EU ETS – what does it mean to the charterer?

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. Some decisions are still pending but the cost will eventually be added to the charterer's freight rate. One way to prepare, is by understanding what the ETS means to the charterer.

The EU Emissions Trading System (ETS) is a cornerstone of the EU's policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively. In July 2021 the European Commission presented a large revision of the ETS directive and the inclusion of shipping from 2023 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 and the Parliament is pushing for a faster and wider implementation. Below we summarise the Commission’s original proposal and the changes suggested by the Parliament.

The EU Emissions Trading System (ETS) today:

  • Today the system operates in all EU countries plus Iceland, Liechtenstein and Norway,
  • limits emissions from around 10 000 installations in the power sector and manufacturing industry, as well as airlines operating between these countries,
  • covers around 40 % of the EU’s greenhouse gas emissions.

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.

Including shipping in the EU ETS

The European Commission’s original proposal

Shipping is to be in incorporated into the EU ETS from 2023. Shipping companies will have to purchase and surrender one EU allowances (EUA) per tonne of CO2 emitted from ships of 5000 gross tonnes and above. The scheme covers

  • 100 % emissions from intra EU voyages (ships operating between EU ports)
  • 100 % of emissions at berth in EU ports
  • 50 % of emissions from extra-EU voyages (incoming and outgoing global EU voyages)

Emissions from shipping will be phased-in, meaning that shipping companies would be required to hand in allowances according to the following schedule.

  • 20 % of verified emissions reported for 2023
  • 45 % of verified emissions reported for 2024
  • 70 % of verified emissions reported for 2025
  • 100 % of verified emissions reported for 2026 and each year thereafter

The responsible entity under the EU ETS is “the shipping company” and emissions costs could be passed on to the charterer.

The Parliament’s more ambitious plan for EU ETS and shipping

In June 2022, the European Parliament presented a basket of amendments that would accelerate shipping’s inclusion to the EU ETS. The basket holds many suggestions, and these are some ofthe most impactful for charterers and ship owners:

  • Deleting the planned phase-in period for maritime emissions, meaning that shipping companies must surrender allowances for 100 % of emissions from start
  • Extending scope to include 100 % of emissions from global EU voyages from 2027
  • Including a binding clause allowing shipowners to pass on the cost of emissions to the charterer
  • Extending scope to cover methane (CH4) and nitrous oxide (N20), not only CO2
  • Extending scope to include ships of 400 gross tonnage (GT) and above, not 5000 GT as in the original proposal
  • Extend scope to include offshore service ships
  • 75 % of shipping’s ETS revenues to be returned to industry, funding green research

Speeding up the inclusion of shipping in the EU ETS will also speed up commercial decabonisation

The three bodies are currently in trilogue negotiations and a final proposal is expected before the end of the year.

Carbon price added to the freight rate

Some final decisions on design, starting date and responsibilities under the scheme are still pending. However, regardless of the outcome of the trilogue negotiations the added carbon cost 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. The Parliament’s suggestion would further increase the carbon exposure.

From carbon cost to carbon opportunity

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.

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