EU ETS: "Beneficial" for the environment or "harmful" for the economy?

The EU Emissions Trading System (EU ETS) is one of the EU's key policies to reduce greenhouse gas emissions. From 01 January 2024, shipping has officially been included in the EU ETS with the aim of limiting emissions in European waters and European ports, creating concerns and questions in the shipping and port industry. What will be the actual cost of ETS for shipping? How will the implementation of the ETS affect EU ports? How is the ETS going to affect EU competitiveness? Will the ETS ultimately be beneficial for the environment, which was its original target, or will it simply be a tool of over taxation? In the following lines we will attempt to answer some of the above questions, also giving the perspective of the port industry.

The integration of shipping into the EU ETS will take place gradually – more specifically, it is envisaged that under the ETS, allowances will be paid covering 40% of greenhouse gas (GHG) emissions in 2024, rising to 70% in 2025 and 100% from 2026. Intra-European voyages (from European port to European port) will be covered at 100% of emissions while voyages between European ports and ports of 3rd countries at 50% of emissions.

As an example, we mention that based on research by the shipping consulting and research services company Drewry Shipping Consultants, the EU ETS-related costs for ships for 2024 are estimated at $3.6 billion. The 1st critical question is who is going to bear the specific cost. Based on the "polluter pays" principle, the commercial operator of the ship (the charterer - commercial operator) and not the ship-owning company is responsible for the compliance costs of the EU ETS. The specific legislation nevertheless does not "prohibit" the commercial operator of the ship from passing on the said cost to the respective user of its services. Therefore, for example, the major container shipping lines have announced that they will impose an EU ETS surcharge on companies that transport products in containers on their ships (import and export trading companies), thus indirectly avoiding the additional costs involved in complying with the EU ETS. In turn, these companies may well pass the additional cost on to the "next" in the supply chain, inevitably reaching the final consumer. Given that part of the EU's targeting under the EU ETS is implicitly to prevent shipping companies from using environmentally burdensome fuels and switch to greener solutions, the following rhetorical question arises: is the EU ETS really an impetus for shipping companies to do the switch to green fuels given the cost of non-compliance or since they can pass the cost on to the next one is simply another factor that will contribute negatively to both the cost of living and the competitiveness of European products without any particular environmental benefit?

When it comes to the port industry, the issues raised are even more complex. Given that ships are obliged to pay for 50% of their emissions for trips to and from 3rd countries, a clear risk arises for European ports. A ship on a direct route from Shanghai to Rotterdam must compensate for 50% of the emissions for the entire voyage. If the same ship chooses to include an intermediate destination outside Europe but geographically close to the 1st European port of destination (e.g. Felixstowe in England) it is obliged to pay for 50% of the emissions from the intermediate destination, i.e. from Felixstowe to Rotterdam. There is therefore a clear incentive for the commercial operator of the vessel to include an intermediate destination to 'save' the emissions compensation for the Shanghai-Felixstowe leg in the above example. This is a risk for European ports and especially for ports that are transshipment hubs as large container shipping lines have an incentive to replace European transshipment hubs with neighboring non-European ports to indirectly avoid the costs of compliance with the EU ETS. In addition to the direct impact on the traffic of European ports, this practice may lead to further problems in Europe's supply chain as if this practice is adopted, the connectivity of European ports with countries outside Europe will be carried out with smaller (feeder) ships with the possibility of a negative impact on the costs of imports and exports to and from Europe and therefore on the competitiveness of the EU.

Based on the above risk, the EU included a clause in the EU ETS which states that any non-European port that is a. within 300 nm from a port under the jurisdiction of a Member State and b. has more than 65% transshipment load ratio. The aforementioned 2 conditions are currently met cumulatively only by the port of Tanger Med in Morocco and East Port Said in Egypt. What this means in practice: that a ship running e.g. a Shanghai-Tanger Med-Valencia route will be considered to have never "called" Tanger Med and will therefore be liable to pay compensation for the emissions of the entire Shanghai-Valencia journey. This list will be revised and in case a non-European port meets the 2 conditions, it will be included. Although this particular clause is a step in the right direction, it is currently considered insufficient as in the "neighborhood" of the EU there are dozens of ports that 1. have (or may have in the future based on investments) the ability to serve and "steal" from European transshipment hubs large cargo flows and 2nd have a sufficient amount of domestic cargo to make it difficult to meet the limit of 65% transshipment cargo ratio (e.g. Turkish ports). The deletion or substantial reduction of this limit is considered a catalyst for the protection of the interests of European ports and, by extension, the entire European supply chain.

In addition to the practical and economic side of the impact of the EU ETS, serious concerns are raised regarding its environmental side. Given what was mentioned above about the risk of avoiding European ports and replacing them with neighboring, non-European ports, it is possible that the ETS will lead to an increase in air pollution near Europe as the mother ships that will have chosen transshipment hubs outside but near Europe they will not be subject to the environmental restrictions of the EU and the EU ETS and therefore will have the "freedom" to pollute as they please at the borders of Europe. Therefore, in addition to the economic impact of the EU ETS, there is a clear risk of an environmental impact as well.

So, what could be indicative actions to deal with the negative effects of the implementation of the EU ETS:

1. The deletion or substantial reduction of the limit of 65% transhipment cargo ratio in order to limit the "attractiveness" of neighboring non-European ports.
2. The harmonization of the EU ETS with future measures of the International Maritime Organization (IMO) which is also a permanent position of the Hellenic Shipowners' Union and given the international nature of shipping.

Shipping and by extension the port industry are cornerstones of energy security and the supply chain and therefore of Europe's competitiveness. The protection of their interests should be a strategic priority for the political leadership of the EU correspondingly and in harmony with the corresponding efforts to protect the environment which is an equally high priority issue.

Giannis Chaskis

Disclaimer: The views expressed in this article are personal and do not necessarily reflect the official position of the writer's Company.