Posted on January 18, 2024
Global shipping news

Going Green: Decoding the EU Emissions Trading System’s Impact on Shippers

What is the European Union Emissions Trading System?

The European Union Emissions Trading System (ETS), set to include shipping as of January 1, 2024, represents a significant shift in the maritime sector’s approach to sustainability. This system imposes a cap on greenhouse gas emissions and necessitates the purchase of allowances for emissions, directly impacting large ships of 5,000 gross tons and above.

In Gartner’s recent survey of over 300 logistics leaders, it was revealed that sustainability and ESG considerations ranked lowest in priority when choosing a 3PL, with efficiency and cost-effectiveness taking the top spots.

However, it’s worth contemplating whether the European Union’s imposition of taxes on greenhouse gas emissions within the shipping industry might be the catalyst needed to shift sustainability to the forefront of future ranking considerations, even among cost-conscious logistics professionals.

The EU ETS Surcharge Explained

  • Surcharge Calculation: Various shipping lines have applied different methods for calculating the ETS surcharge, with Maersk and Hapag-Lloyd indicating surcharges of €70 and €24 per 40’ container respectively.
  • Surcharge Application: The surcharge is applicable to bookings where the Load Port and/or Discharge Port is located in the EU/EEA. In some cases, such as bookings from China, Maersk will add the EU ETS emissions surcharge to the base freight rate.

The EU ETS Challenge for Shippers

Inconsistent Calculation Methods: Different shipping lines are using varied methods to calculate the ETS surcharge, leading to inconsistency and confusion among shippers.

Lack of Clear Communication: There is a lack of uniformity in how shipping lines communicate their carbon emissions offsetting measures. This inconsistency makes it difficult for shippers to understand and compare the environmental impact of different carriers.

Complexity in Understanding Surcharges: The methodologies behind these surcharges are complex, and the lack of transparency can lead to mistrust or misunderstandings between shippers and carriers.

Budget Adjustments: As the surcharge increases from covering 40% to 100% of emissions by 2027, shippers will need to significantly increase their budget allocations for shipping.

Cost Competitiveness: Rising costs may affect the competitiveness of EU-based shippers compared to those in regions without such emissions pricing.

Impact on Profit Margins: For businesses with thin profit margins, these increased costs could have significant financial implications.

Strategies for Shippers in Response to the EU ETS

Implement Dedicated Tracking Systems: Shippers should establish robust systems to specifically monitor and report the financial impact of the EU ETS surcharge. This could involve integrating new accounting codes or software features that distinctly capture these additional costs.

Budget Forecasting and Analysis: Regular analysis and forecasting of how the surcharge impacts overall shipping costs are essential. This allows shippers to adjust their financial strategies and communicate effectively with stakeholders about cost changes.

Transparent Reporting: Creating transparent reports about these additional expenditures can aid in negotiations with customers and suppliers and maintain clarity in pricing structures.

Partnering with Carriers and 3PLs: Shippers should actively collaborate with their carriers and third-party logistics providers (3PLs) to develop and implement carbon emissions reporting frameworks. This partnership is critical as carriers and 3PLs possess the operational data necessary for accurate emissions tracking.

Integrating Sustainability Metrics: Integrating sustainability metrics into the selection criteria for carriers and 3PLs can incentivize these partners to focus more on reducing emissions and adopt greener practices.

Developing Emission Reduction Plans: Shippers should create concrete plans with realistic initiatives aimed at reducing their carbon footprint in transportation. This could include optimizing route planning, investing in more efficient transportation modes, or using cargo space more efficiently.

Investing in Cleaner Technologies: Exploring investments in cleaner technologies such as electric vehicles for last-mile delivery or partnering with carriers that use low-emission ships, can be a significant step towards reducing overall carbon emissions.

Leveraging Data and Technology: Using data analytics to understand and optimize transportation patterns and employing technology to reduce empty runs and improve load factors can lead to significant emission reductions.

Engaging in Policy Discussions: Actively participating in industry and policy discussions around emissions reduction can help shippers stay ahead of regulatory changes and influence the development of practical and effective environmental regulations.

By adopting these strategies, shippers can not only comply with the new EU ETS requirements but also contribute to the broader goal of reducing the environmental impact of the shipping industry.

These actions can provide competitive advantages by enhancing brand reputation, opening new business opportunities, and preparing for future regulatory changes in a rapidly evolving global market.

Conclusion: A Call for Action and Adaptation

The EU ETS represents a pivotal moment for the shipping industry, signalling a transition towards more sustainable practices. It’s an opportunity for shippers to reassess their operational strategies and align with the global movement towards reducing carbon emissions.

While the initial focus is on compliance and understanding the financial implications, the broader goal is to foster a more sustainable and environmentally responsible industry. The journey towards sustainability is indeed challenging, but it is also filled with opportunities for innovation and leadership in green logistics.

FAQs

What are the key compliance obligations for shippers under the EU ETS for maritime emissions?

Shippers under the EU Emissions Trading System (ETS) for maritime emissions are obligated to adhere to specific compliance mechanisms aimed at reducing greenhouse gas emissions. Large ships over 5,000 gross tonnage must monitor, report, and verify their emissions when loading or unloading cargo or passengers at European Economic Area (EEA) ports. The MRV process, integral since 2018, was designed as a precursor to the full inclusion of maritime emissions under the EU ETS​​. Starting in 2024, shipping companies must buy and surrender emission allowances to cover a percentage of their verified emissions. This percentage obligation will increase over time. In 2024, it covers: 40% of emissions for voyages between EU ports and 20% of emissions for voyages from or to EU ports. By 2026, companies must cover 100% of emissions for voyages between EU ports.

How does the EU ETS influence the cost structure for shippers in the maritime sector?

The EU ETS now requires shippers to purchase emission allowances for maritime emissions. This increases costs for shipping companies. This system incentivizes reductions in greenhouse gas emissions by making it more cost-effective to reduce emissions rather than pay for allowances. However, the costs associated with buying allowances can be passed on to charterers, and there are opportunities for trading in allowances, potentially turning a profit or mitigating costs​.

How does the EU ETS influence global shipping routes and trade patterns for shippers?

The phased implementation and cost implications of the EU ETS may influence shipping routes and trade patterns, particularly as companies may seek to optimize routes and operations to minimize emissions and the associated costs of allowances. The specific impact on global shipping routes and trade patterns will depend on various factors, including the availability and cost of low-emission technologies and fuels, as well as the comparative costs of different routes in light of ETS obligations.

Are there exemptions or allowances for small or specific types of shippers within the EU ETS framework?

The EU ETS framework includes provisions for specific exemptions and allowances. There are transitional rules to help certain ships and voyages, such as:

Small islands.

Ice class ships.

Journeys to outermost regions.

Public service obligations.

Some member states with many shipping companies will get a share of the auctioned allowances to distribute to those companies. This approach aims to address geographical specificities and mitigate the risk of evasion in the maritime sector.

How does the EU ETS impact the competitiveness of European shippers compared to their global counterparts?

The competitiveness of European shippers compared to global counterparts could be influenced by the EU ETS through the additional costs associated with compliance. However, the system also provides an opportunity for innovation in emissions reduction technologies and practices, potentially offering a competitive advantage in a global market increasingly focused on sustainability.

How does the EU ETS interact with other international regulations governing maritime emissions, and how do shippers navigate this regulatory landscape?

The EU ETS interacts with other international regulations, such as the International Maritime Organization (IMO) measures, through a regulatory framework that includes varied timelines, stated goals, and legal requirements. While the EU ETS is a part of the EU’s “Fit for 55” package aimed at reducing GHG emissions, it operates alongside IMO’s measures targeting efficiency and emissions reductions in the maritime sector​.

Going Green: Decoding the EU Emissions Trading System’s Impact on Shippers

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