Ships transporting goods to and from the European Union will soon face significant emissions charges as they become part of the bloc’s Emissions Trading System (ETS) in January. This move marks a substantial step towards curbing carbon emissions from the maritime industry, which accounted for over 1 billion tons of CO2 in 2018.
Major freight companies, including MSC Mediterranean Shipping Company SA and A.P. Moller-Maersk A/S, may incur costs reaching into hundreds of millions of dollars, according to BloombergNEF. While vessels constitute a crucial conduit for global trade, they are also a major source of emissions.
The impending system represents the world’s first large-scale carbon charge for international shipping and forms a vital component of the EU’s green initiative to combat climate change. However, despite their significance, the fees are unlikely to prompt an immediate shift towards cleaner marine fuels.
Tore Longva, the decarbonization director at the ship classification society DNV, highlights, “The EU ETS will increase the freight rates.” Yet, it’s anticipated that factors such as vessel supply and demand will exert a more substantial influence on shipping rates.
For a single container ship navigating between Europe and Asia, the emissions cost is projected to be around €810,000 ($864,500) in the coming year, assuming a carbon market price of €90 per ton, as stated by DNV. Over the subsequent two years, firms will be obliged to cover a greater proportion of emissions, thereby further escalating costs.
To illustrate, a vessel undertaking 5,000 standard-sized container journeys annually between the EU and Asia emits roughly 40,000 tons of CO2. However, only half of these emissions require coverage since the voyages extend beyond Europe. Consequently, in the first year, the ship would face charges for 9,000 tons of CO2, amounting to €810,000 at a carbon price of €90 per ton.
While the program is poised to have a positive impact on emissions, it may take time for substantial reductions to materialize. At a carbon price of about €90, utilizing polluting oil-based fuels and compensating for emissions may still prove more economical than adopting pricier marine biofuels, according to Longva.
Despite the notable additional costs, shippers have weathered substantial fluctuations in fuel prices in recent years, surpassing the impending carbon charges. For instance, a carbon price of €90 translates to a charge of less than €300 for every ton of oil-based fuel burned, whereas the cost of very low-sulfur fuel oil in Rotterdam surged by approximately $850 a ton within a span of less than two years through early 2022.
The ETS for ships with a gross tonnage of 5,000 and above applies to vessels entering and exiting EU and European Economic Area ports. Furthermore, future amendments to include emissions of methane and nitrous oxide from shipping are in the pipeline.
In tandem with the ETS, the EU is slated to implement the FuelEU Maritime regulation in 2025, which will further incentivize shippers to transition to cleaner fuels by setting progressively stricter limits on greenhouse gas intensity.