ECG — 2023-08-09
News from ECG
The EU Emission Trading System (ETS) is sending shivers through the industry as the ‘cap and trade’ system will affect the maritime industry from 2024 and the road transport industry from 2025.
In a nutshell the EU ETS will force polluters to buy EU emission allowances (EUAs) to cover their CO2 emissions per annum.
For those involved in FVL in the maritime sector with vessels over 5000GT, this will start from 1.1.2024 when the maritime sector will need to monitor CO2 emissions, purchase required EUAs at the market rate for CO2 per tonne and pay these in by 30 September 2025.
From 1.1.2026 other greenhouse gases (GHGs) such as Methane (CH4) and Nitrous Oxide (N2O) are included in the EU ETS and priced at the same market rate for CO2 per tonne.
From 1.1.2027 vessels under 5000GT (but bigger than 400GT) will be included in the EU ETS.
For voyages within the EU, that is from an EU port to another EU port, the EU ETS stipulates that ships will need to surrender 100% of their CO2 emissions, with other greenhouse gas emissions to be included from 2026. For voyages into or out of the EU, the EU ETS stipulates 50% of emissions are to be surrendered per annum.
But the EU ETS will be implemented using a ‘Phase-in-approach’ which basically means for EU to EU voyages, 40% of emissions are to be surrendered using EUAs on 2024 emissions, followed by 70% in 2025 and 100% from 2026 onwards.
Thus, for voyages into and out of the EU, the ‘Phase-in-approach’ means that in total 20% of emissions are to be paid in for 2024 emissions, followed by 35% for 2025 emissions and 50% for 2026 emissions, while all subsequent years will remain at 50%.
For the Road Transport sector, the EU ETS will be adapted and effective for monitoring from 1.1.2025 but with EUAs and fines only due from 2027. For FVL Road Transport, however, this ETS system will affect the price of fuel in the market as it is aimed at controlling the volume of fossil fuels in the market.
So, the main focus at the moment is the impact the EU ETS will have on the maritime sector. And the worry for the legislators was that mariners would find ways to evade the system. How? By increasing the volume of transhipment at non-EU ports.
This would mean that rather than paying for the emissions on the journey from, say, Shanghai to Zeebrugge, you would pay from Izmir in Turkey to an EU port, such as Piraeus. Why? Well if your port of origin and port of destination are both outside EU waters you are not covered by the EU ETS. And the rate of pay for a journey from a non-EU port to an EU port is at a phase-in rate of 20% leading to a max of 50%.
“Our first case study compared the hub of Piraeus with the nearby ports in Turkey (Izmir area) and concluded that the risk of evasion of the system is real at a price of less than 25 EUR/MT of carbon. Furthermore, the plans to expand the Izmir terminals further encourage the operators to shift their transshipments to the nearby non-EEA port,” says Prof Harilaos Psaraftis of the Technical University of Denmark (DTU).
>But the latest updated policy released in May this year corrects the previous directive and stipulates that there is a 300 nautical mile radius from an EU port which will be covered within the EU ETS.
“In my opinion, the new language may go some way into plugging the loophole, but it does not go all the way. I think it will still be cheaper to use a non-EEA port to do the transshipment. Plus, one could still find a port 310 nm from the EEA,” says Prof. Psaraftis.
But this is for containerised cargo only, and only affects those transhipment hubs where over 65% of the volume of traffic is containers. Daniel Gent of UECC is not convinced the use of transhipment hubs will be that simple.
“The wording is quite clear on this point. Containerships calling at transhipment container ports will have restrictions on ‘port calls’ that are within 300NM of the Union. There are several key elements to unpack here, first is that the vessel type that this regulation is targeting is specifically named. Secondly, transhipment port is clearly defined as a port through which more than 65% of container traffic is transhipped. If we put this into practice, let’s imagine a bulk carrier is calling Tanger Med prior to entering the EU. Tanger Med may well qualify as a ‘container transhipment port’ but it is illogical that a bulk carrier would be penalised on this basis.
When it comes to automotive ports, we see that in locations such as Turkey, the port is established to serve a nearby automotive plant. Even if vehicle carriers were added to the legislation, it would require a huge uptick in transhipping of vehicles to counteract the existing throughput at these ports,” says Gent, who leads UECC’s Energy & Sustainability initiatives.
Estimates as to what the EU ETs will cost a ro-ro vessel, based on the most recent price of €87.1 per tonne of CO2, indicate that for one ro-ro vessel with average CO2 emissions of 19,167 tonnes, it would be €667,762 in 2024, rising to €1,669,405 in 2026, as per a case study conducted by QueSeas. Assuming a company has a fleet of 5 vessels, it would be multiplied.
The costs from the EU ETS will be too high for each shipping line to take on, and thus will need to be shared.
Rasmus Hald Philipsen, Senior Advisor for Public and Regulatory Affairs at Maersk says: “We have announced that we intend to apply the costs of EU ETS as a standalone surcharge.” Daniel Gent of UECC states: “The cost increases are fairly predictable even if the carbon price is a little volatile. In simple terms, one tonne of MGO (marine gas oil) is about to increase in cost by $128 in 2024, $224 in 2025 and $320 in 2026 based on current EUA prices. This cost is, of course, too great to be absorbed by the vessel owners, and so a transparent and equitable system should be established to ensure that the ‘polluter pays’.”
For a detailed look at the upcoming EU ETS impacting the FVL sector please see the report here