Why EU ETS will matter beyond Europe’s borders

The lessons learned from the expansion of the EU Emissions Trading System (EU ETS) to the maritime sector will set the tone for decarbonization around the world, says Harriet Robson, UK Director of Transparensea.

From 1^st January 2024, the impact of EU ETS will be felt most directly by the more than 700,000 ships that call at European ports each year. For the first time ever, they will be required to pay for their ships’ emissions, and the effect will be felt gradually as the scheme is phased in during the next three years. The full impact will be seen from 2027 onwards, when shipowners will need to surrender allowances to cover 100% of their emissions for their voyages between EU ports, and 50% for those between an EU and non-EU port.

This is the start of a new regulatory and commercial phase that will have profound implications. By putting a price on carbon, EU ETS will provide a powerful incentive for the industry to reduce greenhouse gas (GHG) emissions from maritime transport in the short term. And this will soon be complemented by FuelEU, which will introduce requirements on the emission intensity of the fuels used on board ships from 2025.

Multiple aspects of shipping will be transformed as a result, from the fuels used on board to the contractual arrangements that underpin every voyage. Crucially, the effect of the European experience will be felt beyond the EU’s borders, setting the tone and direction of travel for decarbonization more broadly. As the European legislation unfolds in the coming months and years, here are four lessons that it is likely to bring for global shipping.

Decarbonization will be imperfect

Shipping’s journey to decarbonization will inevitably be imperfect, at least for the time being. This is due to limited availability of purely green fuels, and to the sheer complexity of getting new fuels on board.

As DNV’s latest Maritime Forecast to 2050 highlights, the supply of zero-carbon fuels will be scarce for a significant time to come. The report estimates that shipping would need 30% to 40% of the estimated global supply of carbon-neutral fuels to meet the expected demand by 2030 in line with the IMO’s current GHG strategy. And, even when supplies of green hydrogen, ammonia and methanol are scaled up, shipping will be competing with other sectors such as aviation and land-based industries for access to those fuels.

The current (lack of) availability of purely green marine fuels should be made more transparent, as this will support more mature and tangible conversations across the industry, but also enable individual shipowners to make better informed decisions for their own fleets and businesses.

In the short term, many will reduce their greenhouse gas emissions through “imperfect” means such as one-off bunkerings, often involving partial volumes, mass balancing, and carbon offsetting. While those are important to reduce the overall amount of carbon emitted and build experience using new fuels like biofuels, it is also important to recognize that they don’t always reflect the full picture from well to wake.

Energy efficiency technology will also play a key role, helping owners reduce the amount of fuel they burn and therefore the costs related to the buying of EU allowances. This focus on optimizing performance to reduce fuel consumption, whatever the fuel used, is a key lesson for the global industry as it braces for new global and national regulations that will inevitably come its way.

Information will be valuable currency in a multi-fuel universe

Moving away from a single-fuel era will add new levels of complexity to the process of bunkering ships. In additions to considerations around physical availability, new fuels specifications will be essential to give the industry confidence in the safety and reliability of those fuels. Developing standards for new fuels will be key to ensure compliance with emissions reporting regulation and prevent any compatibility issues – but this will take time and require a unified approach.

As we move towards “well to wake” calculations, shipping companies will also need to ensure that the feedstocks or production pathways don’t inadvertently compromise their sustainability credentials, or indeed those of their customers. Traceability will take on a new level of significance and rigor will be essential. Meanwhile, the realities of fuel supplies and production pathways will evolve rapidly, putting even more importance on the capacity to get expert, independent advice.

It's time to re-write contracts

The experience with EU ETS is already demonstrating that to succeed, shipping needs to rethink not just the fuels that will be used in shipping in a decarbonized future, but also the practical and contractual implications required to make the transition a reality.

Bunkering processes will change depending on the fuel selection and corresponding infrastructure, from minimal changes with “drop in” biofuel, to significant change for green ammonia, for instance. This will require new commercial agreements to reapproach factors such as volumes, quality, and bunkering service levels.

Sharing costs related to EU allowances will also require a re-think of contractual frameworks in shipping. How new arrangements such as the newly-released BIMCO clause gain acceptance, and whether disputes between shipowners and charterers arise, will be watched closely in months to come.

We need a level playing field

Last but not least, the EU experience demonstrates the importance of having a level playing field to give businesses the clarity they need to progress with confidence. This is a key lesson for the United States, where the transition is hindered by the current patchwork of regional regulations and inconsistencies between maritime and other sectors.

Despite the shipping volumes coming through ports such as the Gulf of Mexico, New York and Houston and independent initiatives to reduce port emissions, most incentives are still restricted to California and even these could be argued to be insufficient to meet the scale of the challenge.

Furthermore, we need any incentives supporting the adoption of new fuels to be fair between the maritime industry and other sectors such as land transportation, rail, and aviation. The US still has quite a gap to bridge to create a truly level playing field, but it is essential that legislators address this issue – for the competitiveness of US companies in a truly international and interconnected industry, but also for the success of shipping’s decarbonization transition globally.