What is EU-ETS?

The EU-ETS, or European Union emissions trading system, is an EU-wide carbon emission trading scheme that has been in place since 2005 and applies to a number of energy intensive sectors.

It has been expanded to cover the shipping industry from January 1, 2024.

The system is the first large-scale attempt to charge shipping for its carbon emissions, and in time is expected to be a more revolutionary change than the IMO 2020 regulation that brought in a 0.50% global sulfur cap on bunker fuels.

The plan was originally announced in July 2021 as part of the 'Fit for 55' package of decarbonisation measures designed to help the EU meet its 55% GHG emissions cut target from 1990's levels by 2030, and was confirmed in the summer of 2023.

What Does the Regulation Mean for Ship Owners?

From January 1, 2024, all ships over 5,000 GT in size trading within the EU will have to pay for the emissions they generate.

Ship owners will have to pay for 100% of the emissions generated on voyages within the EU, and for 50% of the emissions generated on voyages between EU and non-EU ports.

Emissions are calculated using the EU-MRV system as the basis.This is a system for ships on voyages to, from and within the EU to monitor their fuel consumption data and submit it to the authorities on an annual basis.

The system is being phased in gradually, meaning ship owners pay 40% of the costs incurred in 2024, moving to 70% in 2025 and 100% in 2026.

Under the new rules it is the ship owner that is the 'responsible entity' and liable to pay for the emissions. However, the rules also give ship owners rights to claim the cost of conpliance from the charterers / operators of their vessels.

What is the Cost and How do I Pay?

To pay for the emissions generated, ship owners need to buy and then 'surrender' EU Allowance's (EUAs). One EUA covers the emission of one metric ton of CO2 or equavalent. The price of an EUA is quoted in terms of Euro's per metric tonne of CO2 equivalent (mtCO2e).

EUAs can be bought on exchanges such as ICE, or on the over-the-counter (OTC) market.

As of December 12, 2023, the cost of one EUA was about EUR70/mtCO2e ($75.26/mtCO2e).

At this price, and with 3.114 mt of CO2 emissions produced per mt of heavy fuel oil burned, it would mean an EUA cost of about $94/mt of bunker fuel burned for an intra-EU voyage in 2024, $164/mt in 2025 and $234/mt in 2026.

Costs for voyages between EU ports and other parts of the world would be about half these amounts.

EUAs are a financial instrument that can be bought and sold at any time. To 'pay' for the emissisons generated a ship owner 'surrenders' the appropriate number of EUAs.

When Do Ship Owners Have To Pay for Their Emissions?

Ship owners must surrender EUAs to cover the total emissions generated in a calendar year by September 30 of the following year.

The first payment dealine for ship owners is therefore September 30, 2025, which will cover emissions in 2024.

What Will Be the True Cost to Ship Owners and Operators?

The cost of EUAs fluctuate under the normal pricipals of supply and demand, so much will depend on how the EUA market responds to the new demand from shipping.

The amount of EUAs in existence is fixed, with a decline forced each year as part of the regulation, and the price could start to rise significantly as shipping enters this market.

Front-month ICE EUA futures have ranged between EUR68.64/mtCO2e and EUR100.34mtCO2e in price in 2023.

As of December 12, 2023, the price of the ICE EUA futures contract stood at EUR71.72/mtCO2e for December 2024, EUR74.47/mtCO2e for December 2025 and EUR77.36/mtCO2e for December 2026.

A key question is when the shipping industry will start to buy its EUAs in earnest; if it does so early in 2024, the price could rise rapidly, but many could also wait until much closer to the September 2025 deadline to do so. Those that delay risk paying a higher price for their allowances.

How Will the Money Be Spent?

The question of how the money raised through shipping's EU-ETS inclusion is a controversial one.

The measure has been seen in some quarters as something of a tax-grab by the EU; by raising revenues from 50% of the emissions generated in all global voyages reaching EU ports, the EU is imposing a significant financial burden on the global economy, rather than just its regional industries.

The European Commission has said that EUR1.6 billion will be invested via its Innovation Fund from EUA revenues into maritime decarbonisation by 2030.

The rules of the ETS also require EUA auction revenues directly allocated to member states to be used only for climate-related purposes, under which category maritime decarbonisation projects can be included.

But many in the industry would prefer all EU-ETS revenues from shipping to be used directly to subsidise the uptake of alternative fuels, helping to narrow the price gap between zero-carbon options and conventional bunkers.

The Effect

The effect of the regulation could be profound.

Engineering firm Yara Marine Technologies has suggested the EUA cost could end up at more than half the cost for bunkers on intra-EU voyages, once the regulation has been phased in and as EUA prices rise.

The most immediate effect will be to add to the impetus to invest in any technology that can help reduce bunker consumption.

Wind-assisted propulsion, weather routing, anti-fouling measures, voyage optimisation software, air lubrication systems and other similar technologies will all become more cost-effective once an EUA saving is added to the bunker savings generated by them.

That, in turn, will reduce conventional bunker sales over time, in particular at European ports or those nearby.

Sales of biofuel bunker blends and green fuels can also be expected to rise over time in response. Both of these alternatives are rated at zero CO2 emissions for the purposes of the EU-ETS.

Finally, changes in shipping activity may start to emerge as companies start finding ways of avoiding EU-ETS costs. Larger ships may start calling at ports near the edge of the EU, to transfer cargoes to smaller ships for smaller voyages for the final part of the journey into EU ports; this would save the bulk of the overall voyage being eligible for EU-ETS costs.

This may bring some benefits in terms of bunker sales to these ports on the outside of the EU, at the expense of EU ports.