Maritime needs stronger wind to cut its emissions

The European Commission’s plan to extend the Emissions Trading Scheme to the sector falls short in driving decarbonisation.

In pursuit of mitigating global heating and achieving a carbon-neutral economy by 2050, the European Commission is expanding the scope of the Emissions Trading Scheme (ETS) to include maritime transport. From the new year, shipping companies, regardless of flag flown, will be required to purchase carbon allowances to offset every tonne of carbon dioxide produced by their activities within the European Union.

Despite these institutional intentions, however, the anticipated financial impact of this extension appears limited. The actual effect on decarbonisation within the sector is thus likely to be minimal.

Progress hindered

Maritime contributes significantly to greenhouse-gas emissions, accounting for 2.8 per cent of global emissions in 2022. The sector’s European footprint grew last year by 5 per cent on 2021 to a three-year high, fuelled by a rapid growth of, and reliance on, carbon-intensive bunkers. Although there is substantial technological potential to reduce emissions, lack of market and institutional incentives has hindered progress.

Hence the commission’s inclusion of the industry in the ETS, starting in 2024 with cargo and passenger ships with a gross tonnage (GT) of at least 5,000 and taking in offshore ships of the same size from 2027. The responsibility for monitoring and reporting emissions will lie with the shipowner or any other party responsible for ship operation.

All emissions from trips between EU member states will have to be taken into consideration. Any CO₂ (plus methane and nitrous oxide from 2026) released by a ship at a port in the EU should also be accounted for. When it comes to journeys between EU states and other countries, 50 per cent of the emissions will come under scope.

Companies must establish accounts in the Union Registry, submit monitoring plans and monitor emissions from January 1st. Accredited verifiers will confirm these figures and companies must then purchase allowances corresponding to their emissions. Non-compliance will result in a penalty of €100 per tonne of CO₂ equivalent, with the possibility of an exclusion order after two years of non-compliance.

As an entrée, shipping companies will only have to surrender allowances matching 40 per cent of emissions in 2024, 70 per cent of emissions from 2025 and 100 per cent from 2027. The total annual cost to shipping after 2026, when the three-year phase-in ends, is estimated to be up to €10 billion.

Impact restrained

The financial impact of the ETS on maritime transport appears restrained. The anticipated orders of magnitude are unlikely to generate any discernible impact on the behaviour of shippers.

Take an average container-ship scenario. The ship has a volume of 8,000 TEU (20-foot-equivalent containers) with each container holding on average 20 tonnes. It consumes 225 tonnes of marine gas oil per day at €900 a tonne, with each emitting 3.11 tonnes of CO₂. For a Rotterdam-to-Athens trip spanning 13 days, the fuel cost for transporting one tonne of merchandise stands at €16.45. Adding €80 per emission allowance increases the transport expense by 26.6 per cent to €20.83.

While this represents a substantial rise in fuel costs, the scale of transported volumes renders the overall transport cost negligible per unit of volume (€4.38 per tonne transported). Consequently, the ETS is projected to augment annual operational costs by around 5.4 per cent, equating to €1 million per vessel. This remains insignificant given the substantial quantities transported by each vessel—aligning with the fee estimates to cover ETS costs proposed by industry leaders such as Maersk, Hapag-Lloyd and CMA CGM, which range from €7 to €105 per TEU.

A recent study by Transport and Environment underscores the limits of the 5,000GT threshold, raising concerns about the scheme’s efficacy in reducing emissions. It reveals that while annual CO₂ emissions from vessels above 5,000GT (about 700 ships) amount to around six million tonnes, those from vessels below 5,000GT (16,000 ships approximately) reach nearly 20 million tonnes. This disparity suggests the coverage envisaged will have a relatively small effect on overall emissions.

Substantial pressure

The financial burden of the ETS extension to maritime and its scope appear inadequate to incentivise shipping companies to invest in more carbon-efficient operations. To truly drive decarbonisation, it is imperative to explore and implement additional measures that exert substantial financial pressure, compelling shippers thoroughly to reconsider and adjust their operational processes.

Policy-makers should consider incorporating all vessels over 400GT in the expanded ETS. If operational concerns arise, a targeted approach could focus on the most carbon-intensive fuels. It is crucial to encompass all types of vessels—spanning, service, yacht and military—to ensure a comprehensive and effective emissions-reduction strategy. To bolster the financial incentive for decarbonisation, shippers could be required to pay a carbon price that is not only proportional to the volume of CO₂ produced but also linked to the quantity or value of merchandise transported.

As highlighted in a report from CE Delft, there are potential evasion tactics, such as stopping at extra-EU ports and categorising trips as non-EU domestic. Before tightening financial regulations, policy-makers should therefore ensure that such evasive behaviours are rendered non-viable. Expanding ETS coverage to all vessels in ports near the EU, especially in north Africa, could be one solution.