Shipping in the EU ETS: implications and recommendations for ship operators

Shipping in the EU ETS: implications and recommendations for ship operators

In June 2021 the European Commission launched its ‘Fit for 55’ package. By 2030, its goal is to have reduced carbon emissions by 55% compared to 1990 levels. The package incorporated revisions to the European Union Emissions Trading System (EU ETS) – one of which was the inclusion of shipping within the system.

It is unconfirmed when the revisions will be implemented as the council aims for a three year phase-in period starting in 2023 while the parliament proposes a full implementation in 2024. In any case the commercial operator or charterer of the vessel will be responsible for the costs of obtaining sufficient carbon allowances.

With that in mind, Titan has produced a whitepaper explaining how the EU ETS will impact shipping and the influential role that clean fuels will play. This is a snapshot of that whitepaper.

Changes to CO2 allowances

Impactful changes will be made to the EU’s carbon credits, known as EU allowances (EUAs). In particular, free EUAs for companies with carbon leakage will be phased out. Carbon leakage is the exportation or ‘leakage’ of emissions to countries with less stringent climate regulations. A broader carbon tax for certain imported products, which will discourage this behavior and will create a more level international playing field, is expected to come into effect.

?Another revision is the increase in the rate of reduction of EUAs from 2,2% to 4,2%. This will decrease the maximum allowed EUAs in the market by 61% in 2030 compared to 2004 levels. All of the proposed measures will reduce the supply of EUAs in the market. This, combined with the expansion into shipping and depending on the pace with which companies take decarbonisation measures, will impact the price of EUAs.

Implementation in shipping

Currently (August 2022) the EU ETS is set to include ships over 5000 gross tons from the outset. Then, from 2027, vessels above 400 gross tons will be included. While the start and length of the EU ETS phase-in period is unconfirmed, it is clear that ship operators need to firm up plans now – including how they will secure the supply of new low and zero carbon fuels.????

?The trading system will include 100% of the emissions in and between EU ports and 50% of the emissions from voyages between EU and non-EU ports – potentially increasing to 100% by 2027. CO2 emissions will be monitored through the EU MRV Regulation.

The maritime sector will not have any free EU allowances, so for every ton of CO2 emissions under the scope of EU ETS, EUAs will have to be provided. As for all sectors, there are two options to comply: buy EUAs or eliminate emissions. As the price of EUAs increases, it will significantly impact on ship operators’ costs. This means that eliminating emissions typically makes more commercial sense.

Advice to ship operators?

Strategies to reduce emissions include decreasing fuel consumption and using alternative low or zero emissions fuels. Although both are important, switching to alternative fuels will also be key to compliance with upcoming proposed FuelEU Maritime regulations, expected to come into effect after 2025. Plus, with the cost of emitting a ton of CO2 under the EU ETS set to increase, using oil-based fuels in shipping will become more expensive. Switching to alternative fuels will be more attractive than ever.

At Titan, we recommend that you include the costs of obtaining EUAs in every commercial analysis of fuel consumption and fuel selection. It is also important to reconsider the green investments assessed in the past; the chances are they now have a strong business case and are becoming profitable.

?Start preparing your EU ETS compliance and fuel strategy now. Every shift in regulation is both a risk and an opportunity. With the right strategy, this is the chance to gain a competitive advantage. As a leading physical supplier of low and zero carbon fuels, Titan is well placed to contribute to your decarbonisation strategy and secure you a supply of the fuel you need.??

For more details about EU carbon compliance, including a full analysis of the impact of the EU ETS on ship operators, download our full whitepaper for free: https://titan-cleanfuels.com/low-carbon-solutions/