Introducing EU ETS - An Understanding
Initially established in 2005, the EU Emission Trading System acted as a market-based mechanism to tackle the growing climate issue of GHG emissions across Europe.
According to the European Commission, EU ETS operates on a cap-and-trade principle, where one allowance gives the right to emit one tonne of CO2eq (carbon dioxide equivalent), ensuring that polluters pay for their greenhouse gas emissions.
What makes the EU ETS particularly effective is its dynamic cap, which aligns with the EU’s climate target of a 55% reduction in GHG emissions by 2030 and net zero by 2050 and, therefore, decreases over time.
Within the cap, companies primarily purchase emissions allowances on the EU carbon market but can also receive some free allowances. Interestingly, the system offers flexibility through trading as companies that manage to cut their emissions are presented with 2 options:
- Keep the spare allowances for future use, providing a buffer against future needs.
- Sell the excess allowances to other companies, turning their eco-friendly actions into financial gains.
EU ETS: Scope of Directive
Under the new law, carbon pricing in the EU ETS is determined based on vessels rather than cargo. This means that instead of charging based on what a ship is carrying, the new law charges based on the vessel itself. Alongside introducing carbon pricing for vessels traveling between EU countries, the law has an extraterritorial application. This means that if a vessel sails between an EU port and a non-EU port, half of the emissions from the voyage will be subject to the EU ETS, encouraging shipping companies to reduce their emissions.
Shipping companies must purchase allowances for the following emission categories:
- 50% of emissions from voyages departing from an EU port to a non-EU port and vice versa.
- 100% of emissions from voyages between EU ports.
- 100% of emissions from ships docked at an EU port.
EU ETS in the Maritime Transportation
As the ETS extends to maritime transport activities and increases shipping costs, negotiators are concerned about the risk of evasion and transshipment activities moving outside the EU. These ports are of particular interest because they might be used by shippers trying to evade the carbon pricing regulations.
For these ports, the ETS effectively extends the length of voyages to address concerns about carbon leakage. In practical terms, if a ship docks at these ports, it will still be subject to carbon pricing when it continues its journey. With the new law adopted, there will be a phased implementation of carbon pricing for shipping, as the shipping companies will not have to pay for all their emissions immediately.
Instead, they must account for a portion of their emissions over several years, with different percentages for each year according to the following schedule:
- In 2024: Companies must submit allowances for 40% of their verified emissions.
- In 2025: Companies must submit allowances for 70% of their verified emissions.
- From 2026 onwards: Companies must submit allowances for all their verified emissions.
The Impossible Challenge of the Shipping Industry
In 2024, the European Union (EU) is rolling out a significant change for the shipping industry.
Under this new framework, shipping companies will be required to purchase allowances known as European Union Allowances (EUAs) for every ton of carbon dioxide (CO2) their ships emit. Although the EU is implementing this as part of its broader strategy to combat climate change by curbing greenhouse gas emissions, the shipping industry will face a dynamic and uncertain environment as it adapts to the EU ETS.
One of the primary challenges shipping companies face is the difficulty in accurately calculating these surcharges. This complexity arises because the EU ETS operates dynamically and uncertainly, asking shipping companies to make upfront assumptions about their costs, which can prove imprecise, given that the final expenses are only known post-facto. This unpredictability complicates the industry's financial planning and allocation, making assigning precise figures to emissions costs a very challenging process.
Access Our Webinar: EU ETS & Shipping
The industry also faces the challenge of surcharge disparities among carriers. Different shipping companies have posted varying surcharge rates for similar routes. This lack of uniformity underscores the absence of a standardized approach among carriers in response to the EU ETS. As a result, shipping costs can vary significantly, affecting shippers' financial planning and budgeting.
Due to the complex nature of the EU ETS legislation, it is difficult for shippers to obtain clear, straightforward explanations regarding the basis for these charges. This lack of transparency complicates shippers' understanding of the surcharge components, making informed decision-making regarding their shipping costs impossible.
EU ETS - Next Steps
As the complexities of the EU Emissions Trading System (EU ETS) unfold, we recognize the critical importance of transparency and accuracy in Scope 3 Transportation emissions, and we are committed to providing a holistic view of the market by offering a wealth of data and insights.
VesselBot’s accurate data, sourced from primary origins, empowers stakeholders in the shipping industry to navigate the EU ETS with confidence. By accessing the most valuable and up-to-date market information, companies can make well-informed decisions, reduce unnecessary costs, and avoid the purchase of unneeded EU allowances.
In a world where the regulatory landscape is continually evolving, VesselBot goes beyond mere compliance, enabling companies to actually optimize their operations and gain a competitive advantage in this ever-changing industry.