Europe wants to become the first climate-neutral continent by 2050. This target was made legally binding by the European Climate Law and the European Commission presented a proposal to achieve it, the so-called “Fit for 55”.

What does this mean for shipping?

The expansion of the EU Emissions Trading System (EU ETS) to maritime transport is built upon the existing EU monitoring, reporting, and verification (MRV) system for vessels above 5,000 gross tonnes. In a nutshell:

  • The entity responsible for the operation of the ship under the IMS Code is liable for the CO2 emissions.
  • It will impact around 11,500 ships and cover around 140 million tonnes of CO2.
  • The geographic scope covers 100% of emissions from intra-EU voyages and time spent at berth in an EU port, as well as 50% of emissions from both inbound and outbound voyages to and from the EU.

The shipowner will be responsible for acquiring and surrendering emission allowances (EUAs). Owners need to prepare for this, and the clock is ticking. The obligation to surrender allowances will be gradually phased in from 20% of their 2023 emissions to 100% of their 2026 emissions. This means ship operators should start considering compliance costs as close as of January 2022.

In addition, the administrative procedures for owners to be able to trade in the carbon market are significant (GHG permit, registry account, clearinghouse, or intermediary contract). By looking at the experts’ projections on EUA prices in the forthcoming two to five years, it seems a smart move to start building a compliance plan in advance.

What are the financial implications?

Every situation will be different but if we take the simple example of a capesize vessel performing a voyage from Richards Bay in South Africa to Rotterdam, the purchasing cost of the EUAs should amount to approximately EUR 50/55,000 per voyage, based on today’s market price.

This is indeed a costly exercise because unlike the industrials in the EU ETS, there will be no free allowances for the shipowners. This means a significant direct financial impact on your operations.

EUA prices are extremely volatile and failure to surrender allowances will result in a penalty of EUR 100/t of CO2 increased by inflation. Plus, the unpaid emissions are rolled over to the next year when their corresponding allowances must still be acquired and surrendered.

But compliance is not my priority…

As a shipowner, it is already very challenging to navigate the daily shipping market. So, let’s face it, with a business to run you hardly have time to fully cover your EU-ETS compliance. Finding a reliable partner in the carbon market is key to lessen the extra workload, guarantee your compliance and reduce your financial risk.

When should I start buying allowances? Who should I buy them from? Is there any administrative process I should do before it? Where should I surrender them? How much is this going to cost?

Top 7 best practices in EU ETS compliance

These are the top seven best practices observed in the ETS market.

1) Build your trading strategy: The key lesson learned from companies who have been present in the ETS since 2005 is that those who didn’t build a compliance strategy are the ones that face more uncertainty. The first step in building your compliance strategy is to define your goal. You will also need to answer three simple questions: When to buy, how many units, and how to buy them.

2) Estimate your cash flow and define your risk management: What financial resources are available for your compliance and how bold you want to be in your trading plan will determine your approach to the market.

3) Understand the price dynamics and parameters: ETS is a very volatile market, affected by energy prices, weather, politics, and several other variables. Understanding them will help you make informed decisions.

4) Follow the market: Keep track of the market moves will allow you to estimate your further moves in the market.

5) Don’t speculate: It's tempting, but you need to remember emissions are not your core business. You are doing this because you are obliged to comply. Leaving your purchases for the end of the compliance period, or trying to beat the market can be considered as speculative practices because of its intrinsic financial risk. It can go well, but it can also go wrong and there is a determinant component: luck.

6) Estimate the administrative burden of environmental compliance: Operating in the carbon market takes time and there is a learning curve. Designate a staff member or an experienced trusted partner that will take care of it on your behalf.

7) Calculate the EUA price level for which a technological change compensates for the cost of environmental compliance: This is the final goal of the system. Estimating it in advance will help you get ready for it.

Source: Vertis Environmental Finance

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Carbon neutrality a burden? Not really!

Investment funds, distributors, consumers… all of them are putting the focus on the environmental impact of the products they purchase. However, sustainability is no longer a public affairs tool, is the only path to guarantee companies' survival. Many industries have started their net-zero journeys, but the truth is that technological availability can slow down its progress.

Frederic Bouthillier, head of shipping at Vertis

What can you do? The most committed organisations choose to offset their unavoidable emissions by financing projects aimed at reducing or absorbing emissions. High-quality offsets protect and transform the planet. Emissions offsetting is often accompanied by improvements in efficiency and costs. By reaching carbon neutrality you can also improve your sustainability indexes, back your commitments financially, and improve your stakeholders’ perception.

Vertis is a regulated financial entity with over 20 years of experience. They help business partners to understand complex environmental markets and provide the tools to comply with legislation and to achieve their environmental ambitions. Around 1,800 industrial and 300 aviation clients have trusted them to trade 1.2 billion carbon units and to manage transactions by EUR 1.2bn per year. Vertis is a member of IETA (International Emissions Trading Association) and ICROA (International Carbon Reduction and Offset Alliance). Its services have been awarded by Thompson Reuters, Energy Risk Commodity Rankings, and Environmental Finance Ranking.