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EU ETS carbon emissions regulations – a sea-change for ocean freight shipping or a toothless tiger?

One of the major talking points in ocean freight shipping is the introduction of EU ETS carbon emissions regulations in 2024.

Is this a sign of the industry getting serious about its environmental responsibilities or another initiative which is full of good intentions but ultimately lacking any bite?

Is now the right time for shippers to take a stand on this surcharge and draw their battle lines before the regulations get even tougher down the line?

Xeneta analysts Emily Stausbøll and Peter Sand have taken a deep dive into this issue to bring some much-needed clarity on what these regulations are and, most importantly, how they could impact the sector in future.

What is the EU ETS?
The EU Emission Trading Scheme is actually nothing new. It has been around since 2005 to drive down harmful emissions across industries, but 2024 is the first time ocean freight shipping will fall within its orbit.

The basic premise of the scheme is that carriers must measure and report each ship’s CO2 emissions and then buy allowances for each tonne of CO2 emitted. The intention being that this will incentivize industry-wide investment in cleaner technologies which in turn makes them comparatively less expensive.

How will the scheme work?
The EU ETS scheme will bring numerous complexities and nuances when it is rolled out next year (more on that later), but the basic principle is straightforward.
Allowances (EUAs) can be bought and sold on the open market to cover the carbon emitted on each journey to or from a defined European port. Carriers will compete with fellow polluters from within their own and other industries to purchase these allowances which will reduce in availability each year.

The reduction in available allowances is part of a roadmap towards the EU’s Fit for 55 target of reducing greenhouse gas emissions by 55% by 2030.

A big bang or a more gentle approach?
The EU ETS will be introduced gradually, starting at 40% of emissions in 2024, rising to 70% in 2025 and then 100% from 2026 onwards.

2026 will also see carriers required to report and buy allowances for methane and nitrous oxide emissions as well as CO2.

The revenue from 20 million of the EUAs bought and surrendered by the ocean shipping sector has been earmarked for investment in the decarbonisation of the industry between now and 2030. This is part of the EU ETS overarching strategy across all sectors of pumping money generated from selling EUAs back into climate related initiatives to drive sustainability.

Scope of the regulations is crucial
Ocean freight shipping is a global endeavour so imposing regulations at a regional level can prove problematic.

Establishing what can, and cannot, be covered by the regulations becomes key to successful implementation.

In this case, the European Union has decided all CO2 emitted on journeys within the EU and wider European Economic Area (EEA), and while at berth at an EU/EEA port, must be covered.

On top of this, half of emissions on journeys in and out of the EU must be covered. In deciding to cover only 50% of emissions on these voyages, the EU has left the door open for other regions around the world to establish their own carbon pricing mechanisms without carriers having to pay twice.

Will these regulations last the distance?
Possibly not. The International Maritime Organization (IMO), the UN body which regulates shipping, is also looking at introducing mechanisms to reduce carbon emissions at a global level.

Earlier this year, IMO member states agreed new emissions targets., including a new carbon pricing mechanism to be adopted by 2025 and come into force by 2027.

Should the IMO be successful in introducing these regulations, the EU has reportedly agreed to join the global mechanism. So, while the EU ETS scheme is working toward the Fit for 55 target in 2030, there is every possibility it does not make it that far.

Who is responsible for reporting and paying for emissions?
The regulations are clear that the responsibility for adhering to requirements lies solely with the carrier, both when it comes to reporting emissions as well as buying and submitting the allowances.

Emissions for EU ETS reporting will be calculated using the existing EU Monitoring, Reporting and Verification mechanism (MRV). This has been in force since 2018 and applies to all ships calling at an EU port, requiring operators to calculate the annual CO2 emissions at and between EU ports and half of emissions into or out of the EU.

Reporting carbon emissions is therefore nothing new for carriers, but 2024 will be the first time they have to pay for it through regulation in the EU.

Carriers will need to submit verified emissions for 2024 by the end of April 2025 and then have until the end of September that year to hand over enough allowances to cover their carbon outlay.

They can choose to buy all the allowances right before the deadline in September 2025 or throughout the year as they emit the carbon. This is where we begin to see how nuances between carrier strategies could come into play.

No problem – we’ll just dock at the nearest non-EU port
If carriers think they can get around the regulations by simply stopping at the nearest non-EU/EEA port, then that loophole has been closed off.

The EU ETS regulation has a paragraph to specifically address the potential for evasive behavior by container carriers.

It states any stops made at ports within 300 nautical miles of an EU/EEA port, and where more than 65% of containers are transhipped, will not be considered port calls. For example, a carrier could not lower their EU ETS costs by making an extra port call at Tanger Med or Felixstowe.

The really important question – how much is this going cost?
It may be an important question, but it is not an easy one to answer for a number of reasons.

Firstly, as already mentioned above, carriers can choose to purchase allowances as they go along starting when the regulation come into force next year, or they can buy them before the deadline in September 2025.

Carriers can request these surcharges from shippers and forwarding companies (NVOCCs) as they go along, which means there could be huge amounts of money changing hands well in advance of the allowances actually being purchased.

Secondly, carriers will no doubt take a different approach to calculating these surcharges.

Despite there being nearly two years before carriers must submit the first allowances, Hapag-Lloyd, CMA CGM and Maersk have already published estimates for the surcharges they will add to rates on trades involving the EU – and they vary dramatically.

Let’s take the North Europe to North America trade as an example. CMA CGM estimates surcharges will be EUR 43 per dry TEU, rising to EUR 65 for a 20’ reefer.

Hapag-Lloyd comes in much cheaper at EUR 9 per TEU and EUR 16 for a reefer. Maersk, which estimates based on FEUs, comes in at EUR 81 for dry and EUR 122 for a reefer.

The uncertainty is perfectly demonstrated in the fact CMA CGM and Maersk both explicitly state these surcharges are based on an EUA price of EUR 90, yet their estimates are still wildly different.

The reason for this is found in their different methodologies for applying these surcharges across fronthaul and backhaul. For the same reason we see similar variances across carriers for bunker and IMO 2020 surcharges.

The EU ETS in action
Let’s use a real world example of how the EU ETS will be applied when it comes into force next year.

The containership CMA CGM Lamartine (2010 built, 6 574 TEU) spent the year 2022 sailing on the Ocean Alliance’s Victory Bridge service between North Europe and US East Coast/Gulf ports.

Because this is a transatlantic trade, there is nowhere for carriers to stop and shorten journeys (such as the UK due to the extra 300 nautical mile zone) so it is a good example to estimate the cost of the EU ETS to carriers.

CMA CGM Lamartine made seven round trips during 2022, between Bremerhaven and Charleston on the fronthaul and then New Orleans to Le Havre on the backhaul.

From Le Havre, the service heads to Antwerp, Rotterdam and then Bremerhaven before heading back across the Atlantic. For the purposes of EU ETS any journeys made between North American ports have no impact. It is only the first and last stop in North America which impact EU ETS.

This shows an average round trip from North Europe to the US East/Gulf Coast will incur total extra costs for the carrier of EUR 122 049 to comply with EU ETS. This is calculated using an average price per EUA of EUR 80, as was the case in October 2023.

We can take this a step further by using data from CMA CGM’s average utilization for ships between North Europe and the US East Coast, along with MRV data in the table to calculate the average cost per TEU.

If the carrier chooses to allocate all emissions while at or between EU ports on the fronthaul trade, it would lead to an average of EUR 12.5 per TEU. On the backhaul (excluding any intra-EU voyages/port calls) it would incur EUR 11.7 per TEU.

This is where carrier strategy again comes into play. If they chose to split emissions evenly across fronthaul and backhaul it would incur costs of EUR 10.2 per TEU and EUR 14.6 respectively.

In this method the backhaul has a higher cost per TEU, in part due to slightly longer sailing distance, but more importantly because the lower filling factor on the backhaul means fewer containers to divide the extra cost across.

While only based on 2022 data, it shows Hapag-Lloyd’s estimated surcharge of EUR 9 per TEU in both directions appears closer to actual performance than Maersk’s USD 81 per FEU on the fronthaul and EUR 58 on the backhaul.

An environmental sea-change for shipping or a toothless tiger? Xeneta analysts give us their view…

Emily Stausbøll, Xeneta Market Analyst:

“We should not get too carried away because in the grand scheme of things, these extra costs are not very significant.

“Taking just bunker prices so far this year, the cost of High Sulphur Fuel Oil (HSFO) in Rotterdam has ranged from USD 366.5 per tonne to USD 592.3. These swings alone will have a much bigger impact on carriers’ operating costs than buying EUAs to cover their emissions.

“Then we consider other factors which could impact costs next year. The Suez Canal has announced a 15% rate hike for container ships heading north which, for the average vessel deployed between the Far East and Europe will lead to a cost increase in the range of USD 60 000.”

“Naturally, carriers will want to pass all extra costs on to shippers, but their success at this is by no means guaranteed. Poor market conditions for carriers have already driven freight rates to record lows on some trades and decimated revenues compared to last year.

“In the face of such a challenging market, some carriers are removing surcharges, while others are keeping them in place but offering negative base rates to lower the all-in rate for shippers.

“When you look at it in this way, you start to question what impact EU ETS will have on ocean freight shipping rates. You could even go as far as to question the extent to which carrier costs impact rates at all and whether they are merely a consequence of the balance between supply and demand.”

Peter Sand, Xeneta Chief Analyst:
“Carriers may have an EU ETS surcharge they can pass on, but if the market is weak then they will have to reduce the base rate. It is market dynamics that decide the rates.

“It’s all a part of the negotiation – who is holding the stronger hand when entering discussions? Carriers have been in a stronger position in the recent past but, now the table have turned, it may be the right time for shippers to push back.

“EU ETS is not going to be massively excessive financially from day one, but shippers should perhaps not just bite the bullet now because they may see this surcharge double and triple as the years go by.

“Shippers may decide to battle this right here, right now, to avoid a much bigger EU ETS surcharge when it is fully implemented in 2026.

The complexities of environmental programmes, geopolitics and economics within ocean freight shipping all play out on a global stage. The weight any one factor carries in determining the cost of transporting goods via ocean is debateable, but what can’t be doubted is the importance of data in understanding the market.

Xeneta data and intelligence will bring transparency to the industry on emerging factors such as the EU ETS emissions scheme, to support customers in making considered, evidence-based strategic decisions on cost, reliability and sustainability.
Source: Xeneta

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