Nothing can stop shipping paying for its carbon emissions, but the industry can plan for coming changes, writes Panos Koutsourakis, Vice President, Global Sustainability, ABS
The shipping industry’s relationship to environmental regulation continues to evolve, with regional initiatives set to play an important role in the years ahead. Before the industry reaches the IMO milestone of 2030, European Union regulations will begin to dramatically reshape shipping company operations.
The EU’s Emissions Trading System (ETS) and FuelEU Maritime regulations form an important layer in decarbonization strategy and shipowners must plan accordingly to manage the risk to which they will be exposed.
The EU regulations can be simplistically characterised as stick and carrot. FuelEU Maritime is designed to facilitate the development and use of new fuels and energy solutions for maritime, requiring owners to report greenhouse gas emissions per unit of energy used onboard, based on fuel consumption and lifecycle emissions factors.
FuelEU Maritime uses a greenhouse gas intensity approach which considers the overall conversion of fuel into energy. It is currently unique in adopting a well-to-wake approach to assessing a fuel’s emissions value, requiring the entire fuel production supply chain to be taken into account.
The regulation will set limits for carbon intensity and whether ships are above or below that line determines whether they pay or accrue allowances – surplus of compliance. It also provides tools for compliance and a methodology to achieve lower carbon operations in the short term including using surplus GHG emissions or borrowing them from future years to achieve the required annual limit.
Shipowners with large fleets can also consider pooling their emissions performance pulling together low carbon fuelled vessels and those burning traditional fuels for an aggregated score. The EU believes this type of approach will create the conditions to transition to lower carbon fuels, as older vessels are given time to be phased out or upgraded to adopt low carbon fuels.
Meanwhile, the European Union also has plans that will have a more dramatic effect in the short term, using emissions trading to drive decarbonization and bringing shipping’s emissions into this market for the first time.
The European Parliament and Council have come to an agreement that the first reporting year of the EU ETS will be 2024, with submission of carbon allowances growing in phases between 2024 and 2026 from 40% to 100% of GHG emissions.
The instrument for collecting data on relevant voyages will be the EU’s own MRV mechanism and though the regulation begins with carbon, by 2026 it will be expanded to include other GHGs including methane, nitrous oxides and other emissions.
The responsibility for submitting allowances has been the subject of some debate, with the initial framing that the responsible entity is the one owning ship – as with MRV – revised to include operators. This reflects the fact that in many markets, the manner of operation as well as the fuel choice is the decision of the charterer, not the owner.
This opens up the subject for negotiation between owners and charterers but the text is also subject to final agreement, with the possibility that the EU may derogate responsibility to member states to provide final judgement in case of disputes.
Where the ETS and FuelEU Maritime diverge is that the ETS does not consider lifecycle factors in the calculation of emissions, only those from the combustion of fuel onboard. It levies a charge based on reported consumption for the MRV period and carbon factors for that fuel.
So what will the carbon market mean for shipping? Clearly the impact will vary by vessel type, size and trading patterns. Put simply, an ETS voyage would be the same as one where MRV data is filed, though if the voyage starts or ends outside the EU then half the emissions will be accounted for.
In a simple analysis using 2020 MRV data, a VLCC on a voyage from the Middle East to Europe, running on HFO using a sulphur scrubber would have to surrender up to Euro55,000 as its first ETS allowance in 2024.
The issue for owners, beyond covering the additional expenditure is that the price of carbon will move over time and carbon credits with it. The ETS will take into account the value of carbon in the market and the EU will also reduce the available allowances in future. This creates scarcity as time goes by and infers that the price of carbon allowances will rise.
Given the impact on owners and charterers’ balance sheets – and on voyage profitability, entities trading to and from the EU must make a strategic analysis of the impact of the ETS on their business and how they will improve emissions performance and adopt lower carbon fuels.
Most owners will have a close understanding of fleet deployment and trading patterns, but the question of which ships call how frequently at EU ports will likely require understanding not just how to optimise fleet operations but also how to finance the transition to the era of carbon pricing.
The conclusion that cannot be avoided is that maritime carbon emissions will soon have a value; owners and operators will be asked to verify emissions and no ships currently sailing are so efficient as to avoid it completely. However, there would be an increased demand for adoption of energy efficiency technologies because the cost saving is no longer only for fuels, but also for carbon emissions.
The need to proactively manage a fleet, not just in commercial terms but across all aspects of operational performance becomes imperative. Calculating a fleet’s emissions using recent MRV data may not be too complex, but understanding how to manage the resulting financial impact requires a strategy.
For some owners and charterers, it could even change the business case and assumptions under which they operate, increasing the requirement to hedge costs and operating expenses in order to secure cashflows.
An industry often characterised as traditional and slow to change, shipping is in reality defined by its ability to evolve and meet new challenges. Operating successfully and sustainably in the era of carbon pricing could be its biggest challenge yet.
The views presented are only those of the author and do not necessarily reflect those of SAFETY4SEA and are for information sharing and discussion purposes only.
