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Navigating shipping’s ‘confusing’ and ‘ambiguous’ decarbonization

Navigating the complex world of decarbonisation in the shipping industry can be a daunting task, according to Martin Crawford-Brunt, emissions lead for the Baltic Exchange. “If there’s two words that sum up decarbonisation in maritime at the moment, it’s probably confusion and ambiguity,” he said.

Crawford-Blunt was speaking as moderator of a panel at the Baltic Exchange Tanker & Gas Market Insights Forum 2023. At the Forum, panellist James Blunt, head of voluntary carbon, shipping and aviation at Redshaw Advisors, advised the audience that there are multiple regulatory and voluntary carbon markets to consider including the European Union (EU) Emissions Trading Scheme (ETS) which will cover shipping from 2024. Other compliance markets such as those in the US and Asia are also likely to include shipping in the future.

“The EU ETS is obligatory and a traded instrument. The UK ETS has not included shipping yet but be absolutely assured it will cover shipping at some point in the not-too-distant future. This is something that’s going to have global impact on businesses,” he said.

Blunt explained that the EU ETS will be an annual obligation for ships of 5,000 gross tonnes or more and there will be no free allocation. From 2026, other gases such as methane and nitrous oxide will also be included.

Joining Blunt on the panel, Alastair Stevenson, head of digital analysis at SSY, said one of the most interesting aspects of the inclusion of shipping in the ETS is the impact on contractual agreements. “The polluter pays principle that the EU has taken on board effectively gives the right for the owner of the vessel to push the cost onto the chartering party,” he said. “It gets a little bit more complicated on the time charter side because for the last 100-150-odd years, we’ve included all taxes on the vessel, and the ETF system is a form of taxation. So, the polluter pays principle sets us up for a change in contracting on time charter rates.”

Rolling with the changes

Stevenson noted a growing acceptance of that philosophy, and from some unexpected corners. “Obviously the owners are on board with that, because why wouldn’t you want to push that cost on? But interestingly, a lot of the large chartering parties have been on board with that philosophy as well. And that’s quite a sea change,” he said.

Blunt added that there is no doubt that the decarbonisation of shipping is going to have a cost impact on businesses. The current ETS trading price of around E100 a tonne means that for various ship sizes, the cost could be anywhere between E200,000 and over one million euros a year per ship, he said. “If you’ve got a big fleet, this is a considerable cost.”

While, as a ship brokerage, SSY is not directly involved in the inclusion of shipping in the ETS, Stevenson said that SSY receives a lot of questions from clients about what the Scheme will mean for the industry. “What makes the ETS so complicated for many of us is that there’s been so many different iterations of this regulation over the last few years. And it’s really quite difficult to stay on top of it,” he said.

SSY forecasts that 85 million tonnes of carbon that will need to be offset in Europe with the inclusion of shipping in the ETS. “Our customers at the end of each year will need to offset their annual emissions. They have a very good sense of what their annual emissions are because they’ve been reporting that to the EU since 2018, which is when the EU monitoring reporting and verification system was set up.”

Contracting concerns

Meanwhile, navigating the world of shipping contracts is never easy, and the current situation with carbon emissions and regulations is only adding to the complexity, noted panellist Alessio Sbraga, a partner at HFW.

“There is a lot of uncertainty out there,” he said. “But the important thing to do is really to try and break through the noise.”

Sbraga noted that the IMO’s Carbon Intensity Index (CII) is “here to stay until at least 2026”, while 2024 marks the start of the maritime industry being included in the EU ETS. “Those are two important things you really need to be thinking about when you’re entering into contracts now, not really when it comes into force, but actually right now, because you need to be able to mitigate your risk exposure in these kinds of situations.”

Sbraga warned that for those who leave things to the last minute, the price is only going to go up. Also, he said that looking at the CII in isolation is not enough, as there are many different factors that impact a vessel’s carbon intensity, including design aspects, operational aspects, and commercial aspects. “The reality is that under certain contracts this is going to be extremely complicated,” he said.

Sbraga added that the commercial activities of vessel have been determined by the charterer for almost a century. However, the direction, route, and speed of the vessel – which have the most significant indirect impact on carbon intensity – are determined by the employment of the vessel. This creates a situation where an owner has no control over these activities, making it extremely complicated under certain contracts. “It’s a problem,” he said.

Also, the problem with carbon intensity is not just an owner’s issue, as there are many shipboard impacts that also affect carbon intensity. Additionally, there are aspects that neither party has control over, such as adverse weather, which can have a serious impact on fuel consumption.

“It’s a complex situation,” he said. “There needs to be a change of mindset between those two parties in order to move matters forward. It’s a shared burden and there are implications for both parties,” he concluded.
Source: Baltic Exchange

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