Will the EU ETS reshape the maritime industry?

Georgios Plevrakis from ABS runs the numbers on what owners will have to pay Brussels per ship type once new European emissions legislation kicks in.

If, as expected, the European Council votes to formally extend the EU Emissions Trading System (ETS) to shipping from 2023, then the maritime industry will get its first taste of what a low carbon economy will look like.

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. It will initially see costs rise for shipowners and will usher in a carbon market that could partly re-shape vessel financing and operations.

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

Applicable to all ships of 5,000 gross tonnes and above, the EU ETS will put a price on carbon and lowers the cap on emissions every year. A part of the EU’s ‘Fit for 55’ package, its purpose is to align the ETS with the bloc’s ambition to reach a legally-binding 55% net emissions reductions target by 2030.

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

The ETS makes the party responsible for the operation of the ship under the ISM Code liable for its CO2 emissions. The scope of the ETS expansion includes 50% of emissions from vessels arriving at and departing from EU ports on international voyages.

Shipping will be phased into the ETS from 2023, with more comprehensive inclusion by 2025. 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.

Penalties include fines and blacklisting of vessels levied against shipping companies for non-compliance.

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.

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 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.

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.

Under FuelEU Maritime, the previously modelled kamsarmax 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.

For operators of larger fleets, every year they spend in surplus is an opportunity to offset their wider carbon footprint, pool efforts across their fleet or even consolidate operations with smaller owners for whom the regulatory burden proves too onerous.

Cash-rich owners have already made investments in renewable energy to provide similar revenue and offsetting opportunities. Once the EU ETS becomes fully tradable, further opportunities open up in financial markets and ship finance, as well as in the new carbon and hydrogen markets that will develop as regulation and market forces drive the decarbonised maritime economy.

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