Shelling Out for EU Shipping Charge

How Breakbulk Specialists Are Coping With the Demands of the EU Emissions Trading System

By Felicity Landon

With the EU’s Emissions Trading System (ETS) becoming applicable to shipping from January 2024, vessel owners and operators have had to take on another significant regulatory and administrative burden. How are they coping?

From Issue 3, 2024 of Breakbulk Magazine.

(7-min read)

Did you do your carbon calculations correctly? Did you buy a sufficient number of EU Allowances (EUA)? Did you calculate the cost of the EUAs correctly, and did you assign that cost to the relevant cargo or client accurately? Might there be a better way to achieve the aims of the EU ETS?

Few would argue with the aims of the European Union’s Emissions Trading System (ETS) and the need to reduce CO2 emissions. However, as the ETS became applicable to shipping from January 2024, ship owners and operators have had to take on another significant regulatory and administrative burden, as well as responsibility for a new layer of complexity.

For BBC Chartering, implementing the requirements of the EU ETS has impacted the administrative burden of all departments – chartering, operations, accounting, IT, business systems, fleet procurement and management, said a BBC spokesperson.

“There is a very high administrative burden of checking, counter-measuring and reconciliation of data received from vessel owners. Moreover, many customers are more or less unwilling to pay extra charges. It is almost impossible for the carrier to assign the ‘fair share’ of charges to the individual clients, due to the nature of the breakbulk/project market (freight charged by weight, volume, square meter, unit, etc.),” he said. “Also, there is a very high burden to register own ETS accounts to be able to purchase EUAs directly without going through third parties, banks or bunker suppliers (to avoid further third-party costs).

“More so, there are very high costs due to required additional resources/people to handle the administrative tasks. And there is an impact on cash flow, due to the requirement to purchase EUAs and hand these over to owners more than one year before owners must pass them on to authorities.”

Added Cost

Felix Schoeller, commercial director and strategy director at project heavy-lift carrier AAL, pointed out that bringing shipping into the remit of the EU ETS did not make a huge impact on the ETS as “we are just a small fraction of the trading scheme.”

He said: “The ETS requirements have been in place for other industries such as power generation, construction, steel and manufacturing for many years. But, of course, for customers and owners it is a big impact; there is the added cost, making provisions, properly calculating the ETS, making sure you have the credits when you have to submit them, and so on. For AAL, it took preparation and a lot of open dialogue with customers to explain to them what’s coming their way, because the shippers have to cover the cost.”

AAL did not need to hire additional people for handling the ETS demands, Schoeller said. “We have a very good analytics team. And as there are already many industries that have to purchase EUAs, there are a lot of service providers that can help you deal with it. Columbia Ship Management, our ship manager, has a very good set-up for this. As for the trading partners to buy credits from, there were a lot of options already, as many industries had already been trading EUAs, so we joined an infrastructure that was already established.”

For AAL, the main focus was on transparency. “I think we were the first in the breakbulk/project/MPV sector, for our liner service to Europe via the Middle East to Asia and also Asia to Europe, to introduce a fixed surcharge, making it very simple for customers to understand what this would actually mean. In effect, it adds about $3-$4 per freight tonne,” said Schoeller.

“It was important that customers knew where they were and that there were no surprises. So this was about making sure it is transparent and that it works internally for us.”

As an example, for a full ship of energy-related project cargo, AAL can “very simply show transparently how much it is going to cost the customer.”

Were customers surprised by the new system? “EPCs or construction companies in Europe knew about it because they were likely subject to ETS already. Others were not aware – that’s why we needed to talk about it early. Asian shippers responsible for sea freight to Europe might not have been aware of it.”

Generally, the UN SDGs, decarbonization and sustainability are very current topics anyway, Schoeller said, “so there was plenty of opportunity, throughout 2023, to discuss this with our customers, so when they saw ETS charges on their invoices, it wasn’t a surprise. Everyone understood why it is being done, so there was very little pushback.”

As a general trend, major companies want to track their carbon footprint for their entire supply chain, he added. “This is just becoming a more present topic that you have to deal with.”

AAL operates a fleet of 22 ships and has six newbuildings on order, with four of these to be delivered this year. The newbuilds are equipped with the latest technology, which will automatically help to reduce ETS liabilities because of their lower emissions, said Schoeller.

“They are dual fuel, methanol ready; in a few years they will run on methanol in certain areas and trades. Shipbuilding technology has moved on and ships already consume a lot less fuel than traditional ships. Our flagships are between 26,000 and 32,000 dwt, so they have a good carbon footprint because they are larger and can take more cargo.

“With the new ships, there will be a significant reduction in emissions even with conventional fuel, and once they are operating with methanol there will be an even more substantial reduction.”

ESG and sustainability remain very important for AAL and the wider sector, he added. “We are already looking at our next newbuilding program, for the end of the decade – hopefully we can push emissions even lower.”

Customer Transparency

Sören Bibow, CFO of Harren Group and managing director of SAL Heavy Lift, set the scene by noting: “CO2 reduction goes strongly along with fuel saving. This has been an ongoing process in the company for years and would go on irrespective of EUA trading.

“However, as an operator of an owned fleet and booking cargo directly with clients, the EUAs are fully our responsibility. It was quite a project ensuring the correct measures and price mechanisms to offer our clients a customer-orientated transparent pricing.”

He divided the ETS topic into parts. First, technical. “You measure your systems on board and work with your external auditors to verify the CO2 consumption. Then you allocate the CO2 consumption of the individual cargo and destinations, amend charter parties, set up trading accounts, etc., to a transparent and fair market price. SAL worked well ahead of the deadline, putting the necessary infrastructure in place and reorganizing teams in-house to be live with the starting point 1 January 2024.”

Smaller and medium shipping companies outside the EU prepared nothing, he said, and at the start most firms were not able to open any accounts to buy EUAs. “At the end of February 2024, the EU informed the companies about the country where they have to open accounts, but this will take quite some time. Until this is finalized, they are fully exposed to price changes.”

He pointed out that the EUA price at the beginning of the year was about €75. It dropped to €50, then by mid-March was up to €60. “So there is a lot of volatility. The risk is that a company could calculate ETS costs based on €60 but end up paying €100 per EUA later down the line.”

Emissions data must be recorded, verified and reported for every ship calling at an EU port, and EUAs – carbon credits – purchased. The first bills, when EUAs are surrendered, must be paid by September 2025 for emissions reported this year. The system is being phased in, with 40 percent of emissions covered by EUAs this year; 70 percent in 2025; and 100 percent from 2027.

Port choices matter. EUAs must be purchased for 100 percent of emissions from voyages between EU ports, or 50 percent for voyages between an EU and non-EU port.

There has been much talk about the possible unintended consequences of the EU ETS. In container shipping, there was speculation about whether ships might reorder their routes to call at transshipment hubs just outside the EU, to avoid the 100 percent levy. However, the European Commission, late in 2023, announced that Tanger Med and East Port Said would be fully included in the ETS regime. Since then, the crisis in the Red Sea, with ships diverting around the Cape of Good Hope, has changed all preconceptions – and, of course, increased ETS liabilities due to the much longer voyages.

Cost Exposure

BBC Chartering said the Red Sea crisis had made the ETS more expensive because of the distances being covered. But in general, when it comes to changing routes, there is not a lot to be achieved, the spokesperson said. “Certainly, reduced consumption helps to reduce exposure to costs, but only to a certain extent. Our experience is that many clients expect us to include the ETS-related costs in the freight rate, rather than paying a specifically mentioned ETS-surcharge.”

Inbound to Europe, Schoeller said AAL tries to minimize the ETS impact on a voyage as much as possible. As he pointed out, with ETS still discounted at present, the cost differences are not so great. “But when it goes to 100 percent, then routing will definitely adapt to the most economical way.”

Bibow said that SAL had taken time to consider the issues around port calls. “But in the multipurpose and heavy-lift markets, the routes are following the cargo and limiting the potential cost-saving optimization.”

In the end, he said, it makes sense to put a price on CO2 and that’s something that ties in with the ESG policies of Harren Group. “So the general idea behind the EUAs, I really agree on. For us, it is an administrative task and one of the many things we have to cope with. We all share the view that reducing CO2 emissions is very important. On the one hand, we might argue it’s a complicated way to do it. But I really believe that in a couple of years we will see the same, probably in a different way, measured by the U.S. and China. The EU allowance trading is most likely the first step in many steps we will have to cope with.”

At BBC Chartering, the view was similar. “To be clear, the cause for this system is right and to be supported since we need to battle climate change,” he said. “Yet we think that the implementation for the shipping sector has not been thought through far enough and that the shipping industry should have been consulted more thoroughly beforehand.”

Schoeller described the overall response from customers to the ETS charges: “People are willing – they are not opposed to this. Consider a large hydrogen plant being built. The owner is a European energy company. The components come from a Western manufacturer. A European logistics company is involved. These are all players for whom ESG and the carbon footprint topic is very important. That’s why ETS credits and reports are very important for the whole value chain.”

He concluded: “Let’s hope the money is put to good use to reduce emissions. We hope the EU uses the money [from ETS} to support changing the energy mix.”

The Jumbo-SAL Alliance, BBC Chartering and AAL Shipping will be exhibiting at Breakbulk Europe 2024 on 21-23 May at Rotterdam Ahoy.

TOP PHOTO: SAL's MV Maria in Helsinki, Finland. CREDIT: SAL Heavy Lift