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EU carbon pricing brings new pressures and opportunities to maritime

Posted on: 29 March 2023

The EU Emissions Trading Scheme and FuelEU Maritime can offer significant competitive advantage to owners and charterers that understand the incentives, says Lloyd’s Register (LR) in an article commenting on the recently announced by the EU carbon-pricing schemes.

Exposure to carbon pricing may seem like a threat to some ship owners and charterers. The aim, after all, is to encourage a switch to green fuels that will likely be more expensive than fossil fuels, accompanied by costly changes to operations. But these incentives and penalties can also offer wide scope for profit to those that understand them fully.

The two EU carbon-pricing schemes that shipping will soon be subject to are a case in point. Carbon Dioxide (CO2) emissions from ships ≥5000GT in 2024 reported under the EU’s Monitoring, Reporting and Verification (MRV) system will also be included in the regional Emissions Trading Scheme (ETS). Those vessels in scope of the ETS will need to buy EU Allowances (EUA) to cover half of their greenhouse gas (GHG) emissions to and from EU, Norwegian and Icelandic (EEA) ports, and all emissions for intra-EEA voyages and while at berth at EEA ports. In 2025, 40% of the CO2 emissions from voyages and at berth stays in 2024 will be subject to the ETS, ramping up to 100% in 2027. Just as the ETS phase-in ends there is a financial double-hit for shipowners. In 2026, the MRV will also require the reporting of CH4 (Methane) and N2O (Nitrous Oxide) emissions from ships, with EUAs to be paid on 100% of the CO2 equivalent of those emissions, in addition to CO2, within the ETS from 2027.

The other mechanism is FuelEU Maritime, which will come into effect in 2025. The regulation sets targets for reducing the yearly average GHG intensity of the energy used by a ship (or, crucially, by a fleet or pool of ships). The required GHG intensity reduction starts small, at -2% in 2025 (compared to a 2020 baseline), reaching -6% in 2030 and -14.5% in 2035, through to -80% by 2050. A penalty or reward is then calculated based on the extent of under- or over-performance against the vessel or fleet’s target for the year, and the cost of low-carbon fuel that would have been needed to meet the target.

At first glance, it is easy to believe that the ETS, covering 100% of in-scope 2026 emissions by 2027, will have the bigger impact of the two mechanisms. FuelEU Maritime, by contrast, covers only a small percentage of emissions even as late as 2035. But analysis by Lloyd’s Register reveals that by that stage, the financial impact of FuelEU Maritime could already have overtaken the EU ETS. By 2050, the cost in FuelEU penalties could be six to eight times greater than the cost of buying EUAs.

“I think ETS is easier to understand,” says Luke Shu, Technical Manager – Maritime Commercial Markets at Lloyd’s Register. “If you emit one tonne of CO2, then you buy one allowance and you pay for that. Whereas FuelEU Maritime is entirely technical. The easiest way to see the impact is to model the compliance costs next to each other.”

Continue to the full article here.

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