Navigating the knowns and unknowns of EU ETS
In less than 100 days, the game will change significantly for commercial ships travelling to, from, or within Europe. The expansion of the European Union Emissions Trading Scheme (EU ETS) to maritime transport means that for the first time, the industry will have to pay for its carbon emissions. Entering this new era is no small task, but with the right data, shipping can get a head start.
In boardrooms and on decks across the maritime industry, decision-makers are faced with a burning question: how to make EU ETS work for their businesses, fleets, and operations. The implications are wide-ranging, from contractual matters to the practicalities of buying and managing allowances, to the best strategies to make their voyages more fuel-efficient. With much of the detail about the practical implementation of EU ETS yet to be confirmed, many business leaders feel underprepared for a change with such important consequences.
So where to start? By getting a thorough, data-driven understanding of their fleet’s operations. It may sound simple, but this is fundamental. Only with a clear picture of their emissions, past, present and future, can companies buy the right allowances at the right time, work out any cost sharing mechanism with stakeholders up and down the chain, and unlock efficiency gains that will reduce CO2 emissions from their voyages, which is after all the main objective of EU ETS.
This is why I believe that solid data analysis will be essential to companies’ success under this new legislation – and much of this technological groundwork already exists. Here are three ways in which shipping can already use digital tools to progress with confidence.
1. Predict your emissions to buy allowances strategically
By now, the industry will be familiar with the headline principles of EU ETS: from the 1st January 2024, shipping companies operating in the region will be required to deliver allowances (in other words, carbon credits) for their CO2 emissions. The system will be phased in, and from 2027 allowances will need to cover 100% of emissions for intra-European voyages, and 50% for voyages between EU and non-EU ports.
In practice, this adds a new task on shipping companies’ plate: buying, managing, and surrendering allowances. This will be a learning curve for everyone. While the industry is already used to data collection and emissions reporting under EU MRV, the management of allowances will add a new layer of administrative complexity that will increase workloads for many, especially smaller companies that don’t necessarily have a large compliance team to deal with these new requirements.
A big question for companies is how they can buy EU allowances strategically. Like any market-based commodity, the price of EU Carbon Emission Allowances (EUAs) fluctuates greatly with time. Therefore, being able to buy the right number, at the right time, could make a significant difference on the total price paid at the end of the year. Given market volatility, many will seek to buy allowances “preventatively” at a low price, taking advantage of favorable market conditions to accumulate allowances that they can surrender at the appropriate moment. But they can only do so effectively if they can accurately estimate how much carbon they will emit that year.
Simulation and data analysis tools will play a key role here. In short, they give owners and fleet managers the ability to simulate fuel consumption. For example, NAPA Fleet intelligence uses data on a vessel’s past and current operations and performance to predict the likely fuel consumption and CO2 emissions for the rest of the year, or for any given chartering period. This enables teams to take a proactive, strategic approach to EU ETS, having visibility on a key variable: their own emissions.
2. Use digital platforms collaboratively for transparent cost sharing
One of the core questions of EU ETS is how (and if) costs and responsibility will be shared among the web of stakeholders involved in maritime transport. How this unfolds in the coming years will help create a new blueprint for green shipping that will be watched closely by regulators and industry globally.
What we do know is that the default responsibility for EU ETS lies with the shipowner, unless there is an explicit contract delegating this responsibility to a charterer or International Safety Management (ISM)manager. However, while the shipowner must pay for the allowances, manage them and surrender the right amount to cover for their CO2 emissions at the end of the year, there are provisions that allow them to transfer costs to other entities – although the details remain ambiguous.
From a shipowner and charterer perspective, this makes it even more important to be able to set the right price for voyages. Because the proportion of emissions to be covered by allowances will be phased in, we are unlikely to feel the full impact from year one, and the industry will inevitably have to adapt. In this context, forward-looking shipowners and charterers are already looking for ways to simulate their voyages and their EU ETS payments. Again, data analysis and simulation tools will be invaluable.
NAPA Fleet Intelligence , for example, already gives shipowners and charterers a comprehensive and objective assessment of emissions for each voyage. This impartial information will be an essential foundation to make any cost sharing mechanism work in practice, by bringing all parties on the same page with a common understanding. The system also gives them visibility on how many allowances have already been purchased, and how many more need to be obtained to cover for their emissions. This provides a common, objective platform to enable the industry to collaborate more and navigate this new regulation in a way that is predictable and fair for all.
3. Make voyages as efficient as possible to reduce emissions – and EU ETS costs
The final contribution of data-driven solutions in the EU ETS era is perhaps the most obvious: digital tools, and voyage optimization in particular, can help companies slash their greenhouse gas emissions, so they need to buy fewer allowances in the first place.
By putting a price on carbon emissions, EU ETS is the latest in a series of new regulations that builds an even stronger case for voyage optimization. The reason is quite simple: weather routing can save an average 10% of fuel consumption and greenhouse gas emissions, and offer benefits even on short intra-European routes. With the price of allowances expected to be high, this could make a significant difference for companies’ bottom lines.
As a result, demand for voyage optimization solutions is growing exponentially, as a solution that is easy to implement and delivers immediate benefits. In many ways, this is a no-brainer: making voyages more fuel-efficient saves costs, which is good for business, and reduces actual GHG emissions, which is good for the planet. The emissions reductions achieved also support compliance with other regulation, including the IMO’s Carbon Intensity Indicator (CII). In short, by optimizing voyages companies can kill several birds with one stone.
Furthermore, the wealth of data collected on board, via mandatory logbooks for example, can be turned into a goldmine of insights to boost a fleet’s operational performance and optimize practices as varied as hull cleaning and the ship’s trim to reduce fuel consumption, while ensuring safety. This also supports companies’ longer-term strategic decision-making, helping them decide which ships are best suited to specific routes to maximize performance, for example.
An era-defining moment
Will EU ETS work as a measure to reduce CO2 emissions from the maritime sector? There is every reason to be hopeful. Putting a price on carbon is perhaps the most powerful incentive possible to drive true decarbonization in shipping. It incentivizes the right goals – actual reductions in greenhouse gas emissions – while giving the industry the latitude on the means to achieve those improvements. By altering cost calculations, it will help build the business case for innovative clean technologies and alternative fuels, making the payback period shorter for such retrofits.
These are times of challenge, but also of opportunity. Shipping has the tools it needs at its fingertips to succeed in an EU ETS world, in the form of digital and energy efficiency technology that is already available. It is imperative that we make the most of these tools to take control of our own emissions, starting today. After all, EU ETS is only one part of the equation driving greener shipping, with the industry already starting to feel pressure from investors, financiers, and cargo owners.
There is more than costs and compliance at stake. Reducing greenhouse gas emissions from shipping should not be seen as a “box ticking” exercise, but as a transformation that must happen to keep the planet more livable – for our own generation and those that will come next. Every ton of carbon that isn’t released into the atmosphere makes a difference, so we have a responsibility to act now. With the right data-driven insights, doing good business and doing good for the planet can go hand in hand.