Op-Ed: The EU ETS is an Opportunity to Create Genuine Change

Shipping’s inclusion in the EU Emissions Trading System (EU ETS) has created countless conversations over the past 12 months, as the industry prepares to comply with the new regulation. The EU ETS is a ‘cap-and-trade’ system, whereby the EU will set a limit each year on how much CO2 can be emitted, which decreases each year in line with the target to reduce emissions by 62% from 2005 to 2030. Companies will need to have a European Emission Allowance (EUA) for every tonne of CO2 they emit within each calendar year.  Operators will not be allowed to generate more greenhouse gas emissions than their EUAs can cover. If they do, heavy fines are imposed, creating both a financial and regulatory incentive to reduce emissions and improve efficiency.

According to a Reuters survey, the cost of an EUA is forecast to be on average €83.55 a metric tonne in 2024 and €88.95 in 2025. Shipping companies will be responsible for paying for emissions reported in the previous year in a phased implementation. In 2024, only CO2 emissions need to be covered by EUAs; in 2025, companies will pay for 40% of the emissions reported in 2024; in 2026, this rises to 70% of their emissions from 2025; and by 2027, they must cover 100% of their reported emissions.

A quarter of the revenue from maritime EUAs will go into the “Ocean Fund”, funding innovative decarbonization projects in the EU, with the rest going to Member States to specifically pay for maritime decarbonization projects such as port modernization, alternative fuel trials or funding projects in developing countries.

The EU ETS revenue potential for shipping in 2024 is estimated to be in the range of €1.6bn, reach €5.5bn in 2025 and €8bn in 2026. However, the latter two figures are broader estimations as CH4 and N2O gases will need to be accounted for in addition to CO2 and the industry has no prior experience calculating these gases. While this is surely a step in the right direction, revenue from the EU carbon market is a drop in the ocean compared to what a global carbon tax could generate. The World Bank estimates this could be an estimated $1 trillion to $3.7 trillion by 2050, or $40 – $60 billion annually.

A global carbon tax may be the eventual goal for the shipping industry to accelerate decarbonization, but the EU ETS is a great first step. It addresses the sector’s emissions, which have previously been exempt from carbon pricing mechanisms and, moreover, creates a set of rules that can be used immediately as a lever and generator of genuine change across the entire maritime value chain.

Challenges of compliance

By design, compliance with the EU ETS will further ramp up regulatory challenges and environmental pressure, as well as increase costs for companies that exceed their emissions threshold. This will add complexity for owners and operators, requiring them to find the right solutions to adjust or face the significant financial risk of not meeting the requirements.

However, it is important not to dwell too much on these challenges. We should instead look at the EU ETS as a real opportunity to take a decisive leap forward for shipping’s decarbonization, as by putting a price on carbon, the system directly incentivises emissions reductions.

This will encourage companies to invest in cleaner technologies and practices, improve vessel design, optimise operational efficiencies, and explore alternative fuels, fostering innovation and supporting both the EU’s climate goals and shipping’s journey towards zero emissions.

This outlines the opportunity that regulation brings, as it forces industry players to start thinking smarter about how they can drive more sustainable operations.

The good news is, there are solutions currently available on the market that can provide data-driven insights and analytics to optimise vessel performance and reduce emissions.

By connecting multiple data points across a single interface, software can interpret data to generate thousands of recommendations to optimise voyage plans and increase earnings. Organisations can therefore better predict and forecast performance, making decisions that will optimise the voyage, vessel, bunker, costs, and emissions. This means companies will also see the financial benefits that come from optimising their operations, such as reduced fuel consumption and costs, benefitting both profit and planet.

Overcoming data fragmentation

Data will also play a pivotal role in managing EU ETS reporting, as accurate and reliable data is essential for assessing a vessel's environmental impact and progress towards sustainability. However, the maritime value chain still currently suffers from fragmentation when collecting and reporting data. Information is dispersed across the value chain, among various tech platforms, classification societies, and internal systems, leading to inefficiencies and challenges in obtaining a comprehensive view of the industry's operations.

Moreover, many companies employ single-function or in-house systems, which only address certain aspects of the emissions reporting process. As the diversity and number of data sources involved increase, so does the risk of errors in analysis and compliance.

Failing to collect and validate emissions data throughout the year will lead to significant work burdens to meet end-of-year mandatory, regulatory reporting, and voluntary reporting requirements. Shippers and operators will then be forced to navigate complex data sources to ensure accuracy and compliance, which can be time-consuming and prone to human error. This burden not only hampers operational efficiency. It also diverts resources from core activities and undermines the ability to proactively manage emissions and EU ETS compliance.

By adopting a continuous data collection and validation approach, shippers can streamline workflows, alleviate year-end pressures, ensure compliance with the EU ETS, and focus on wider sustainability strategy planning.

Maximizing progress

As shipping finds its feet, it must seize the opportunity that the EU ETS presents to ensure the adoption of long-lasting processes and tools. This will prepare us for the future, as regulations tighten further, and more rules for reaching zero emissions come into force. It is critical that solutions that bring together information across the value chain are prioritized, to deliver a comprehensive view of the industry's operations and enhance collaboration as we work together to make global trade green.

Søren Meyer is CEO of ZeroNorth.