EU ETS Breakdown: Will Shippers Shoulder the Burden?

The ocean cargo industry has been weighing the true impact of its greenhouse gas emissions for a long time. Though talking about supply chain sustainability has been mostly done in the abstract, the European Union has made sure to put those ideas into regulations starting January 1, 2024. That’s when the EU will impose its cap-and-trade EU ETS, a scheme to reduce emissions in Europe by propping up a carbon market for big polluters, onto the ocean freight world. The focus on ocean shipping makes sense to European regulators because global freight transportation contributes 8 percent of GHG emissions. 

The cap-and-trade scheme became policy way back in 2005 to meet the emissions reduction targets in the Kyoto Protocol from 1997. Since then, the EU ETS has expanded and is the driving force behind transforming EU member states into climate-neutral nations by 2050. 

This matters for shippers all over the world because, on January 1, all ocean cargo vessels that move through Europe must pay for their emissions. That’s right; if the vessel touches a European port – beginning or ending its journey in Europe or simply docking at a port while heading to a final destination – it must account for its GHG emissions and purchase credits for each ton emitted. 

To prepare, carriers have begun signaling EU ETS surcharges, passing the cost of emissions onto shippers. While many carriers are pursuing emissions mitigation strategies, making a shipment carbon neutral is a long way off. Shippers can protect themselves from incorrect carrier sustainability surcharges by identifying, tracking, and mitigating their emissions, but it seems clear that emissions fines will be part of the industry in the near future. 

Industry Perceptions: Debates Over EU ETS

Even with the widespread adoption of cap-and-trade sustainability policies, the effectiveness of such plans has come into question. 
The research firm EY found that pricing might be unpredictable: “The EU ETS is essentially a marketplace driven by supply and demand, resulting in some unpredictability regarding the underlying price of the allowances.” Instead of a straightforward carbon tax, the EU ETS operates on a sliding scale, with the marketplace dictating the price for emissions credits. At the end of October, GHG emissions credits were trading at more than $85 per ton. The price can fluctuate wildly since the EU will only release a certain amount of credits. Carriers will have their work cut out for them, maintaining oversight of the marketplace and the purchase of credits, and implementing a robust strategy for dealing with the regulation. 

While the end goal with EU ETS is clear, it’s unknown how effective it will be in reducing the 8-11 percent of global emissions directly tied to freight transportation. Freight shipping, and ocean cargo in general, is expected to grow rapidly over the coming years, and carriers can only pass so many costs onto their customers. Carriers are planning on implementing new technologies that reduce GHG emissions output, but zero-emissions freight shipping is not on the horizon. Will cap-and-trade, with severe limits on the number of credits in the market, be enough to create systemic change toward supply chain sustainability? Will the EU’s success be contingent on other countries following suit? And when other regulatory agencies severely restrict supply chain emissions, how hard will supply chain groups and lobbyists — and perhaps the shippers and carriers themselves — push back?   

EU ETS: The Basics of the EU’s New Regulations

Ocean shipping is responsible for somewhere around 3 percent of global cargo emissions. This statistic made it easy for the European Union to look to the ocean cargo industry as a transportation mode in need of drastic action. The EU started with aviation, bringing all manner of airlines, including freighters, into the ETS cap-and-trade regulation in 2012. The regulation is limited to intra-European transport, but still, the EU reports removing 17 million tons of greenhouse gasses annually.  

Under the EU ETS, ocean carriers have already been measuring their carbon dioxide emissions in preparation for the start of the cap-and-trade policy. The measurement happens under an EU-approved monitoring plan. Each year, carriers submit reports for all vessels under their command to be verified. 

In 2024, 40 percent of a vessel’s emissions count toward the regulations, moving up in phases all the way to 100 percent by 2026. Carriers will also have to, under a phased approach, account for and trade under their methane and nitrous oxide emissions, making the EU ETS scheme a comprehensive approach to GHG emissions reduction. Payment for the 2024 first batch of emissions allowances will occur by the end of the third quarter in 2025. Heavy fines will be imposed on carriers that emit more than their allowances cover.    

Potential Challenges and Global Impact

The European Union isn’t the only regulatory body concerned with supply chain sustainability, and the EU’s cap-and-trade policy may eventually come up against a more robust, industry-driven approach. 

The International Maritime Organization has sustainability in its sights — the regulation IMO 2020 targeted sulfur oxide by requiring that vessels trim the sulfur content of their fuel. The regulation, enacted in 2020, effectively rid the ocean waters of heavy fuel oil as carriers embraced very low sulfur fuel oil (VLSFO). The 2023 IMO Strategy on Reduction of GHG Emissions from Ships espouses reaching a zero-emissions goal for the maritime shipping industry by 2050. It comes complete with checkpoints and a commitment to widespread alternative fuel and zero-emissions fuel by 2030. Lofty goals to be sure: By 2030, the IMO strategy calls for a 20-30% reduction in emissions and a 70-80% reduction by 2040.  

The IMO measures GHG emissions using an energy efficiency index for vessels in combination with a carbon intensity indicator. The indicator would change according to how fast the ship is going, how much cargo it is carrying, and the length of its journeys, among other factors. This strategy seems to shift some of the reporting burden off carriers. The establishment of GHG emissions fees is still up in the air for the IMO, with stakeholders in the organization arguing for and against a carbon tax. 

The two different approaches have a similar goal. It remains to be seen if the EU ETS can be wrapped into the larger IMO framework, which would be applied globally. 

Facing Emissions Fees, Carriers Levy Surcharges

Supply chain sustainability is a worthy cause, and reducing GHG emissions from the supply chain will ensure the continued health of a vital and integral component of international commerce. Whether from the EU or the IMO, the regulatory burden lands squarely on the carriers. There is a clear mandate that carriers identify, monitor, and track their emissions, buy or trade from emissions credits, and make an effort toward becoming an emissions-free operation. Shippers can obviously help carriers achieve this goal by eliminating emissions from their own processes. Still, the fact remains that carriers will require shippers to shoulder a significant portion of the cost burden for the transition to cleaner shipping.  

The true cost is unknown. Recently, Maersk predicted a vastly different cost for an EU ETS EU-compliant journey than Hapag-Lloyd quoted, and these mixed messages will only get worse until carriers have some time to live with the new rules. Surcharges that carriers have already announced will hopefully be adjusted as the picture becomes clearer.  

Navigating EU ETS: Three Strategies for Shippers

Shippers aiming to plot a strategic course to comply with EU ETS should focus on solid planning and leveraging robust technologies that derive actionable insights from their data. 

Optimized Route Planning for Emission Reduction

Searoutes employs advanced analytics to optimize shipping routes, considering not only traditional factors like time and cost but also carbon emissions. Shippers can leverage this feature to choose routes that minimize emissions, thereby reducing the impact of EU ETS surcharges.

Real-Time Monitoring and Adaptation

The platform provides real-time data analytics, enabling shippers to monitor ongoing voyages and adjust routes if necessary. With insights into emissions during the journey, shippers can proactively make route adjustments to stay within allowable limits, potentially mitigating surcharge costs.

Predictive Analytics for Informed Decision-Making

Ocean cargo has an emissions problem, and it’s not clear if the true solution has emerged. Regardless, carriers will begin confronting supply chain sustainability regulations in 2024, passing the extra costs from EU ETS compliance onto their customers. Shippers need to embrace third-party tracking and monitoring to ensure they are paying their fair share. Searoutes utilizes predictive analytics to forecast future trends, including potential changes in EU ETS regulations. Shippers can stay ahead of the curve by making informed decisions based on these predictions, allowing them to strategically negotiate rates and prepare for evolving surcharge scenarios.

You Don’t Have to Navigate Regulatory Changes Alone

Adapting to new regulations is always difficult. With Searoutes, shippers can leverage innovative solutions in the era of decarbonization, turning regulatory challenges into opportunities for sustainable and efficient shipping. Searoutes offers shippers a strategic advantage with optimized route planning, real-time monitoring, and predictive analytics. Searoutes helps shippers gain control of their carbon emissions.