MPVs Ready Themselves for EU Emissions Trading
By Carly Fields
From Issue 6 of Breakbulk Magazine, news editor Carly Fields speaks to analysts and project professionals about the likely impact of new European emissions regulations on MPV trading, and how operators are working with shippers and forwarders to share the burden.
The European Union (EU) has embarked on a mission to set a price on greenhouse gas (GHG) emissions from all ships over 5,000 gross tonnage, including multipurpose vessels, through its Emission Trading Scheme, or ETS. Effective from 2024, this initiative marks a pivotal moment in international shipping and could serve as a blueprint for global adoption by the International Maritime Organization.
The EU ETS is an emission cap-and-trade system designed to curtail carbon emissions within the European Union. It sets a cap on the total allowable emissions and allows companies to trade emission allowances. This cap diminishes annually, aligning with the EU’s ambitious climate goals – a 55 percent emissions reduction by 2030 and climate neutrality by 2050. Starting from 2024, ships above 5,000 gross tonnage engaged in commercial activities within the EU must acquire and surrender emission allowances for their GHG emissions.
The EU has outlined a gradual expansion in the coming years. Beginning in 2024, methane (CH4) and nitrous oxides (N2O) must be reported, with emissions included in the ETS from 2026. General cargo and offshore ships ranging from 400 to 5,000 gross tonnage will be subject to the EU’s Monitoring, Reporting and Verification (MRV) starting in 2025, with potential ETS inclusion to be evaluated in 2026. The EU’s MRV is mandatory and was introduced in 2017 as the first step in a larger process to collect and analyze shipping emissions data.
Non-compliance with the EU ETS regulations comes at a significant cost. Companies failing to surrender allowances face an excess emissions penalty of E100 per tonne of CO2 (tCO2). Importantly, they remain responsible for acquiring the required allowances. If a company repeatedly fails to comply for two or more consecutive periods, it risks being denied entry into the EU for all its ships – a serious threat to European MPV operators.
Implications for MPVs
The EU ETS is set to exert a substantial influence on the operations, costs, and contractual agreements of multipurpose ships. As of May 2023, the ETS emission allowance price stood at approximately €90 per tCO2, adding €290 to the cost per tonne of fossil fuel combusted. This represents nearly a 50 percent surge in fuel costs for operations within the EU, assuming a fuel cost of around E600 per tonne, according to data from DNV.
“This will be the first time that ships in international trade are subject to a carbon price, and the EU ETS is expected to have a significant financial impact,” DNV said.
Mark Jackson, CEO at The Baltic Exchange, explained the dynamics of regulatory adoption at a Reed Smith seminar. While acknowledging the initial challenges and uncertainties within the EU ETS, he believed that these could create opportunities. Jackson explained: “For a lot of the small-medium sized companies, the de-risking is just don’t go there. It’s as simple as that. And that in itself presents opportunities.” He anticipates that pioneering companies specializing in trading EU allowances, or EUAs, will gain a competitive edge, thus transforming the breakbulk market landscape.
The EU ETS, in essence, imposes a surcharge on fuel, primarily due to the limited availability of alternative fuels, Jackson added.
Once the EU ETS is in full swing, a two-tier market seems imminent. Jackson explained: “The U.S. hasn’t come out with its ETS yet and the UK is coming up with its ETS. But at the moment, if those systems aren’t fungible, they don’t recognize each other.” This complexity may lead to inefficiencies in the market, creating opportunities for MPV ship owners and adding barriers to entry for newcomers.
Regarding other market-based measures, China’s national ETS started operating in 2021 and covers power production only at the moment. The planned expansion of its ETS into seven new sectors does not include shipping. However, the national market has been built on the successful experience of local pilot markets. The Shanghai ETS market has included local shipping companies and ports in its carbon emission allowance management unit list since 2021, indicating that the national ETS could be further expanded as well, noted DNV.
Shippers and Burden of Costs
Chris To, global containers managing editor at S&P Global, pointed to the uncertainty surrounding who will bear the costs of the EU ETS. He noted: “There is a lot of lack of clarity and opacity with regards to who will be footing the bill, and that kind of goes across all shipping markets in general.” This ambiguity raises questions about how these costs will be distributed along the supply chain.
Peter Norfolk, global head of freight pricing at S&P Global, underscored the complexity of implementing alternative fuels for tramp and spot voyages, common in the MPV sector. He pointed out: “When we’re talking about tramp voyage, or spot voyages, who knows where they might change destination to halfway through. It’s a slightly more complicated story in terms of having the available infrastructure around those alternative fuels.”
But despite the challenges, the maritime industry must align itself with global decarbonization goals. There is a need for innovation and collaboration to achieve those goals. Kostas Gkonis, secretary general of Intercargo, speaking an S&P Global event, said: “To achieve decarbonization, we need to go into ship designs, new technologies, alternative fuels. These are in the direct remit of shipbuilders and engine manufacturers.”
Gkonis also noted that the challenges of the ETS are particularly acute for small and medium sized companies - the backbone of the MPV sector. “These are transformational times,” he said. “The IMO and these regulators set the broad framework within which the industry needs to evolve and operate. When it goes down to the company level one needs to adopt an agenda that best reflects the challenges that are currently being faced and what they do to deal with them in their due diligence.
“This is why I often argue that the decarbonization agenda is not the appropriate one for shipowners. Instead, it’s the ESG agenda, and the sustainability agenda. This is more relevant as it better reflects the current challenges. It’s a question of shifting mindsets.”
Joint Efforts
Global logistics giant DHL Industrial Projects has set the bar high with its “Mission 2050.” Speaking with Breakbulk, Torben Waalkes, global head of marine chartering, emphasized the need for collective efforts to decarbonize the logistics sector: “Decarbonizing logistics is a joint effort and requires clarity on regulation and reporting procedures.”
His thoughts were echoed by Elpi Petraki, WISTA International President, who called for unity across the industry: “Definitely we need everybody from energy makers to the suppliers of energy to start making big steps. We are there waiting, seriously waiting to see what this is. Everybody knows that something has to be done. We have to move forward. It’s not an easy way and we don’t have the solutions ready.”
She suggested that the biggest ship owners lead the way as they have the resources to experiment. “There is a will, but we have to find a way,” she said.
MSC has already declared its intentions for its container ships, which also carry project cargo. In a customer note, the carrier said: “As a result of the EU ETS implementation, we anticipate higher operating costs to be compliant. Customers will therefore contribute to this added cost through a manifested surcharge called ETS. The surcharge will be applied to all Spot and Long-term contracts, existing and new ones.
“Furthermore, given the phased-in approach decided by the EU, we expect the cost of compliance to increase over time, further impacting operating costs for the next three years.”
S&P Global’s To pointed out that the ETS is “a little bit peculiar” because it goes against the polluter pays principle that EU legislation generally promotes. “Carrier companies have been suggesting that this additional surcharge will be passed down to the shippers and the customers themselves. Then the shippers are saying that we are not going to be paying some of these costs on these overhangs for decarbonization. So, who is actually going to be paying? That’s a very, very interesting question.”
He foresees the creation of a block charge that might be passed down to the shippers and potentially to the customers. But, overall, there is “a lot of lack of clarity and opacity in regard to who will be footing the bill.”
The Baltic Exchange’s Jackson agreed that there are a lot of grey areas and therefore, in the initial phase, there will be opportunity to make money out of the regulation - with one caveat: “I always come at regulations saying ‘don’t make it your core business’. It should be icing on the cake. You should already be trading your trading pattern and should already be going to that EU area and then you decide whether you want to preserve it or not.”
He added that the ETS could be bad for the consumer and relatively good for business services because split markets and grey areas provide opportunities. But there will also be more disputes, more delays, more problems, he said. “The trading patterns are disrupted so therefore you’re going to need more ships.”
The inclusion of multipurpose ships in the EU ETS signifies a pivotal moment in the global shipping industry’s journey towards carbon accountability. While it presents challenges in the form of increased costs, it also offers opportunities for innovation and sustainability. Stakeholders across the breakbulk and project cargo supply chain must collaborate to ensure that these costs are appropriately managed through contracts between ship managers, owners, charterers, and cargo owners.
Carly Fields has reported on the shipping industry for the past 23 years, covering bunkers and broking and much in between.
PHOTO CREDITS
MAIN: UHL
SECOND: Jumbo Offshore
