Forecasted Effect of the Emissions Trading System
From 2024 onwards, the European Union’s Emissions Trading System (ETS) will incrementally be phased into the shipping industry, triggering a deluge of debates on its potential impact. In a recent report, Hecla Emissions Management, a consultancy established by Wilhelmsen Ship Management and Affinity Shipping, revealed that the shipping industry might face a liability approaching a staggering $20 billion throughout the initial three-year phase-in.
To arrive at this conclusion, Hecla utilized 2022 statistics from the Union’s Monitoring, Reporting, and Verification (MRV) system. It further incorporated the present market value of an emission allowance for CO2—pegged at €90. In 2022, the maritime sector’s total ETS-applicable emissions amounted to an astronomical 83.4 million metric tons of CO2, yielding an estimated cost burden of €7.5 billion for the industry.
Demystifying the Cost Calculation
Upon scrutinizing the 2022 data and factoring in a three-year ETS phase-in period, Hecla painted a sobering financial portrait. In 2024, with 40 percent ETS coverage, the cost would amount to €3.1 billion. By 2025, at 70 percent coverage, the figure could spiral to €5.7 billion. Once there’s full coverage in the same year, Hecla projects the cost to skyrocket to €8.4 billion. Cumulatively, this would represent €17.2 billion or approximately $18.9 billion as per current exchange rates.
Hugo Wilson, Director of Hecla Emissions Management, emphasizes the significance of these liabilities and the necessity for shipping companies to prepare for their ETS entry. He concedes, however, that yearly CO2 emissions vary due to different shipping industry sectors producing distinct quantities.
Potential Loopholes and Prevention Measures
Despite measures in the ETS system to counter avoidance tactics, shipowners can still implement strategies within their normal trading patterns. A keen examination of the MRV data disclosed a noticeable CO2 reduction between 2021 and 2022, attributed partially to market environment changes.
For instance, the robust demand for container shipping in 2021, as compared to a waning market in 2022, led to an approximately 8.95 percent reduction in emissions. This equates to a saving of roughly 2.3 million metric tons of CO2 equivalents. A similar diminution trend appeared in several shipping sectors, including tankers, general cargo ships, reefers, Ro-Ros, and chemical tankers.
Contrasting Emissions Trajectories
On the other end of the spectrum, passenger ships recorded emission increments of 118 percent in 2022, likely propelled by the post-pandemic travel resurgence. LNG carriers showed a significant 63 percent emission upswing, fuelling the increased demand for LNG shipping in Europe to supersede erstwhile Russian gas supplies.
A Glimpse at Future Emission Trends
The MRV dataset documenting European CO2 emissions manifests a slight overall reduction for the shipping industry in 2022. Seen as a robust measure for the ETS, the MRV mandates that all ships exceeding 5,000 gross tons must register and report CO2 emissions data to and from EU and EEA ports. This will be instrumental in incorporating shipping into the EU ETS commencing January 1, 2024.
