EU shipping carbon tax looms, but who will pay?
BACK in July, there was widespread relief within the shipping industry that the International Maritime Organization (IMO) had managed to agree on a revised greenhouse gas (GHG) strategy that aims to achieve net-zero carbon emissions by 2050.
At the time, Simon Bennett, International Chamber of Shipping (ICS) deputy secretary general, welcomed the newly agreed strategy but cautioned: “The checkpoints agreed for 2030 and 2040 are particularly ambitious. The industry will do everything possible to achieve these goals including the 70 per cent to 80 per cent absolute reduction of GHG emissions now demanded of the entire global shipping sector by 2040.
“But this can only be achieved if IMO rapidly agrees to a global levy on ships’ GHG emissions to support a ‘fund and reward’ mechanism, as proposed by the industry. We urgently need to reduce the cost gap between conventional and alternative marine fuels, and incentivise the production and uptake of new fuels at the scale now required to meet this accelerated transition. The year 2040 is less than 17 years away, and the availability of zero-GHG marine fuels today is virtually zero.”
The elephant in the room was that the EU was poised to implement its own unilateral charge on shipping in the form of its Emissions Trading Scheme (ETS). This will now come into effect from Jan 1, 2024 – in just over two months’ time.
The hope had been that IMO would have an effective “market-based measure” to incentivise the move to zero-GHG fuels in time to persuade the EU that it would not need to go it alone with the ETS.
That opportunity has now gone. The shipping industry is now, hurriedly and belatedly, getting ready to comply with the new EU regime. The classification societies and numerous technology companies are rushing to provide their services to help ship operators meet their ETS obligations.
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My inbox has been full of press releases announcing new products and services. For example, Metis Cyberspace Technology said it has “added new functionality to its cloud-based Total Emissions Management solution that allows ship owners and operators to make best use of the ETS”.
The company explained that, after expanding to include maritime transport from next year, the EU-ETS will apply 100 per cent for EU-to-EU voyages and 50 per cent for EU-to-non-EU voyages. It aims to cut greenhouse gases using a combination of emissions trading and emissions allowances for ships. Cargo and passenger ships of 5,000 gross tonnage (GT) and above must account for emissions from Jan 1 in order to “surrender” (or use) their first trading allowances by Sep 30, 2025. The ETS will also cover offshore ships from 2027.
To comply, shipping companies need to monitor emissions under a revised plan that has been assessed by a verified organisation and approved by the administering authority. Once a year, companies submit an emissions report for each ship and aggregated data into the ETS. The progressively more stringent scheme requires ships to surrender emissions allowances, starting at 40 per cent of emissions in 2024, rising to 70 per cent in 2026, and reaching 100 per cent thereafter.
The shipping industry prefers a straightforward system that is easy to comply with. That is why it wants IMO to bring in a simple levy system, based on bunker consumption. The EU-ETS is very different. It is complicated and involves managing financial risk, with carbon credits trading in a volatile market. Prices have swung between 80 euros (S$115.66) per tonne of carbon dioxide emitted and more than 100 euros in 2023, after falling to below 60 euros in 2022 following Russia’s invasion of Ukraine.
Hamburg-based maritime data and technology firm OceanScore said that the concept of trading is about to take on a whole new meaning for shipping companies. It cautioned: “As well as monitoring their emissions to meet reporting requirements, companies must now grapple with the complexities of carbon credit trading to manage and mitigate financial exposure to the EU-ETS.”
OceanScore warned: “The new regulatory regime will require the ship owner or manager, as Document of Compliance holder, to surrender to the authorities so-called EU Allowances (EUAs), or carbon credits, corresponding to fleet emissions based on reported MRV (measurement, reporting and verification) data for the previous year.”
Shipping companies will have to start purchasing EUAs on an ongoing basis from Jan 1, 2024 in the run-up to an initial deadline of September 2025 to surrender EUAs.
OceanScore’s co-managing director Albrecht Grell noted that shipping companies need to have administrative systems in place both to track fleet emissions and continually assess the volume of allowances required, as well as allocate these allowances or the related costs to relevant stakeholders as part of the EUA accounting process. Quality and timely availability of data will become crucial, especially in voyage charter environments.
He added: “Critically, companies will have to determine the best strategy for acquiring EUAs, which will entail complex considerations related to price, volume and timing of EUA transactions and other issues.”
If all this isn’t enough for the shipping industry to grapple with, a crucial decision on who should pay the EU has still not been made. Law firm Watson Farley & Williams has highlighted what it calls a “hotly debated topic”. The European Commission still has to make up its mind who is responsible for submitting EUAs – the ship owner or the ship manager.
We could be in for interesting times as this new unilateral EU measure kicks in. Look out for increased feeder ship activity, of vessels slightly under 5,000 GT, between transshipment hubs just outside the EU and ports inside the trading bloc.
Meanwhile, another question is whether this EU action makes an IMO levy more or less likely. Time will tell on that one.
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