Europe's Emissions Trading Revolution for Shipping is One Month Away

The EU is starting to charge the shipping industry for its GHG emissions. File Image / Pixabay

One month from today, shipping faces the first large-scale attempt to charge it for its greenhouse gas emissions.

Shipping will enter the European Union's emissions trading system on January 1, forcing operators to buy allowances to cover a percentage of their voyages to and from Europe's ports.

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 this year.

The regulation covers all ships over 5,000 GT in size trading in Europe, with those on voyages between EU and non-EU ports only paying for 50% of the emissions generated on the voyage. Emissions are calculated using the EU-MRV system as the basis.

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

Paying the Bill

The current cost of European Union allowances (EUAs) is about EUR72/mtCO2e ($78.34/mtCO2e). With around 3.15 mt of CO2 emissions produced per mt of fuel oil consumed, this would give an EUA cost of about $99/mt for an intra-EU voyage in 2024, $173/mt in 2025 and $247/mt in 2026.

These EUAs for each year must be surrendered by September 30 of the following year, meaning September 30, 2025 will be the first deadline for 2024's figures.

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

But much will depend on how the EUA market responds to 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.

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.