29 February 2024 (Lloyd's List) - SHIPPING’S inclusion in the EU Emissions Trading System has the industry grappling with the unfamiliar world of carbon trading — and a niche business is emerging to help it.
Software firms that sprung up to count ships’ carbon emissions, plan smarter voyages and cut fuel costs, are adding ETS compliance tools to their digital dashboards.
Thetius, a maritime tech research firm, said announcements by shipping companies related to “carbon trading” in the past 12 months have increased to 372 from 88 in 2021-2022.
Class societies such as DNV and Lloyd’s Register, big brokers including Clarksons and lines such as Japan’s MOL have offered products to help shipping companies manage their ETS exposure.
Carbon brokers say some shipping companies (usually bigger, but not always) have seen carbon trading as an opportunity; some have had their own trading desks since 2023.
However, hundreds — maybe thousands — of companies are taking their first steps toward compliance and struggling with the change.
The European Commission finally published a list on January 31 of companies that must open maritime operator holding accounts (MOHAs) and in which countries, and gave them 40 days in which to do so. This has left companies scrambling to get their documents in order.
Setting up is complicated and difficult, especially for Asia-based charterers with no European office. Who is and is not on the list is already causing headaches.
HFW partner Peter Zaman said the list is based on information from various EU maritime databases using an algorithm to identify companies carrying out port calls in the past four years, identified by entities submitting monitoring, reporting and verification data.
However, some companies argue they were added in error, while others have reported MRV data but are not on the list.
James Ash, head of carbon at shipbroker SSY, said the ETS represents “an enormous administrative burden” for shipping companies over the next 12 months, and adds unfamiliar demands.
“It’s completely alien to their normal course of business,” Ash said. “This is not like buying bunker fuel.”
Readiness varies widely. Ash has traded derivatives for some advanced companies, while others “are very much at the start of their learning curve for EU ETS”.
Shipowners are often worried about the volatile price of EU allowances, which is driven by European industry and hard to predict.
Siglar Carbon chief executive Sigmund Kyvik said EUAs were made for German power plants, which do not move, emit predictable amounts of CO2, and have clear ownership.
Yet ships can float in and out of the EU, while each voyage’s emissions will differ depending on the route, the cargo, the weather and other variables.
The shipowner does not always control how much the ship emits, so depending on the commercial agreement, different entities will be responsible for paying for and surrendering EUAs.
Shipping companies must surrender allowances for 40% of CO2 emissions reported for 2024 — a concession to ease the early cost.
However, by 2027, that will rise to 100% and include emissions of methane and nitrous oxide as well.
When companies see they could be on the hook for, say, €20m ($21.7m) for 200,000 tonnes of CO2 in 2026, Kyvik says, “then they focus”.
The current low EUA price (about €52 and falling, as of February 23, 2024) means charterers are happy for owners to absorb the cost into freight costs.
Hugo Wilson, a carbon broker at Hecla Emissions Management, said he expects charterers to take more notice when the ETS is fully phased in and the EUA price returns to the €100 a tonne it cost a year ago.
Companies will need more EUAs and fewer will be available, so the costs will rise.
Wilson says some owners have “copped out” and agreed to accept EUAs from charterers in “a timely manner” — in reality, a week before the deadline of September 30, 2025.
Owners can leave their carbon tally to the last minute and face a big mess of documents in August 2025, and the nightmare of having to chase their charterers for emissions numbers from long-ago voyages.
“If, as is sensible, you as a shipowner are looking to pass the cost on for the voyage, you have to manage it on every voyage,” Wilson said.
Shipping lawyers are busy helping shipping companies prepare their contracts so it is clear which entity must surrender the allowances, and how carbon costs will be passed to charterers.
Commission curveball
The European Commission threw a curveball in late 2023 when it said that a ship’s registered owner — rather than its ISM Document of Compliance holder (often the technical manager) — would be responsible for EUA compliance, unless the parties agree between them. Details are still foggy and lawyers unhappy.
Zaman, a derivatives lawyer in Singapore, said some owners hope the ETS will be replaced when the International Maritime Organization enacts its own, global emissions rules, so are reluctant to engage with it now.
“Anything they do, they do it begrudgingly — and they do it slowly,” he said.
Zaman urges shipping clients to view the ETS not as a carbon tax, but as an exercise in managing price risk.
At its essence, the ETS is simple: operators must surrender an EUA for every verified tonne of carbon they emit that falls under the ETS. including progressive thresholds. which will rise from 40% to 100% between 2024 and 2026. The deadline to surrender EUAs is the September of the year after the compliance year.
However, the EUA price yo-yos and an owner will not know how many EUAs they need until the end of the reporting period and their emissions are verified.
To avoid having to buy too high or low, they must monitor the market, choose to buy at the right time and seize chances when they arise. In other words, derivatives trading.
Zaman said companies that already sell MRV-reporting software are looking to bolt on ETS services to their products. However, because ETS allowances are financial instruments, such companies must be careful in expanding their services so as not to require a financial services licence.
Product ideas are sometimes watered down so as not to cross that line.
“Everyone’s trying to manage the risk of inadvertently being an adviser on financial services,” Zaman said.
The European Commission has not helped. Sources complain of unclear advice not suited to how the shipping industry works. Officials’ written guidance sometimes goes against what they say on ‘informal’ webinars.
The EU ETS Directive contemplates a statutory recovery provision letting a compliance entity recover its ETS costs from the entity ultimately responsible for operating the vessel or buying its fuel.
However, it left the task of enacting the recovery right to member states, meaning that at its extreme, shipping will end up with 27 different versions of how the rights will work.
HFW partner Alessio Sbraga said: “This underlies the importance of agreeing appropriate contractual solutions which provide both parties with the commercial certainty they need to have confidence that they have earmarked their risk and exposure.”
Who will win the carbon trading race? Having good data helps; those passing on risk want to know what they are paying for.
“He or she who has the data is going to be king at the end of the day,” Sbraga said.
Sources said the industry will get its bearings in time and shipowners will get used to weighing carbon costs in their commercial decisions.
“With new markets, with new regulations, these things are going to pop up and they do get ironed out in the end,” Ash said.
He argued that once contracts are in place for who procures and pays for EUAs, “it is actually quite simple”.
Clarksons green transition head Kenneth Tveter said consolidation was likely among the new green tech firms.
Software companies have offered several “very neat solutions” for understanding a ship’s emissions profile, but “is there really room for 10, 15, 20 different providers? Over time, I don’t think there will be.”
Tveter said discussions over ETS responsibilities are “commercial discussions and very manageable”.
“At the end of the day, it’s the end consumer” who pays, he added.
This article is part of Lloyd’s List special report on Decarbonisation, which will be published in full later this week
