Starting from January 2024, the European Union's Emissions Trading System (ETS) will encompass CO2 emissions from all large ships, regardless of their flag. This expanded scope of the ETS introduces significant changes for the maritime industry.
As a result of the new ETS regulations, ship operators will be required to monitor and report their emissions and surrender allowances for every ton of CO2 they emit. The carbon pricing in the EU ETS is determined based on vessels rather than cargo. The ETS regulation applies to vessels traveling between, to, and from EU countries. 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. Shipping companies are obligated to purchase allowances for the following emissions:
- 50% of emissions from voyages starting or ending outside of the EU (allowing the third country to decide on appropriate action for the remaining share of emissions);
- 100% of emissions that occur between two EU ports and when ships are within EU ports.
What exactly is the EU ETS?
The EU ETS is a significant milestone in combating climate change. It is a system that aims to create financial incentives for reducing greenhouse gases by placing a cap on emissions produced by companies in specific industries. The ETS operates by creating a market for emissions allowances, aiming to reduce carbon dioxide emissions. Companies will need to acquire the right to emit a specific amount of greenhouse gases. Each emission allowance corresponds to one ton of carbon dioxide. Businesses exceeding their allotted emissions must pay for the excess, while those with surplus allowances have the option to trade them on a specialized emissions trading platform. This means that shipping companies will be required to submit allowances equivalent to a portion of their emissions. Like other sectors operating under the EU ETS, shipping companies and other ship operators, will now need to purchase and surrender (use) ETS emission allowances for every ton of CO2 emissions reported under the scope of the system.
To facilitate a seamless transition, shipping companies will only need to surrender allowances for a portion of their emissions during an initial phase-in period:
- 2025: 40% of reported emissions in 2024.
- 2026: 70% of reported emissions in 2025.
- 2027 onwards: 100% of reported emissions.
What does it mean for customers?
Consequently, the implementation of the EU ETS for shipping is anticipated to result in higher operational expenses to ensure compliance. As a response to these increased costs, carriers will introduce a surcharge, referred to as ETS, which will apply to both Spot or Long-term contracts, both existing and new, effective from 1 January 2024.
Furthermore, considering the phased-in approach outlined by the EU, we anticipate that compliance costs will increase over time, adding to operating expenses over the next three years. This change reflects the commitment to environmental sustainability and the broader effort to reduce carbon emissions within the shipping industry.
We will keep you informed about any updates on the impacts of the new EU ETS regulations. Feel free to contact us if you have any questions.
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