The roots of the EU ETS trace back to the “European Green Deal,” wherein EU warrants to reduce total greenhouse gas emissions within EU / EEA area by 55% within 2030 compared to the baseline year 1990. Widely known as the EU “fit for 55”, the emission trading system stands as the very cornerstone of EU’s strategy to combat climate change, and it affects the shipping industry significantly.
The EU ETS is a cap-and-trade system and for the maritime sector. It will be applicable for all ships exceeding 5000 gross ton, sailing to, from, and within the EU, calling at any EU /EEA ports. The EU, along with its member states, establishes a cap or limit on the total CO2, or the equivalent greenhouse gas allowed in the regulated market.
The imposed cap will reduce about 4 percent per year until 2030. This linear shortage and scarcity of allowances will encourage investments in fuel reduction technology and the use of more sustainable biofuels.
Established in 2005, the EU ETS stands as the world's pioneering carbon market. Today the EU ETS covers about 10,000 installations, constituting 40% of the greenhouse gas emissions by EU.
A key focus of the EU ETS is promoting efficiency. The EU permits the trading of emissions allowances known as European Union Allowances (EUA), where each EUA authorizes the emission of one ton of CO2 equivalent.
Within the regulatory scope, ships bear full responsibility for emissions in and between EU/EEA ports, and 50% when entering or leaving the EU, provided that the vessel is engaged in commercial trade. For example: For EU inbound voyages, it is necessary to account for all CO2 emissions from the last non-EU port with cargo operations to the first EU berth with cargo operations (from last “All Clear” non-EU to first “All Fast” in the EU), and vice versa on EU outbound voyages. For this example, EUAs covering 50% of the total CO2 emissions must be secured.
Some might argue that the ETS will influence how ships will be traded to and from the EU, encouraging a shift in cargo operations to minimize the last/first “loaded leg” to and from the EU. This ETS arbitrage is challenged by terminal capacity outside the EU, additional port costs with potential delays and specific EU rules covering qualified transshipment ports.
The combination of a cap with a trade mechanism creates a carbon emissions market, wherein regulation entitles a bid to secure the right to emit. Presently, the EUAs are traded at approximately USD 80 per ton of CO2, equivalent to an increase of USD 300 per ton of fuel. However, the price of allowances will fluctuate based on allowances in the market for auctioning, energy prices, abatements costs etc.
It is important to note that the EU administration regulates the allowance availability and during periods of amble or tight EUAs in circulation, auctioned volumes may be reduced or increased beyond the intended cap trajectory to keep the EUA price stable.
The costs associated with emissions allowances, coupled with potential investments in innovative technology and energy-saving devices, will undoubtedly impact the financial landscape for ship owners.
As ETS costs align with a ship's fuel consumption, this regulation lays the foundation for favoring the most energy-efficient vessels, but to mitigate the financial impact, the EU has implemented a phased-in approach:
“For Odfjell, the estimated ETS cost in 2024 is about USD 7 million. These costs will increase as ETS is phased-in, which situates the importance of establishing good routines, from the start to passing through ETS costs to our customers.”
Gustav Sannem, VP Finance
A standard practice within the EU ETS is the concept of “pass-through” of costs. In shipping, the ETS regulation falls on the owner or the entity responsible for the ship under the ISM code. This means that managers will pass on costs to the commercial operator, the “emitter”. For obvious reasons, the commercial operator does not want to be left with the cost of EU allowances, so coverage for the cost of allowances borne by seaborn transportation must be included in the terms of commercial contracts before agreeing to a shipment.
“In-principal agreement - charterer shall compensate Odfjell Tankers for CO2 ETS emissions on EU relevant voyages.”
Knut Holsen, VP Special Projects
The annual EU Emissions Trading System (ETS) for each ship is determined by the data submitted to the European Union through the Monitoring, Reporting, and Verification requirement (EU MRV), which was established in 2018.
Within this regulatory framework, vessel-specific emissions data is meticulously shared with class and undergoes thorough validation before being submitted to the EU. Ship owners are legally bound to ensure the accurate monitoring and reporting of their emissions, with severe penalties in place for non-compliance. EUAs are therefore securely stored in registry accounts (digital storage) and it's up to each owner to monitor EUA balance and to surrender the allowances to EU before the stipulated deadline.
Odfjell has effectively addressed this regulatory challenge through Orca. By reporting daily in the abstract of log (AOL), each vessel is ensured compliance with reporting requirements, contingent on the high quality of the data. The integration of analytical tools in Power BI further enhances our capabilities, providing robust systems for monitoring ETS exposure and calculating ETS costs per voyage and charterer.
The EU ETS presents a complex landscape that demands proactive adaptation and strategic planning. The navigation of these regulatory waters requires a comprehensive understanding of the ETS, the carbon market dynamics, and a commitment to accurate reporting to ensure compliance and position the company favorably towards a more sustainable tomorrow.
As you saw in the 3Q23 presentation, Odfjell is well prepared for the inclusion of shipping in EU ETS and intend to pass the ETS cost through to the charterers. The ETS is now a topic in every customer meeting and every contract negotiation. Pass-through of ETS cost naturally encourages charterers to prioritize the most sustainable alternatives. Our charterers will experience that transporting with Odfjell is a good choice as our leading energy-efficient chemical tanker fleet minimizes the ETS costs.
“For Odfjell, embracing sustainability is not only a legal requirement, but also a smart strategic move, since the ETS per design will favor the most energy-efficient ships.”
Kristoffer Ramstad, Manager Fleet Performance
