within European ports under the phased adoption from 2023 to 2025. We need to stop chasing all these illusions that everybody will have a completely level playing field For this vessel using conventional marine fuel, the owner would be required to surrender allowances equivalent to EUR330,000 ($364,000) in the three years to 2025. With no carbon trading taking place, the emissions are a straightforward calculation based on MRV data rather than a variable amount. “The clear challenge,” says Plevrakis, “is that shipowners, especially operators of smaller fleets less able to implement energy efficiency measures or to consolidate or pool emissions across a fleet, may find their operational costs increase sharply.” For an operator of a VLCC with high CII performance using conventional fuel, ABS analysis estimates that the owners could be called upon to surrender EUR340,000 by 2025, a similar level to that for a large LNG carrier. The operator of a 14,000 teu containership with high CII performance could be liable for as much as EUR0.7m in allowances by the end of 2026. FuelEU Maritime complications The situation is further complicated by the closely related FuelEU Maritime programme. Designed to accelerate the maritime industry’s decarbonisation through renewable and low-carbon fuels and technologies, it will apply goal-based reduction of GHG energy intensity from 2025. A further complication has been created in that FuelEU Maritime employs a well-to-wake or lifecycle assessment methodology to measure the carbon intensity of fuels from production to consumption, whereas the EU ETS at present employs the ‘tank-to wake’ currently used by IMO. While FuelEU Maritime looks at all greenhouse gases and the entire fuel value chain, ETS only looks at the greenhouse gas CO2, and only at emissions during actual combustion. In FuelEU Maritime, the total climate footprint of extraction, refining, distribution and finally combustion is assessed, while the climate calculation for ETS is simpler. The EU's good intentions of reducing greenhouse gas emissions from shipping could be hampered by two measures that interact poorly with each other, argues Maria Skipper Schwenn, director of climate, environment and security at Danish Shipping. "Both tools will reduce greenhouse gases, but if they are to function optimally and contribute to the most effective reduction, the two bills must be adjusted so that they fit better together," she says. Under FuelEU Maritime, the previously kamsarmax modelled by ABS if powered by methanol or HFO would start incurring penalties immediately but only from 2035 if using 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 fall into the deficit range. Similar performance is expected for the 14,000 teu containership powered by dual fuel/LNG. The fines due under Fuel EU represent a GHG intensity limit that tightens over time and could represent significant additional capital costs; non-compliance with the requirements of Fuel EU could add up to EUR1.5m in penalties by 2040. However, FuelEU Maritime allows pooling of carbon intensity meaning owners can average emissions across a fleet and hedge by borrowing intensity allowances from next year to compensate for shortages. Undermining IMO’s global authority? The EU’s decision to go it alone and splinter the global green governance of shipping has attracted sharp criticism from many shipping bodies. In an uncharacteristically strongly worded missive from the Asian Shipowners’ Association (ASA) late last year, the Singapore-headquartered organisation said it was not in favour of any unilateral or regional regulation of international shipping that may undermine the authority of the IMO. ASA said it believes the application of the EU ETS to non-EU flag ships is essentially an extraterritorial tax when the EU needs to encourage global trade, not create new barriers. Furthermore, ASA said other nations around the world might follow, applying their own carbon charges to international voyages, which originate or terminate at ports outside their territory, “creating chaos and fragmentation of the global maritime regulatory framework”. China, the US, Canada and the UK are all believed to be watching the EU’s ETS move closely with a view to possibly replicating similar measures in the coming years. Rolf Habben Jansen, the CEO Hapag-Lloyd, speaking at the Shaping the Future of Shipping conference on the sidelines of COP26 in Glasgow last November, told delegates: “We need to stop chasing all these illusions that everybody will have a completely level playing field and that there will be only one set of rules around the globe.” Whose responsibility? The impact of the next wave of regulation and where responsibility will ultimately fall when it comes to emissions and implications such as carbon taxation remains to be seen, Kishore Rajvanshy, the managing director of Fleet Management, tells Splash Extra. Rajesh Unni, the founder of Synergy Marine Group, reckons regulators and flag states will look to the holders of the Document of Compliance (DOC) - the shipmanager - to ensure compliance with any upcoming regulation, something also picked up by Jianfeng Zhou, the managing director of Wah Kwong Maritime Transport Holdings, who specifically picks up on the upcoming EU ETS in which the manager as the DOC holder will be responsible for reporting and settling payment for the emission allowance, of which the cost would then be passed down to owners or charterers accordingly. Carl Schou, the president of Wilhelmsen Ship Management, is concerned by the EU ETS where the responsible person for carbon tax does indeed look like it will be the DOC holder. The shipmanagement model is based on a service on behalf of owners and charterers, he points out. Internally, Wilhelmsen has got its legal team to assess the risk and steps ahead on how the company can manage this moving forward. The burden for complying with regulations concerning atmospheric emissions will ultimately fall on the shipowner, argues Wallem Group CEO John-Kaare Aune. In this case, the manager’s role, according to Aune, will be to support owners in choosing the solutions that allow their vessels – the ships of the future – to achieve compliance while best serving their operational needs.

Shipping’s first taste of what a low carbon economy will look like

All you need to know about the impending addition of shipping into the European Union’s emissions trading scheme.

⊗

To continue reading, please login below or subscribe here.

Read Next

Costs for armed guards onboard rocket

Reining in black swans

March 2024 Review

March’s tanker rollercoaster

A sense of euphoria sweeps through dry bulk

Costs for armed guards onboard rocket

Reining in black swans

March 2024 Review

March’s tanker rollercoaster

A sense of euphoria sweeps through dry bulk

Maritime CEO Forum Singapore

Maritime CEO Forum Monaco

Advertising

Press Releases

Splash

Splash Extra

Splash Special Reports