Who will pay the bill?

January 1, 2024 will see the beginning of yet another era in shipping: Vessels calling European ports will become subject to Europe’s Emissions Trading System (ETS), eventually having to surrender Carbon Credits (EUAs) for the CO2 emissions generated on journeys to/from EU ports (50%) as well as between and in EU ports (100%).

How much is the total cost levied on shipping through this new regime and who will actually bear this burden? To answer these questions, we have to make a few assumptions: EUA prices will remain as they are today (unlikely, but a good basis from which to extrapolate), trading patterns and emissions efficiencies will follow the trends of 2021 and 2022. What is the resulting picture?

In 2022, 126 million tons CO2 were emitted to, from, between or within EU ports by vessels >5,000GT. Given that emissions to/from Europe are only accounted for with 50%, this would have resulted into 82.7mEUAs to be surrendered (once the phase in of 40%, 70%, 100% has been completed) or costs of €7.9bn.

Of the total emissions, 68% have been generated on voyages to and from European ports (from/to non European ports), 32% between or within European ports. That officially verified data point at emissions of 6% in European ports appears surprising at a first glance but is testament to the significance of the cruise industry (their in-port emissions share is high) and supports Europe’s drive towards onshore power supply.

Total emissions have come down from 2021, but only at a disappointing rate of 0.14%. This reduction is driven by fewer vessels (down 2.6% to 11,641 vessels in EU waters) sailing fewer miles (down 3.13% to 307 million miles in 2022). Larger, more efficient vessels have driven the development.

In 2022, CO2 emissions came in at 411tons/1,000miles sailed, with huge differences by vessel type (see below) but way below any alternative transport option. Given the above mentioned changes in trading patterns and vessel sizes, the emissions / nautical mile sailed increased by 3.09%.

So, who is paying the bill? Not surprisingly, container shipping leads: 28% of the total cost of eventually around €7.9bn (at today’s prices) will be carried by this segment, closely follow by – and that might come as a surprise to many – the Ro-Pax segment, still accounting for 14%. Bulkers and Oil Tankers follow with 11% each.

On a per vessel picture, Cruise and Ro-Pax will have to carry by far the largest burden with €3.4m and €3.0m costs for EUAs annually per vessel. Not surprisingly: The sheer size and hotelload of the cruise sector and the deployment patterns and speeds of Ro-Paxes will have a significant impact. In contrast, the average bulk-carrier – while being the largest segment with 30% of all vessels in the ETS regime, will only see EUA costs of annually.

It comes as no surprise then that 9 out of the top 10 contributors to CO2 emissions under the EU’s ETS regime are Cruise and Ro-Pax vessels, with >100.000 tons of CO2 emissions reported under EU ETS (and likely more outside of it), the highest emitter in European waters is a cruise vessel, accounting for 134k tons of CO2.

European regulation calls for a likely inclusion of smaller vessels into EU ETS after 2027. The argument is that vessels between 400 and 5.000GT only contribute 15% of maritime emissions and that the effort to include them in the ETS regime from the very beginning It surprising though that the regulation proposes to only include offshore and general cargo vessels. Based on our data, it’s hard to see the logic: With 9% of the total fleet calling EU ports and only 4% of the registered emissions general cargo doesn’t stand out in any way. Are we right to assume that this is more a naming error than political intent?

 

Taking a step back, Europe’s ETS is leading shipping in the right direction. It will target the biggest polluters and make evasion challenging. Even at today’s price levels for EUAs, but certainly when they continue to go up as expected, the additional cost will at least be a contributing factor to stimulate further operational improvements, technical innovation and the use of alternative fuels as well as shorepower. Yes, there are a few questionmarks to be resolved, but given the monumental challenge, EU’s ETS appears rather well designed.

 

There is a side-effect: Emissions data become transparent. This will certainly help to build momentum behind the transition to net zero. Much of the regulation of previous years, including the introduction of EEDI, EEOI, EEXI, CII, … was trying to generate emissions transparency and drive efficiency increases from different angels, too. EU ETS appears to be the most powerful of these regulations as it is comprehensive (impacted by vessel design and operations) and has significant economic consequences. We believe a case could be made to reduce this unnecessary regulatory complexity and refocus emissions oriented regulation to a system based on EU’s ETS (or similar, well appreciating that some of this regulation is IMO based, thus not within the regulatory realm of the EU). It would significantly reduce administrative burdens for shipping without slowing the industry’s transition to net-zero. But then: Have we ever seen a roll-back of regulation? Let’s hope the EU’s ETS can do the trick.

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.

For more: info@oceanscore.com