Many of you would have no doubt heard the term EU ETS and its applicability to global shipping..
However many are not aware of what is EU ETS and is its impact on global shipping.. Let’s take a look..
So starting from the beginning, Greenhouse gases (GHG) are gases that keep Earth’s climate habitable for humans and millions of other species by trapping heat from the sun..
However, humans have been releasing GHG into the air by burning fossil fuels for centuries.. In an effect known as the Greenhouse effect, these gases that are released in the air have been absorbing solar energy, keeping the heat close to Earth’s surface, rather than letting it escape into space..
After centuries of this happening, these greenhouse gases are now out of balance threatening to drastically alter the living conditions of all species on Earth and where they live..
Several greenhouse gases such as Carbon dioxide (CO2), Methane (CH4), Nitrous Oxide (N2O), and Fluorinated Industrial gases such as hydrofluorocarbons, perfluorocarbons, chlorofluorocarbons, sulfur hexafluoride (SF6), and nitrogen trifluoride (NF3) are in circulation..
CO2 and its impact
Of all these GHG emissions, CO2 is primarily responsible for about three-quarters of emissions as it can linger in the atmosphere for thousands of years.. CO2 is mainly emitted due to the burning of organic materials such as coal, oil, gas, wood, and solid waste..
Many world bodies have been working on reducing and controlling emissions, especially CO2 emissions globally and particularly in global shipping..
The EU (European Union) has set a goal for its member states to become climate neutral by 2050 with a first milestone of reducing net emissions by at least 55% by 2030 compared to 1990..
In trying to achieve this vision, the EU set up EU ETS (Emissions Trading System) in 2005 as the world’s first and largest major carbon market to date..
It represents a central mechanism in the EU’s policy for combating climate change and driving decarbonization, particularly in energy-intensive industries..
The EU ETS follows a cap-and-trade approach which sets a cap on the total emissions allowed, which decreases each year.. Companies must hold a European Emission Allowance (EUA) for each tonne of CO2 they emit..
These allowances can be received or bought and are tradeable in the EU market.. Companies that reduce emissions can sell their excess allowances, incentivizing investment in cleaner technologies..
This process makes power production from high-emission emitters such as burning coal and other fossil fuels more expensive while making clean power sources like the use of renewable energy and fuels comparably more attractive..
Companies may be liable to a fine of EUR100/excess tonne if they emit more CO2 than they have covered through emission allowances..
The EU ETS will
- Penalise polluters monetarily for their greenhouse gas emissions which will help bring emissions down and generate revenues to finance the EU’s green transition
- Operate in all EU countries plus Iceland, Liechtenstein and Norway (EEA-EFTA states)
- cover emissions from around 10,000 installations in the energy sector and manufacturing industry, as well as aircraft operators flying within the EU and departing to Switzerland and the United Kingdom – or around 40% of the EU’s emissions
EU ETS will be extended to include maritime from 2024
The EU ETS will include emissions from maritime transport from 2024 for the first time and will have an introduction timeline and scope as per info from DNV..
The phasing in of EU ETS will begin in 2024 with 40% emissions coverage for cargo and passenger ships over 5000 GT increasing to 70% in 2025 and reaching the full 100% coverage by 2026 and will cover offshore ships over 5000 GT from 2027..
Starting with CO2 in 2024, it is expected that the EU ETS will expand to include methane and nitrous oxide emissions from 2026..
The scope of the EU ETS Directive will cover all emissions from voyages within the EU/EEA 100% while voyages entering or leaving the EU/EEA will be covered 50%..
For container ships stopping at non-EU/EEA transshipment ports within 300 nautical miles of an EU/EEA port, 50% of the entire voyage’s emissions are included.
This phasing in and scope will mean that shipping companies need to adhere to several compliance requirements such as monitoring, reporting, and verification of their GHG emissions.
The shipping companies are also required to ensure that they have acquired sufficient EUAs for GHG emissions for their ships and surrender these to authorities each year..
Implications of EU ETS for the Shipping Industry
The EU ETS and its requirements are naturally expected to have an impact on global trade in terms of compliance and associated costs..
The inclusion of the shipping sector in the EU ETS means that shipping companies must now acquire emission allowances for their CO2 emissions.. This leads to increased operational costs, as these allowances represent a new cost factor that did not previously affect this sector..
International Transport Intermediaries Club (ITIC) has forecasted that the cost of the EU ETS to the shipping industry could be in the billions. Robert Hodge, General Manager at ITIC, noted “Ship managers will have an important role in managing the scheme for their owners. It is, therefore, vital that ship management agreements set out the responsibilities and liabilities for doing so.
The EU ETS is likely to cost the industry billions in extra fees so ship managers and charterers should assess every aspect of the costs and legal risks associated with the scheme to ensure they are not left in a financial precarious position,”.
These costs could increase the cost of transportation of goods to and within the European Union which can potentially be passed on to consumers, affecting the prices of goods and services..
These higher costs for shipping could also lead to changes in global trade patterns with companies seeking to optimize their logistics to reduce emissions and costs, potentially favoring shorter trade routes or different modes of transport..
Industries such as steel, cement, and chemicals, which are typically energy-intensive and have high emissions, face higher costs due to the need to purchase more allowances.. This can impact the cost of raw materials and, subsequently, the products made from these materials..
EU-based companies might face a competitive disadvantage compared to their counterparts in regions without similar carbon pricing mechanisms potentially leading to a carbon leakage situation with companies moving production to countries with less stringent emission regulations..
This also means that there has to be reliable mechanism/software for the calculation of emissions data and voyage verification which could also come at a cost..
While the EU ETS serves as a model for similar systems globally influencing climate policy worldwide, its success, challenges, and impacts could shape the adoption and design of emission trading systems in other regions, potentially leading to a more harmonized global approach to carbon pricing..
The above highlights the multipronged impact of EU ETS on global shipping and trade, and associated costs while illustrating the complex interplay between environmental policy, economic factors, and international trade dynamics..
Sources : National Geographic, DNV, EU