EU ETS In The Shipping Sector:

Lessons learned 6 months post-implementation

Vertis Environmental Finance – Frederic Bouthillier

Since January 2024, the EU Emissions Trading System (ETS) has been extended to the maritime sector. The first EU ETS compliance deadline (for 40% of emissions only) is September 2025 in all Member States for emissions reported throughout 2024.

Further to the publication by the EU of a list of shipping companies and their attributed Member State on 1 February, many questions and challenges have arisen for shipowners and operators.

• Firstly, there has been a surge in enquiries and discussions about operational frameworks. One prevailing scheme suggests that the Document of Compliance (DOC) entity holder will be responsible for submitting MRV reports, opening MOHA accounts and surrendering units for compliance by September 2025. Meanwhile, owners will rather keep their hands on EU Allowances (EUAs) procurement. To address the bottleneck in opening MOHA accounts, Vertis’ Long Delivery Product has emerged as a potential solution.
• Trading-related challenges persist, with price transparency remaining a pressing concern within the industry. This can be addressed by placing orders based on daily settlement prices (Trading at Settlement).
• Many compliant entities have opted to cover their exposure, on a sea passage basis, on the spot market, trading volumes below the minimum Exchange requirement size of 1,000 units through over-the-counter trades. In response to this, ICE introduced a "mini contract" for futures.
• Additionally, owners with vessels on long-term time charters are likely to receive EUAs from charterers, generating growing concerns over counterparty risk. As the industry navigates these developments, the need for clarity and risk mitigation strategies becomes increasingly important.

A proactive approach has proved essential to managing potential disruptions and ensuring smooth operations. We have seen that owners who have ensured proper organisation to cover off-hire periods and positioning legs when trading vessels under voyage charters, even when receiving EUAs from charterers, have been able to optimise their compliance.

Furthermore, the EUA market has exhibited high volatility, underscoring the importance of conducting swift market reviews.

To cover all aspects of EU ETS from procurement to surrendering EUAs including market & research analysis, Vertis is finalising its service offering with its “Carbon package” which will be soon available.

Regarding the price, it is unlikely that the inclusion of shipping has had a significant impact on EUA price direction yet. On the demand side, the 2023 MRV, updated on 14 July, shows a 10.64% decrease in shipping emissions year-on-year, following the trend seen in the other ETS sectors (-15.5%). This number might change depending on the magnitude of late MRV reporting by compliance entities. To compensate for the maritime expansion, the EU allocated an additional 78.4 million EUAs in the 2024 auction, not enough to meet additional demand. However, the maritime sector is only required to comply with 40% of its verified emissions from 2024, leaving a shortfall of around 45m EUAs. While this means the current impact is bearish, it is essentially a drop in the ocean given the overall size of the market.

The market is expected to trade on a sideway to bearish trajectory in July. Hedge funds, which are important market players, have remained net short since August 2023. This is mainly driven by the bearish fundamental balance for the year 2024. On the flipside, this situation is more sensitive to upside risk stemming from warmer-than-usual weather, bullish energy markets and political turmoil.

What way forward?

Three pivotal recommendations emerge to optimise carbon compliance. First and foremost, closely monitoring emissions volume and types enables instant and precise coverage on a sea passage basis. Moreover, a comprehensive understanding of the EUA market dynamics and its primary drivers is crucial for informed decision-making. Lastly, fine-tuning procurement strategies based on individual profiles and segments, with a focus on “cost pass through”, determines the optimal timing for EUA purchases. By implementing these strategies, stakeholders can navigate the complexities of carbon compliance with confidence and efficiency.

To dive into Vertis' market research and analysis, and to optimise your EU ETS compliance strategy, contact our experts at [email protected]

Watch Replay here:

4th Annual Capital Link Decarbonization in Shipping Forum

July 1, 2024 | Digital Conference

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