ASIAN shipowners with vessels sailing to and from Europe could soon be paying one billion euros (S$1.45 billion) a year in total once the European Union Emissions Trading System (EU ETS) kicks in fully – with companies registered in China and Singapore likely to bear the biggest burden.

This is the warning from Hamburg-based maritime-technology firm OceanScore, which says it has calculated that Asia-based holders of the Document of Compliance (DoC) will ultimately have to surrender a total of between 15 and 16 million EU Allowances (EUAs), or carbon credits, for voyages made to and from the EU. They are liable for 50 per cent of emissions. (Voyages within the EU are liable for 100 per cent of their emissions.)

OceanScore estimates that EU ETS costs for Asian owners in 2024 will total around 500 million euros – and this is the phase-in period. This year, owners of ships on voyages made to and from the EU will have to surrender allowances equivalent to 40 per cent of their liability for their emissions. This will rise to 70 per cent in 2025, and 100 per cent in 2026.

OceanScore estimates that the EU ETS, which came into effect on Jan 1, 2024, will affect around 4,000 Asian-flagged vessels – about a third of the total 12,500 cargo and passenger ships above 5,000 gross tonnage (gt) currently subject to the EU ETS, which is the world’s first international emissions trading system.

The company says that these vessels are owned or operated by 400 DoC holders, “including major players like China’s Cosco, Hong Kong-based Anglo Eastern Ship Management and South Korean HMM”.

Now we come to why the shipping, in general, dislikes the EU ETS: OceanScore cautions that its cost estimate of one billion euros for Asian shipping is based on the expected volume of EUAs to be surrendered by regional DoC holders from 2026.

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However, the sum will vary according to the price of carbon – and that has been volatile. It is now at a relatively low level of around 55 euros per tonne of carbon dioxide, after having fluctuated between 80 and 100 euros last year.

The carbon price is, in turn, dictated by supply and demand for EUAs, with the volume of allowances available for trading set to be gradually reduced over time under the EU’s cap-and-trade system, to spur investments in measures to cut ship emissions. In other words, shipowners can expect to pay a tax which will gyrate unpredictably, although it will go up in the long term. Just like most business people, shipowners like certainty, especially when factoring in costs. The EU ETS gives them the very opposite of certainty.

The company says that, in a breakdown of cost exposure for individual companies, it has calculated that a company with 15 vessels would be required to surrender just over 300,000 EUAs; at the current carbon price, this would come to 16.5 million euros.  

This raises a lot of questions, including the sort and size of ship being referenced. If we are talking about the big container lines, the sum would come to roughly 30 Suez Canal transits by the largest ships. 

OceanScore is one of several companies offering services to shipping companies looking to set up administrative systems to “navigate the complexity of the EU ETS”. 

Managing director Albrecht Grell notes that long-haul voyages into the EU can be broken up by stopping at transshipment ports to reduce emissions exposure. However, he adds, “we don’t see many people seriously discussing this” because doing it incurs higher fuel costs, waiting time, additional sailing distances and other inefficiencies.

I’m not sure about that. I don’t know what is being said in boardrooms or what shipowners might be planning, but geography suggests that there must some attraction to restructuring services, and at least looking at transshipping.

The most obvious services to look at are those to both the EU and the UK. In 2026, the UK will introduce a regulation that resembles the EU ETS, but with one crucial difference: It will apply only to domestically trading ships exceeding 5,000 gt. So it could be tempting to have dedicated services for cargo bound for Britain, instead of ones that stop at a number of north European ports.

Moreover, is transshipment to feeder vessels from nearby countries to EU ports really such a non-starter? Several feeder services and short-distance container routes connecting EU and non-EU ports are already running. It would be interesting to see whether vessels of under 5,000 gt become popular with the operators of these routes.

Whether or not ways of avoiding the EU ETS start to emerge, it is clear that most shipowners serving EU ports from outside the bloc have no realistic option but to comply.

OceanScore says the EU ETS is focusing the minds of European owners with an EU-centric deployment pattern for their vessels. 

Grell says: “Consequently, we see that European owners have generally started to prepare earlier for compliance with the EU ETS, because it is closer to home, and therefore perceived as having a more tangible financial impact on their operations.” 

He adds: “It is also typically easier for companies domiciled in the EU to set up Union Registry accounts required for handling EUAs, as well as gain access to trading platforms, which is more difficult for those based in non-EU countries, given the sometimes-quite-complex Know Your Customer processes.”

He implies that some Asian owners are not yet fully up to speed with the EU ETS regulation, nor have they put systems in place to manage and mitigate their EUA liabilities.

More generally, shipowners still cling to the hope that, eventually, an International Maritime Organization (IMO) pricing mechanism will be agreed upon by the United Nations’ agency’s member states. If so, it is possible that the EU could agree to replace its ETS with a global IMO scheme.

I suspect, though, that Grell doesn’t stay awake at night worrying about the possibility that OceanScore’s business model will disappear any time soon.