INSIGHT: How to Approach EU-ETS Compliance

The European Union’s emissions trading system for shipping is now in effect. File Image / Pixabay

The European Union's emissions trading system for shipping is now in effect, but many companies in this industry have yet to develop their compliance strategy.

As of January 1, the EU requires cargo and passenger ships over 5,000 GT in size to purchase emissions allowances (EUAs) covering the GHGs from their bunker consumption. The system will cover 100% of the emissions from intra-EU voyages, and 50% of those between the EU and elsewhere in the world.

A gradual phase-in has been agreed, meaning ships will pay 40% of the costs incurred in 2024, moving to 70% in 2025 and 100% in 2026.

The first deadline for EUAs to be surrendered -- for 2024's voyages -- is September 30, 2025.

Image Credit: Glander International Bunkering

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The Consequences of Non-Compliance

As always with any costly new regulation for the shipping industry, some companies may be tempted to try their luck with non-compliance, or may fall into it by default by failing to develop a strategy in time.

This would be a highly risky approach.

Three main consequences of non-compliance must be considered:

1. Companies that fail to surrender EUAs for the preceding year by the September 30 deadline will be forced to pay a €100 penalty per missed EUA, and will still be required to surrender the missing EUAs.
2. Ships may be detained at or denied entry to EU or European Economic Area ports, and may be expelled from the area altogether for two or more consecutive years of non-compliance.
3. Finally, there is significant reputational risk – the EU plans to publish a list of the names of companies failing to comply, which may result in a loss of business for those companies on the list. Access to credit and other services may become more difficult for companies revealed as not complying.

EUA price development

To calculate the cost of compliance, shipping companies need to monitor the market for EUAs.

At first glance, the trend here looks promising. Looking at the ICE EUA futures contract for December 2024, the price has almost halved in a year. The contract saw its peak last year on February 24, at €105.14/mt CO2e, and was down by 46.1% from this level at €56.63/mt CO2e as of February 14, 2024.

The sharp drop in prices has come about as a result of a weak European gas market, driven by a mild winter and low industrial activity on the continent.

These factors are all temporary, and an increase in prices on a similar scale to the drop since late 2022 could happen just as quickly. Hedging the price in the spring of 2024, while the market remains depressed, may be a good option to protect shipowners against a price rise later in the year.

The following table provides a comprehensive overview of the anticipated costs linked to emissions regulations in maritime transport within the European Union (EU), based on March's contract.

The calculations take into account CO2 emissions per metric ton of heavy fuel oil, EUA costs for VLSFO consumption during intra-EU voyages, and the combined bunker and EUA expenses. These estimates are derived from March's contract, incorporating the gradual phase-in, and assume constant VLSFO and EUA prices over the specified period.

Image Credit: Glander International Bunkering

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What Happens if You Wait?

While non-compliance is unlikely to be a mainstream option among shipping companies, a wait-and-see approach may prove more popular. However, it's essential to consider the broader market dynamics.

Each year, a limited number of EU Allowances (EUAs) is made available for trading, and this allocation is reduced annually as part of the EU's commitment to achieving a 55% reduction in GHG emissions by 2030 and reaching net zero by 2050.

This reduction in available allowances signifies a strategic move by the EU to drive emission reductions. Consequently, this yearly reduction can potentially lead to a shortage and thereby increase the EUA prices in the future.

The downward trend in the EUA market over the past year may encourage the wait-and-see attitude, with companies expecting to buy their allowances at a lower price if they wait.

While those who bought allowances for 2024 in Q4 of last year certainly paid more than those currently doing so, this strategy will also prove risky over the longer term.

As the September 2025 deadline approaches and more shipping companies flood into the EUA market to buy their allowances at the last minute, a significant price increase may emerge that could leave compliance costs much higher than for those who bought earlier.

Making the arrangements to buy EUAs and be in a position to surrender them is also not a quick task, and any failure to do so in time for the deadline will result in penalties, emphasizing the importance of a well-thought-out and timely compliance strategy.

Compliance Options

For shipping companies arranging EU-ETS compliance now, a range of options are available to them to reduce costs.

The first task is to determine who in the company will be responsible for the procurement, handling and surrender of EUAs.

The company will then need to determine its risk approach; will it wait until the last minute to buy EUAs, buy and hold in advance or hedge its position? Each option comes with its own advantages and disadvantages.

And the other side of this coin is for the shipping company to take as many measures as possible to reduce bunker consumption and thus reduce the need for EUAs.

Replacing bunker consumption where possible with biofuel blends will be an important part of this process, as these blends are now widely available and can be used in existing ships with little modification. Consuming these blends will also go towards compliance with the FuelEU Maritime regulation, which comes into force in 2025 and will require fleets to make low-carbon fuels take up a fixed percentage of energy consumption.

Energy-efficiency measures are also a consideration that may bring about significant savings. These could include vessel and bunker optimisation software, weather routing, anti-fouling technologies, bow and rudder modifications, air lubrication systems and wind-assisted propulsion.

Any technology that can reduce bunker consumption will play an important part in cutting
EU-ETS compliance costs.