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Searoutes Presents: The Complete Guide to EU ETS
Since January, the European maritime sector has been participating in the European Union’s emissions trading system. Known as the EU ETS, this groundbreaking regulatory initiative calls for the maritime shipping sector to reduce greenhouse gas (GHG) emissions using a phased approach. Joining efforts with other sectors, the overarching goal is to slash GHG emissions by 55% by 2030 and to become climate neutral by 2050.
The EU is taking a phased-in approach to compliance, meaning that carriers and shippers might not immediately feel the full impact that the regulatory scheme will have on freight costs. But as coverage expands to encompass all vessels and emissions by 2028, Searoutes estimates that shippers could expect their freight costs to increase by as much as 5% in that same timeframe.
While some shippers have expressed concern about how much freight costs might increase under the EU ETS, they can pursue strategies to ensure carrier accountability and mitigate unnecessary costs. By using Searoutes’ API tools to compare current conditions against historical trends, shippers gain a better understanding of what costs to expect under the EU ETS.
This guide to EU ETS contains the following sections:
- Understanding EU ETS: Policy Framework and Evolution
- EU ETS Brings Big Changes to Shippers
- Changing Tides: Carrier Approaches to EU ETS
- Regulatory Resilience Starts with Data Methodology
- Searoutes: Navigating EU ETS with Data Analytics
- Get equipped to handle EU ETS surcharges
I. Understanding EU ETS: Policy Framework and Evolution
The EU ETS has one overarching goal: to reduce carbon emissions for Europe’s industrial sector, thus slowing down or alleviating environmental impacts stemming from climate change. The EU says the program, which kicked off in 2005, creates a financial incentive for the biggest emitters to cut back on their emissions. Broadly, EU member states are aiming to be climate-neutral by 2050 in accordance with European climate law. Climate-neutral means to have an economy that results in net-zero GHG emissions.
Under the EU ETS, businesses trade international emissions allowances via a cap-and-trade program. The program caps a company’s annual GHG emissions. A company receives a set amount of carbon allowances that account for its annual carbon emissions.
If a company exceeds its emissions limits, it faces significant fines or it may choose to trade allowances with another company that has leftover allowances from cutting its emissions by more than its prescribed limit. As this cap-and-trade program continues, technologies to slash emissions are produced, and shipping companies are given fewer emissions allowances as the years go forward. The hope is that using these technologies cuts emissions, thus tackling climate change.
The EU expects to lower the emissions cap over time so that the broader transport industry will be encouraged to become more energy-efficient and develop lower-carbon alternatives, such as alternative fuels. Conversely, this also means penalizing dirty ships and shipping companies that don’t take action to reduce their emissions. This is similar to the “polluter pays principle,” in which the cost of pollution should be borne by its creators.
II. EU ETS Brings Big Changes to Shippers
Although maritime transport is already an energy-efficient mode of transportation, projected emissions increases within the sector of up to 130% by 2050 could undermine climate change remedies occurring elsewhere in Europe, according to the EU.
By incorporating maritime transport into the EU ETS, shipping companies will have caps on how much emissions they can produce, as well as access to ETS allowances so that the broader sector can meet the goal of reducing emissions by 55% by 2030.
As of this January, the EU ETS applies to cargo and passenger ships with a gross tonnage of 5,000 metric tons or more, and by 2027, the EU ETS will apply to offshore ships with a gross tonnage of 5,000. This means that vessels, regardless of the flag they fly, will have to account for the emissions. If the vessel sails between two EU ports, then the vessel will eventually have 100% of its emissions covered by the EU ETS. If the vessel sails to or from the EU, then 50% of its emissions will be covered by the EU ETS.
The type of emissions covered will also expand in the coming years. For now, the EU ETS covers only carbon emissions, but in 2026, it will also include methane and nitrous oxide emissions.
To ease the maritime transport sector into this regulatory scheme, the EU has put compliance guidelines in phases so the share of emissions covered by allowances will grow over the next three years. By 2025, 40% of shipping companies’ emissions reported in 2024 will be covered by allowances; in 2026, that percentage will rise to 70% of emissions reported in 2025. By 2027, shipping companies will be responsible for 100% of their reported emissions, according to the EU.
To comply with the EU ETS, shipping companies might employ dynamic pricing to facilitate their adoption of GHG emission-reduction strategies. Through dynamic pricing, shipping companies set an internal carbon price that may be indexed to the emissions trading scheme, using factors such as container type and trade lane and which carrier is involved to enable them to be more agile and responsive to changing emissions allowance prices. Dynamic pricing also helps companies incorporate compliance costs that could add up to 5% of freight spend.
III. Changing Tides: Carrier Approaches to EU ETS
What’s different about the EU ETS is that shippers will need to pay upfront for what carriers will pay a year later. To understand this point, think about an Amazon gift card: when someone buys a $50 gift card from Amazon, it essentially translates into Amazon getting a loan from the buyer until the gift card gets used — and that card may not be redeemed for years.
Turning back to shippers, this means that shippers will have to give carriers this year the price of the ETS surcharge. Meanwhile, the EU will penalize carriers starting next year for not properly complying with the regulatory scheme.
Implementing costs this way may frustrate some shippers because carriers are charging them a fee they haven’t yet paid. So, the question becomes, how can shippers mitigate these costs, and how can partnering companies — like Searoutes — help shippers navigate various mitigation strategies?
The answer lies in looking into the details of how emissions prices are calculated so that shippers don’t overpay for complying with the EU ETS.
To calculate the price of the EU ETS, one looks at the emissions per tonne and then multiplies that figure by the cost of carbon. However, the cost of carbon may fluctuate as carriers are given fewer carbon allowances over time. By granting fewer carbon allowances, the price of polluting also becomes more expensive over time.
How bitcoins work might be a suitable analogy to what’s described above: there is an eliminated amount of bitcoins that are released into the market, and that tightening supply of bitcoin amid rising demand can raise the price of bitcoin.
A carrier might calculate the emissions cost using a rationale similar to the one in the chart above. For instance, ONE might determine how much emissions are emitted between the Port of Singapore and the Port of Algeciras in Spain. Since the leg originated in Europe, only 50% of the vessel’s emissions are taxable. The legs between Algeciras and Rotterdam and Rotterdam and Hamburg would have vessel emissions that are 100% taxable.
Since only 40% of a vessel’s overall emissions will count in the EU ETS regulatory scheme for the maritime sector in 2024, the total volume of carbon emissions is calculated. Then that volume is multiplied by the cost of carbon.
However, shippers might see different numbers and figures, such as those in the chart below:
In this chart, a carrier might not define surcharges by leg but rather by region. As a result, a shipper might view these surcharges as being at a fixed price per carrier and per trade lane, even though other factors, such as the port pair and the vessel, will impact the final price.
To add to this complexity, global events and disruptions may further impact emissions pricing. For instance, the diversion of vessels from the Suez Canal to around the Cape of Good Hope means that a vessel is traveling longer distances — and emitting more emissions. Carriers will take this into account as they calculate what shippers will be paying into the EU ETS.
The above two charts teach shippers that they need to understand how emissions prices are calculated to ensure that they’re not overpaying for the EU ETS.
Indeed, Searoutes’ simulation above, which shows how much emissions pricing would affect a dry container along varying routes, illustrates a likely outcome: over time, the EU ETS can represent up to 5% of a company’s freight spend by the time the ETS is fully implemented.
The charts above illustrate the potential differences in how carriers and shippers might view emissions surcharges. Carriers will be looking at comparisons between routes and vessels, while the shippers’ perspective may focus on trade lanes and carriers.
Being aware of how carriers might be computing emissions surcharges is important because that knowledge can be used as a tool during the tender season to ensure that shippers are getting a fair emissions price from carriers.
To help determine what they should be paying, shippers need to look at historical data and its historical trajectories.
For instance, in the chart above that shows the differences by carrier in EU ETS per TEU or twenty-foot equivalent volume, the carriers’ surcharges are according to trade lanes. By default, a shipper might just look at the trade lane and assume that the emissions pricing figure is a flat fee.
However, that might not be the case. Rather, an individual carrier might have several different service options for getting from Point A to Point B. Each option has differing levels of emissions output, depending on the length of time that each vessel spent at sea getting from Point A to Point B.
For example, as illustrated in the Searoutes chart above, CMA CGM offers different services between Singapore and Hamburg. The services differ in the amount of emissions emitted, but the surcharge is the same regardless of the amount emitted.
IV. Regulatory Resilience Starts with Data Methodology
One of the main concerns facing shippers and companies exposed to the new EU ETS for the maritime sector is the lack of transparency over how emissions surcharges are calculated. This, in turn, leads to uncertainty over how much freight costs might increase each year under the new scheme.
However, working with companies like Searoutes, a leading provider of maritime data analytics and optimization solutions, can give shippers confidence that they are not only watching costs carefully but also meeting company sustainability goals.
V. Searoutes: Navigating EU ETS with Data Analytics
Having the right datasets helps ensure that shippers are getting the right price for emissions surcharges because the data helps shippers understand the latitude carriers have in setting emissions pricing.
Through each of our APIs — our Routing API to calculate distances and estimate carbon emissions, our Vessel+AIS API to track the positions of the global fleet via terrestrial and satellite automatic identification systems or AIS, and our Carbon Report API to get accurate carbon emissions based on detailed vessel consumption and traveled distances — shippers and maritime stakeholders can be equipped to talk with vessel operators about how both parties can comply with the EU ETS fairly and effectively.
Regulatory Resilience Through Data Analytics
Knowing how much routes differ in fuel consumption, emissions, and transit times can help companies understand the rationale behind configuring EU ETS surcharges. This knowledge can also help companies monitor costs and fulfill sustainability initiatives.
Historical Data for Future Resilience
Having historical data at your fingertips via Searoutes’ APIs provides shippers with insight into how carriers configure emissions prices. The historical data shows how carriers can have latitude in setting emissions pricing.
To see an example of how Searoutes has helped a company develop and execute a sustainability strategy, check out our case study involving Latin American logistics provider Andes Integracion Logística. Andes used Searoutes’ tools to identify ways to help support their clients’ environmental risks and opportunities, as well as help lower Scope 3 GHG emissions.
Integration with Procurement Processes
Using Searotes’ tools can help procurement professionals ensure that they’re receiving fair and accurate pricing from carriers. When procurement professionals work with carriers during the tender season, for instance, the insights from Searoutes’ tools can provide leverage during those discussions. That’s because the tools use historical data to analyze trends and patterns within the data. By seeing these trends within the data, shippers can understand the latitude that carriers might have in setting emissions pricing. This insight then helps shippers determine what are reasonable emissions surcharges.
VI. Get Equipped to Handle EU ETS Surcharges
For companies looking to navigate these changes and gain insights into their emissions, Searoutes offers the tools and expertise needed to transition smoothly into a more sustainable future. Searoutes’ three offerings aim to help procurement professionals see how emissions reductions can occur throughout the whole supply chain. Our tools include:
- Vessel API helps you keep track of a vessel’s position and provides historical tracking information of numerous vessels.
- Routing API monitors fuel consumption, tracks carbon emissions, and calculates accurate routes and sea distances.
- Carbon Report API enables users to search for optimal routes and their related carbon emissions.
Contact Searoutes today to learn how our tools can help you navigate and comply with the EU’s new emissions trading scheme for the maritime sector.