September 21, 2022
Shipping’s inclusion in the European Union’s Emissions Trading System (EU ETS) will bring carbon pricing to the maritime sector for the first time and the cost will eventually be added to the charterer's freight rate. One way to prepare, is by understanding what the EU ETS means to the charterer.
Updated: December 19, 2022
The European Union Emissions Trading System is a cornerstone of the EU's policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively.
The EU Emissions Trading System (ETS) today:
The EU ETS works on a cap-and-trade principle. A cap is set on the total amount of certain greenhouse gases that can be emitted in the system. The cap is reduced over time so that total emissions fall. Within the cap, installations buy or receive emissions, which they can trade with one another as needed.
An EU allowance, or an EUA, is a permit to emit 1 tonne of carbon dioxide or its equivalent (CO2e). The European Energy Exchange (EEX) lists the EUA spot market price.
In July 2021 the European Commission presented a large revision of the ETS directive and the inclusion of shipping was one of many major amendments. Since then, the European Parliament and the Council of the European Union have suggested several amendments to the Commission's proposal to include shipping in its carbon trading scheme.
Mid December, EU institutions managed to come to a agreement on how to reform the European Union's Emissions Trading System (EU ETS). From the charterer's perspective these are the most important takeaways:
The agreement still needs to be officially approved before entering into force.
See updated list according to EU legal developments
Speeding up the inclusion of shipping in the EU ETS will also speed up commercial decabonisation
The added carbon cost from the inclusion of shipping in the EU ETS will eventually be included in the freight rate. Some shipowners warn that the cost of complience with the EU ETS will be included in the freight rate from 2023.
Shipping might be a minor part of the charterers’ everyday work, but emissions from shipping have the potential to highly influence freight rates. At a rate of EUR 90/tonne CO2 the added carbon cost of an internal EU voyage in the MR segment would be roughly EUR 70 000.
Charterers could choose to wait and see what happens and then accept the added cost, or they could be proactive and harvest the possibilities that lie within factoring carbon into your commercial decisions.
Want to know more about making shipping emissions your competitive advantage? Read our article Charterers can kickstart the commercial decarbonisation of shipping.