The inclusion of the shipping sector in the European Union's Emissions Trading System means additional revenues for the shipping companies but also the risk of conflicts with their shipper clients.
Since 1 January 2024, shipping has been included in the European Union's Emissions Trading system (ETS). The deadline had been feared, mainly because of the effect it was expected to have on freight rates and some professional organisations even asked for it to be postponed. In the event, this concern became a secondary one, compared to the disruption caused by Yemeni Houthi rebel attacks on shipping in the Red Sea. These attacks had a much greater impact at the time on freight rates and voyage times.
A study published on 26 March by NGO grouping Transport & Environment, which aims to promote "a zero-emission mobility system that is affordable and has minimal impacts on our health, climate and environment", nevertheless reopened the debate on the ETS surcharges used by the shipping companies to pass on CO² charges to their customers. T&E made no bones about claiming that "the shipping giants are profiteering from the EU’s carbon market". On the basis of a sample of 500 container ship journeys in and out of Europe, it has calculated that, "in nearly 90% of cases, shipping companies are charging customers more than the actual costs of the EU ETS". We wanted to respond to this highly documented report by drawing up a first assessment of the system after three months of operation.
Complex, incomplete and difficult to implement
- A system designed on the basis of a political vision
The ETS is above all a system which aims to generate resources for the deployment of the EU's decarbonisation projects on the "polluter pays" principle and to promote a reduction in CO² emissions. The logic is that the volume of emission allowances available is progressively reduced in line with an EU economy which reduces its carbon emissions a little more each year. This is important, since, even if this not its objective as such, it allows for a possible reduction in trade from a philosophical point of view in the name of a certain, indispensable sobriety and the need to act urgently to achieve global warming limitation objectives.
- A eurocentric vision
In the transport sector, all shipping companies doing business with European ports are inaugurating the ETS at international level. The airlines are only concerned for the time being in relation to their flights within Europe. The system is nevertheless due to be extended to all flights to and from the European Union, as well as to other transport modes, particularly road transport. Most of the big regular line shipping companies, the European companies included, did not want the system to be introduced, arguing that it was "eurocentric" and difficult to implement.
As things stand, application of the carbon tax in the shipping sector is hampered by the system's purely European dimension, which does not help third countries, unused to the "polluter pays" principle, to understand it. Since EU law does not allow companies to impose identical tax charges, each company is using its own obscure criteria to draw up its own table of surcharges and taking care to ensure that they are different from those of its neighbours, so as not to incur the wrath of the competition authorities. This has resulted in the creation of highly complex formulae, which even their authors quickly find themselves unable to check and understand.
When they were questioned on the subject by T&E, the four reference companies used for the study - Maersk, MSC, CMA CGM and Hapag Lloyd - found it difficult to reply. Only Hapag Lloyd indicated that it was ready to cooperate by opening its doors to the investigators and detailing the formulae it was using to calculate the surcharges. This is very much to its credit, given the high level of complexity this is likely to involve!
- A pricing system lacking transparency
In applying the ETS to the shipping sector, the EU has opted for a progressive approach to the obligation it imposes on shipping companies to surrender allowances corresponding to the emissions they have to report annually. Companies will have to surrender allowances representing just 40% of their actual emissions in 2024, 70% in 2025 and then 100% in 2026. The idea is to enable shipowners and their customers to prepare themselves little by little to take on the additional cost. Roughly speaking, the ETS surcharge is expected to amount to around a hundred euros per 40' container between Asia and Europe at the end of the transition period in 2027. For a freight rate of USD 1,000, this is a significant amount, but, for a freight rate of USD 4,000, much less so. It is nevertheless a non negligeable amount in terms of the profitability of any individual transaction.
The introduction of a common, EU-administered tariff during the launch period would have had the merit of clarifying a pricing system which is not at all clear for shippers, since the shipping companies are currently balancing out their tariffs among several different routes, as the T&E study clearly shows.
- A questionable regulatory system
Each year, the shipping companies will need to submit individual emission reports for each ship, as well as a report on emissions generated by the company as a whole. Data for the year n will need to be verified by an accredited checker before 31 March in year n+1, which means that the first declarations from the shipping companies will be verified in 2025. The whole company emissions report will determine the number of emission allowances that the shipping company will need to surrender as part of the ETS's European register. We will continue to be in a form of market self-regulation, therefore, given that the EU itself does not really have the means to check and supervise its policy. A body similar to the Federal Maritime Commission in the US would be the perfect regulatory body for this purpose but does not currently exist.
Company "greening" efforts insufficiently taken into account
The shipping companies have been engaged for some years now in the energy transition process. The efforts made vary from one operator to another but are generally sincere. That does not mean, however, that they are efficient. In the current state of technological development, it is difficult for the shipping companies to abandon combustion engines for the propulsion of big deep-sea ships, even if the use of e-methane and ammonia should improve their performances markedly in future.
Open-loop scrubbers, on the other hand, are a veritable time bomb, to the point that they are sometimes described as "cheater devices". A growing number of countries are opting to ban them from their territorial waters, moreover. The last one to do this was Denmark, home of the Maersk group. Meanwhile, open-loop scrubbers are enabling market leader MSC to benefit from lower operating costs.
The EU has so far taken a very tolerant approach to these scrubbers, which T&E itself does not directly attack. The grouping has, therefore, adopted a stance on the subject which we can call moderate. Ocean Rebellion, a lobbying group which takes a more extreme approach to the defence of the maritime environment, has adopted a clearer position. It has attacked open-loop scrubbers and MSC, their leading user, publicly on the grounds that they dump combustion waste into the sea. The ETS does not take such artifices into account, which is regrettable since they damage its credibility.
Financialisation of the energy transition
The auctioning of carbon allowances brings in revenues, three quarters of which go to the countries to which the shipping companies belong and the remainder to the European Union. The logic of the ETS means that the EU and its member countries can be considered as green investment banks, therefore, and the shipping companies as brokers.
The revenues generated by the system promise to be colossal. It remains to be seen now how these revenues will be put to use. Here again, the system is unclear, to say the least. The legislator has provided for them to be directed towards environmental improvement and members states will have to detail their spending in this regard. The definition is sufficiently wide, however, as to leave the way open to interpretation. In France, energy transition and territorial cohesion minister Christophe Béchu sought to reassure those attending the annual Armateurs de France gala on 9 April, according to the French magazine Journal de la Marine Marchande. "The ETS is not there to contribute to efforts to eradicate budget deficits," he said, "but to provide the means to decarbonise and avoid unfair competition. It is indispensable that revenue from the ETS is directed into the maritime sector.
Between this still to be defined effort on the part of the authorities and the profiteering highlighted by T&E, the pill promises be a bitter one for shippers, who have been so little involved in the system and so unfairly stigmatised. They are accused of being polluters, but we often forget that they are also the bedrock of the economic growth that the EU is trying to achieve. The cargo side should certainly pay but should not foot the entire bill, particularly since the shippers are themselves involved in their own energfy transition processes.
The role of the shipping companies
The T&E report comes close to expressing surprise that the shipping companies should offer themselves remuneration for the very real business of buying and selling emission quotas. This is an indication of the lack of explanation accompanying the system's implementation.
The EU considers that it is legitimate for the shipping companies to allocate themselves reasonable remuneration for this activity but these additional financial resources, which were decided in 2023, when the outlook for the revenues of the regular line shipping companies was at its worst, is supposed to help them to finance the greening of their activities. There is, therefore, in the spirit of the legislation an incitation to speed up and extend the industry's efforts to decarbonise.
At the same time, there is a basic paradox in the unwillingness of the legislator to push for one technical solution against another and, here again, this is a source of ambiguity. In its study, T&E indicated that, among the shipping companies under study, Maersk had applied the biggest differential between the purchase and sale prices for emission allowances. Its report makes a nuance, however, pointing out that Maersk is and has been for a long time one of the companies investing the most in R&D work on low pollution maritime propulsion. T&E, which is openly opposed to the use of LNG, is more indulgent towards companies looking for alternative maritime fuels!
By way of conclusion, we can take the view that the forced inclusion of shipping in the EU emissions trading system has resulted in the deployment of a system which is relatively immature and will need to be adjusted if the noble cause it is supposed to be defending is not to be harmed.
