EU ETS: catalyst for change, mired in growing pains
Confusion continues to circle regional emission legislation
By Carly Fields
The European Union’s Emissions Trading System (ETS) continues to cause confusion and consternation for stakeholders in shipping, with questions around ballast legs, accounting for allowances, and compliance.
A panel discussion at the Baltic Exchange’s Freight Forum in Singapore explored the complexities and opportunities surrounding the ETS, with Baltic Exchange carbon lead Martin Crawford-Brunt moderating the event.
Crawford-Brunt noted that the EU ETS emphasised a significant paradigm shift in the regulatory landscape. He said: “We’re moving from an old way of looking at regulation developments… Regulation is becoming more and more goal-based and also a moving target in terms of where the ambitions levels are set – so it’s becoming a much, much more challenging task for organisations like the IMO.” He added that the IMO is today grappling with defining and enforcing ambitious goals, placing immense pressure on stakeholders to keep pace with ever-tightening environmental expectations.
Ian Butler, head of energy transition – shipping at Vitol, discussed the EU ETS as a potential driver for compliance and the adoption of alternative fuels. He acknowledged the scheme’s potential, stating: “The new EU Emissions Trading Scheme (EU ETS) is an opportunity. This will be the first step for the shipping market to start to comply, and then we can start looking to the future with a rather substantial dual fuel orderbook.”
However, he also highlighted the significant administrative burden associated with the EU ETS and the challenges faced by ship owners, particularly those with smaller fleets, in complying with its requirements.
Owners are struggling to navigate the complexities of opening ETS accounts, managing allowances, and ensuring proper financial instruments are in place to meet their obligations.
“Owners are struggling to navigate the complexities of opening ETS accounts, managing allowances, and ensuring proper financial instruments are in place to meet their obligations.”
Bulk unintended consequences
Also on the panel, Swire Shipping/Swire Bulk chief sustainability officer Susana Germino pinpointed the difficulties faced by the dry bulk sector in adapting to regulations designed primarily for the container shipping industry. She pointed out: “It seems to be a little bit easier to apply some of these regulations and energy transition principles to the liner side. But for ETS and Fuel EU, the whole dry bulk and the tramping model is very, very difficult to adapt to some of these regulations.”
Toby Forrest, head of chartering and shipping operations at Pavilion Energy, echoed Germino’s concern, highlighting the complexities for LNG ship owners operating outside the EU for extended periods. Forrest noted: “EU ETS is a method to licence product. It’s not until the voyage ends – which is first line ashore in the non-EU port – that the ETS goes. So, if you ballast from Tianjin and you go to Europe to load that entire voyage is subject to ETS.”
The panel also discussed unintended consequences arising from the EU ETS. Germino highlighted the lack of control charterers have over emissions allowances under bareboat charters, creating potential friction points between contracting parties. In these agreements, the charterer is responsible for the vessel’s commercial operation, but ownership and any associated EU ETS obligations remain with the owner. Germino said: “If you are on a bareboat charter, on EU ETS you can either be the owner – so not the bareboat charterer – or the ISM company. The person that is controlling that ship commercially has absolutely no way to control the ETS allowances, purchases and surrendering. That is just not what we are used to in a commercial market.”
Butler added there were credit risk concerns for technical managers, who are responsible for vessel operations but lack control over ETS costs.
“The person that is controlling that ship commercially has absolutely no way to control the ETS allowances, purchases and surrendering.”
Domino effect
Turning to the rising costs associated with decarbonisation, Forrest pointed to the increasing financial burden as the EU ETS reaches full implementation in 2026. He added: “Plus for those of us with dual fuel ships we will be paying for methane slip on those ships, which will be expensive.” These rising costs will have a ripple effect throughout the maritime supply chain, potentially impacting everything from freight rates to the price of goods delivered by sea.
Germino also noted that EU ETS applies not just during cargo discharge but also during ballast voyages within the EU zone. She reminded the conference audience: “I hear so many times people thinking that EU ETS is only paid when there is cargo on board when the vessel is leaving. That is not correct. If it is in ballast entering Europe or in ballast coming out of Europe, it will still have paid EU allowances related to the emissions of that particular voyage.”
“I hear so many times people thinking that EU ETS is only paid when there is cargo on board when the vessel is leaving. That is not correct.”
The panel highlighted the critical need for industry-wide education on the complexities of the EU ETS and upcoming regulations. Butler criticised the lack of education across the industry, particularly regarding the specificities of the EU ETS, which was designed with container shipping in mind. This knowledge gap can lead to misunderstandings, missed opportunities for cost-saving measures, and non-compliance, potentially resulting in hefty fines and reputational damage.
The discussion concluded with an implicit call for collaboration between regulators, industry players, and financial institutions. By working together, these stakeholders can navigate the challenges and opportunities presented by the evolving regulatory landscape. Regulators need to develop clear, well-defined, and sector-specific regulations that provide a roadmap for achieving environmental goals without crippling industry growth.
