Since 2005, the EU has had an Emissions Trading System (EU ETS) in place. A scheme which has been helping bring the bloc’s carbon emissions down, in pursuit of net zero targets.
From January 2024, the application of EU ETS is being widened to include the maritime industry. All large vessels of over 5000 gross tonnage that dock at EU ports, regardless of the flag they fly, will be subject to the scheme. A move which is going to have significant ramifications for shippers in the UK and EU, despite the United Kingdom’s departure from the European Union in 2021.
In this article we will explore exactly what the EU’s Emission Trading System regulation means for sea freight shippers across Europe in 2024.
What is the EU Emissions Trading System (EU ETS)?
In their own words, the EU ETS is “a cornerstone of the EU's policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively”.
Basically, it makes polluters in certain sectors pay compensation for their greenhouse gas emissions.
This works in the form of a cap-and-trade scheme. The ETS caps the total amount of CO2 that can be emitted from operators in targeted sectors. Then the operators have to purchase carbon allowances or trade them with other companies on a carbon market for every ton of CO2 emitted. The more emissions an operator is responsible for, the more carbon allowances they need to purchase. Failing to account for all emissions with allowances results in heavy fines.
In 2022, the average price of EU carbon allowances (EUAs) were £71 per tonne of CO2.
Sectors covered by the scheme include over 10,000 installations in the energy generation sector, aviation, and manufacturing industries (such as oil refineries, metals, cement, lime, glass, ceramics, pulp, paper and more).
From January 2024, the EU ETS will include maritime transport vessels above 5000 gross tonnes, which is why sea freight shippers need to be ready for changes.
The policy has been successful in reducing emissions in the target sectors to-date. The EU’s own estimations are that power and industry plant emissions have reduced 37% since 2005 because of the policy.
How is the EU Emissions Trading System being introduced for the maritime sector?
From January 1st 2024, the EU ETS will cover 100% of the greenhouse gas emissions from intra-European voyages taken by ships of over 5000 gross tonnage. 50% of the emissions from voyages that start or finish in a EU port, will also be covered by the scheme.
However, to ensure a smooth transition, the implementation will be phased. Shipping companies only must surrender carbon allowances for a portion of their emissions during the phase-in:
- 2025: 40% of emissions from 2024 reported.
- 2026: 70% of emissions from 2025 reported.
- 2027: 100% of emissions from 2026 onwards reported.
Who in the maritime industry is responsible for paying the EU ETS costs?
Speaking directly, it falls to the shipping lines to purchase carbon allowances for the CO2 of their vessels. Failure to account for their emissions, and the fines that can result, is a risk that carriers will bear.
However, we all know it’s not that simple.
Shippers, freight forwarders, and other supply chain stakeholders are going to end up paying these charges indirectly, in the form of surcharges that the carriers add to shipments.
How much is the EU ETS going to cost shippers?
Estimates are that this is the roughly $7 billion dollar question. That is the forecast this widening of the EU ETS is going to raise for investment in decarbonisation.
All the major shipping lines have published their EU ETS surcharge estimates. They are as follows:
| Trade | Maersk per TEU | ONE per TEU | CMA CGM per TEU | ZIM per TEU | Yang Ming per TEU | Hapag-Lloyd per TEU | Evergreen per TEU | MSC per TEU | COSCO per TEU | HMM per TEU | OOCL per TEU |
| Asia - North Europe | £17 | £20 | £22 | n/a | £21 | £20 | £23 | £18 | £16 | £14 | £23 |
| Asia - Med | £9 | £14 | £17 | n/a | £16 | £19 | £20 | £15 | £16 | £12 | £16 |
| Europe - North America | £20 | £26 | £34 | £32 | £23 | £21 | £28 | £30 | £36 | £35 | £40 |
Source: The Loadstar. Values converted from € to nearest £.
Unfortunately, those figures aren't certain. They are only estimates. But they are a good indication that we aren't talking about huge new charges and that the rates are expected to be broadly the same across the shipping lines. They only vary £6 per teu on the Asia – North Europe trade lane, £11 on Asia – Mediterranean routes and £19 on European exports to North America.
Will UK shippers avoid the EU ETS surcharges?
No is the short answer.
When the UK left the European Union, the EU ETS became the UK ETS for Great Britain and Northern Ireland. The scheme has largely remained the same since, just with UK ETS regulators in charge of ensuring compliance from aircraft and installation operators, instead of a European body. Until now.
The UK ETS scheme is under review for the next two or three years and isn’t being adapted in January 2024 to include large vessels in the maritime sector. So, will UK shippers avoid these charges? Not really.
Almost every vessel service that arrives or departs the North Europe region, makes other calls at ports that are covered by the European Union. Whether that is Antwerp, Rotterdam, Hamburg, or others. This means the vessel will be subject to the EU ETS scheme and then any shipper with containers on board will almost certainly be required to pay surcharges. Even if their containers' destination is London Gateway, Southampton, Felixstowe or another UK port.
Are shipping lines going to change their routes to avoid EU ports?
We cannot know for sure, but I think we can confidently say this is extremely unlikely, for several reasons.
Firstly, for deep sea journeys, it’s simply not worth it for the carriers. These charges are only a mild inconvenience for them in the grand scheme of things, and we know they plan on passing most of the charge onto shippers anyway.
Furthermore, there isn't the required infrastructure to move all cargo destined for the European Union to ports outside the bloc. Other ports in the region that aren’t associated with the EU wouldn’t have the capacity to accommodate a sudden massive increase in ship volume.
Added to that is the cost of getting the cargo to the required destination within the EU would massively outstrip this ETS charge for shippers.
Where questions remain is whether the UK or other ports in the Mediterranean basin that are not part of ETS could use the charges to leverage some kind of advantage. This could be in the form of a transhipment voyage, i.e. using the local non-EU port to move cargo onto a new vessel, then only paying ETS charges associated with a small leg of the journey. An interesting concept, but again, the costs of this likely massively outstrip the EU ETS charge. Therefore it feels unlikely this kind of tactic will be implemented.
What if my goods are on a zero-emission or low-emission vessel?
Whilst options are limited currently, in the years to come there will be a growing number of zero or low-emission vessels in operation on major trade lanes. Maersk is set to take delivery of its first large ocean-going 16,000 TEU methanol-powered vessel in Q1 of 2024.
So, will using these vessels avoid the charges? In theory, yes. But that will depend on how the carriers decide to charge for their carbon allowances.
They could take their total EU ETS charge and divide it equally, per teu, amongst shippers on a certain trade lane. Or they could calculate their ETS charges on a vessel-by-vessel basis. Meaning if you opt for a zero or low-emission vessel, you avoid most, if not all, charges.
Ultimately, it’s a move that incentivises these new, green, fuel-efficient vessels. Which is what the EU wants (and the planet needs), of course.
In the immediate future, it’s certainly true that the shipping lines with newer, more fuel-efficient fleets will have lower EU ETS charges. Therefore, making themselves more price competitive.
Whilst these charges are a burden for the logistics industry and shippers particularly, the sector is under increasing pressure to decarbonise. This is just one of many regulations that businesses using the industry can expect in the coming years as pressure mounts.
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