Page 20 - 2021 - Q3 - Minerva in Focus

GHG EMISSIONS: NEW REQUIREMENTS FOR SHIPPING
Shipping and the EU Emissions
Trading System
by Hugo Wilson
Affinity Carbon Solutions
18 MINERVA IN FOCUS – ISSUE 17 / Q3 2021
The shipping industry is set to be includ-
ed in the EU Emissions Trading System (EU
ETS), Europe’s flagship decarbonisation
mechanism, from January 2023. This move
is a watershed moment for the industry
and will have considerable financial im-
plications across charter rates, vessel val- We are everywhere and we take you forward
ues, and equity prices. Over the last three
years, shipping has accounted for around www.aeromet.gr
5.5% of total ETS-covered emissions and,
assuming today’s EUA prices, have cost
$5.6 billion annually.
The ETS is a mandatory cap-and-trade system
that sets an overall cap on CO 2 emissions, in
operation since 2005. The allowances, known
as European Union Allowances (EUAs), are
auctioned amongst participants, and the
number of available allowances relative to
total emissions creates a carbon price. The
quantity of available allowances decreases
by 2.2% per year, towards the target of re-
ducing emissions by 55% compared to 1990
levels. This diminishing number of allowanc-
es results in the appreciation of EUA pricing
(in so far as EU emissions do not decrease at
a similar rate).
As far as shipping’s inclusion is concerned,
the key questions – those of free allowances
and the geographic scope of jurisdiction and
responsibility for surrendering (i.e., using)
allowances – were answered by the European
Commission on 14 July this year. Unlike the
aviation industry, shipping will not receive
any free allowances. Instead, shipping com-
panies will be responsible for 20% of their
emissions in 2023, increasing to 45% in 2024, 70% in 2025, and 100% in 2026 and every
year thereafter. In terms of geographical scope, all emissions generated by vessels on
voyages between EU ports and emissions generated while at berth at an EU port come
under the scope of the ETS. In addition, 50% of the emissions generated by voyages
arriving at/departing from an EU port will be included. Lastly, and most controversially,
the entity responsible for dealing with the allowances will be the shipowner or organi-
sation administering the ISM Code.
It is this last point, i.e., the fact that the buck stops with the entity in charge of the ISM
code rather than the entity paying for the fuel, that will present the most challenges:
August’s annualised volatility of the EUA prices is currently 38% compared to 21% for
VLSFO. On top of this, Berenberg Bank is forecasting a three-digit EUA price, at least during
the first period of shipping’s inclusion in the ETS. Managing costs, therefore, will be vital.
We should remember that the EUA is more of a political tool than a market product at its Air Sea Road
essence. When it comes to Europe’s decarbonisation aims, the political signals are clear. Freight Freight
This combination of volatility, appreciation, and bullish politics will also offer significant Transport
opportunities to those who choose to get on board.
Affinity Carbon Solutions is an advisory and trading service that manages shipping’s finan-
cial exposure to the global carbon markets. The company offers client-specific hedging
strategies, access to the global carbon markets, database services, and carbon strategy Riga Ferraiou 73 & Sokratous 26, Moschato
development. For more details, you may send an email to carbon@affinityship.com
Telephone: +30 210 94 15 316 Fax: +30 210 45 33 910 E-mail: info@aeromet.gr
Aeromet.indd 1 22/9/20 10:23 AM