Europe’s Emissions Trading System (ETS):

How to pick a fit for (shipping-)purpose trading solution

When discussing the need to procure EUAs to be compliant with Europe’s upcoming ETS regime, we are often confronted with one question: “How do I make sure I get the best possible price?”. But diving deeper into the unique challenges of shipping, we quickly conclude that this is not it alone. We are convinced that the selection of the right trading platform must challenge possible solutions around multiple aspects.

Here is our top 5:

Price: Obviously price is important. Especially if volumes traded are large. From the point of view of a third party manager or a ship owner who might only have to trade for offhires or times of unemployment, the importance of price should probably drop. Naturally, any provider will claim to offer “best possible prices”. How to check? Assuming that the trader offers to buy and to sell EUAs via his platform, there is a simple check: Get a quote to buy and a quote to sell EUAs at the same time. The difference – the so called bid-ask-spread – is what’s on the table. Being an efficient and transparent market, this bid-ask-spread for EUAs should not go above 0,15%. Which means, that the average trader’s margin should be below 0,075%. That’s negligible

Buy and sell: The ability to sell EUAs via the same platform is critical. Standard case: You fix a cargo at a certain rate with an assumption on the volume of EUAs needed. You procure the EUAs to avoid the risk of price changes. But things go well, you don’t need all EUAs after the journey is completed. Sure, you can keep them for later use. But what if you prefer cash in the bank? Or want to benefit from price fluctuations and buy EUAs when prices are low, sell when high? Added benefit of the option to sell: You can always check your platform’s bis-ask-spread (see above).

Futures/Forwards: There are several points to be made here. Obviously, it’s important to be able to fix prices for EUAs for the future – as you will have agreements that include EUA obligations in the future and you want to hedge the risk of price changes. Don’t be confused by terminology: Futures are traded on exchanges, forwards are traded outside. But what is critical to watch out for?

  • Odd delivery dates. Forwards and futures come with delivery dates. I.e. you agree on receiving the EUA at some point in the future at a price you now agree with the counterparty. The whole concept of hedging the risk of price change vs. a future need falters, though, if the offered delivery dates are not flexible. Look for solutions that offer any date (odd dates) in their forward concept. Not just beginning of quarter,…
  • Forward margin: When you align cash flows between receiving money from your customer and paying for your EUAs, you will want to use forwards. What you don’t want to do is lose all the benefit to the bank or trader. The forward margins depend on many factors, primarily your company’s credit rating, general interest rates. So hard to compare. But the forward margin should not be in excess of your corporate cost of capital – otherwise you be better off buying the EUAs with your regular credit line.
  • Downpayment: The whole idea of a future or forward is to protect cash flows – at at the price of the forward margin. Futures require you, dependent on their set-up to provide a down-payment. Often we are talking about €10 and more per EUA for a “normal” future contract. Good forward models can help avoid or minimize that unnecessary cash drain.

Odd volumes: Especially for managers and owners (if they provide EUAs themselves rather than tasking their manager with the provision of EUAs), EUA volumes needed tend to be small in every single instance. This can be 32 EUAs for an offhire, 423 for a period of unemployment. We propose to make sure that the platform chosen to trade EUAs can trade these odd volumes. Not just batches of 500s or 1,000s. For two reasons: To pass the cost on, an exact volume of EUAs on the invoice helps to avoid unnecessary disputes. EUAs can then directly be deposited through within the transaction rather than requiring unnecessary efforts and internal charges when conducting manual transfers of the exact volumes needed to the target account. And while EUAs can be saved for later if procurements are only possible in large batches: who will carry the risk of price changes? A platform truly fit for shipping will offer these small, odd volumes at the same or similar price as for a batch of 1.000.

Online only: We keep coming across providers who ask for written or faxed orders. That obviously is nonsense. With prices changing every second, anything but online should be discarded.

All this doesn’t come natural. EUAs have been developed for landbased industries with huge volumes of CO2 emissions and reasonably simple industry structures. That’s where most of the traders now entering the shipping world have built their experience and developed their systems. We propose to spend a bit more time on finding the right partner. Shipping is different and so is the solution you deserve.

OceanScore is a Hamburg based provider of sustainability data and compliance solutions with a strong maritime background. The company offers a range of ETS solutions tailored to the industry’s unique needs.

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