May 24, 2022
Deleting shipping’s phase-in period in the EU ETS would lead to a fivefold rise in carbon cost in the initial year. It will be a steep learning curve for commercial decision-makers who are influenced by carbon exposure. The added carbon cost to a commonly traded intra-EU tanker route would go from USD 14 000 to USD 70 000. This is a new type of exposure that the industry needs to get familiar with, says Siglar CEO Sigmund Kyvik.
The EU Parliament’s environmental committee (ENVI) voted last week for a basket of amendments to speed up shipping’s inclusion to the EU Emissions Trading System (ETS). Suggestions included deleting the planned phase-in period and including 100 % of emissions from global EU voyages (or extra-EU voyages in EU language) while allowing shipowners to pass on the carbon cost to the charterer.
In the original EU commission proposal requirements to surrender allowances are introduced in stages from 2023 to 2026; 20 % of verified emissions for 2023, 45 % for 2024, 70 % for 2025 and 100 % for 2026. ENVI proposes to drop the phase-in period and include 100 % of emissions from day one.
Under the current proposal only 50 % of emissions from incoming and outgoing global EU voyages are included in the scheme. The new draft suggests to include 100 % of emissions from global EU voyages from 2027 if third country does not have a national or international carbon pricing mechanism in place that is at least equivalent to EU-ETS. Either way there will be a cost related to all emissions also from the global EU voyages.
ENVI also suggests to include a binding clause allowing shipowners to pass on the cost of carbon to the charterer. The amended text reads: In order to ensure that the polluter pays principle is fully respected… a binding clause should be included in such arrangements for the purpose of passing on the costs so that the entity that is ultimately responsible for the decisions affecting the greenhouse gas emissions of the ship is held accountable for covering the compliance costs paid by the shipping company...”
The inclusion of maritime emissions has the potential to greatly influence freight rates. Compared to the original proposal to phase-in 20 % of emissions, deleting the phase-in means that the carbon cost exposure in year one of the inclusion will be multiplied by five. From a commercial point of view this translates into added dollars to the freight rate.
The added carbon cost to a commonly traded intra-EU tanker route like an MR vessel from Riga to Amsterdam* would go from USD 15 000 to USD 70 000. The extra-EU baltic TC2 route** would see the carbon cost increase from 16000 to 80000 from day one, and thereafter to 155000 once all emissions become eligible.
As the carbon cost hits the charterers full on from year one, trial and error learning will be an expensive method for commercial decision-makers. Former global commodity trader and now Siglar CEO, Sigmund Kyvik believes that the ENVI suggestion emphasises the importance of understanding your carbon exposure.
“This is a new type of exposure that the industry needs to get familiar with. Full exposure from day one means that the learning curve will be steep and that financial risks and opportunities could be substantial. Preparing is vital.”
Siglar Carbon started monitoring, reporting and analysing shipping emissions in 2019, with the purpose of making emissions data into decision support for the commercial decision-makers. We believe that bringing carbon insights into commercial shipping decisions is how shipping decarbonisation will scale short term, because it is the fastest and most cost-effective way to start decarbonising the maritime industry.
* A modern MR vessel transporting 37 000 tonnes of gasoline from Riga to Amsterdam, ballasting from Le Havre emits approx. 700 tonnes of CO2. The number includes emissions from laden leg and ballast from Le Havre and emissions from port stay in Riga and Amsterdam. The carbon price is set at USD 100 per EUA (per tonne CO2 emitted).
**A modern MR vessel transporting 37 000 tonnes of gasoline from Antwerp to New York, ballasting from New York emits approx. 1 550 tonnes of CO2. The number includes emissions from laden leg and ballast from New York and emissions from port stay in Antwerp. The carbon price is set at USD 100 per EUA (per tonne CO2 emitted).