From 2024, CO2 emissions from shipping to/from/within Europe will gradually become subject to the EU emission trading system (ETS). Some 80 m tonnes of annual emissions will be covered under the scheme. That volume might seem a relatively modest addition to the approximately 1,200 Mt EU ETS, but under current assumptions, the maritime sector is set to be net short from 2027 and become a significant competitor for a steadily decreasing supply of EUAs.
The revision of the EU ETS Directive that was formally signed off on 10 May defines the framework of European carbon trading in the years to come. One key change is the accelerated cap tightening that will reduce the number of allowances in 2030 and bring issuance to zero in 2040. Another is the scope expansion to include maritime emissions alongside the existing sectors of power generation, industry, and aviation.
For those that are currently trading in the EU ETS – the entities that are already regulated plus the financial traders – the size of the aggregate demand from shipping companies is important when trying to gauge the overall ETS balance out to 2030 and beyond. In this analyst update, we provide some preliminary answers on this demand based on our new maritime supply-demand model.
Based on the supply side parameters stipulated in the newly revised ETS Directive (the extra issuance of emission allowances, EUAs) and in a scenario assuming European shipping follows a business-as-usual trajectory of modest traffic growth and limited abatement options before 2030 we could see the shipping sector net short around 100 million EUAs in the period 2024-2030. If so, that will intensify the scramble for EUAs just as supply gets very tight. If maritime traffic to/from/within Europe decreases in the years to come, or if one or more shipping emission abatement technologies suddenly take off, the picture will look different.
Ships visiting European ports are already obliged to monitor, report, and verify emissions (MRV), but from 2024 onwards ships will also need to surrender EUA allowances to cover their emissions.
Initially, the compliance obligation relates to ships above 5,000 gross tonnes transporting passengers and cargo. Large ships like container ships and other large general cargo ships, oil, gas, and chemical tankers, bulk and vehicle carriers, and large ferries and cruise ships will be the key ship types covered from the outset. There are exceptions as well, most notably fishing vessels. Offshore vessels are exempted until 2027. The inclusion threshold might eventually be lowered to 400 gt, this will be reviewed in 2026.
The compliance obligation will be phased in gradually, starting at 40% of CO2 emissions in 2024, 70% in 2025, and finally reaching 100% compliance from 2026 onwards. There will be no free allowances, instead shipping companies will need to purchase all their EUAs, either at the auctions or in the secondary market.
As of now, the obligation to monitor and report maritime emissions relates only to CO2, not to other greenhouse gases. That will change when methane and N2O are added to the MRV scope in 2024. These gases will then be added to the ETS scope in 2026.
Once non-CO2 gases (methane and N2O) will be added in 2026, and large offshore ships in 2027, the supply (issuance) of EUAs will be adjusted accordingly. Article 9 of the ETS Directive states that “the quantity of allowances shall be increased to take into account the coverage of greenhouse gas emissions other than CO2 emissions from maritime transport activities and the coverage of emissions of offshore ships, based on their emissions for the most recent year for which data are available”.
All intra-EU emissions are included. That means journeys between member states’ ports and emissions at berth. Also, 50% of emissions from inbound and outbound journeys are included.
Figure 1 shows the applicable timelines and sums up how the coverage develops from 2024 onwards in terms of ship types and sizes, and greenhouse gases. Given the scope of inclusion of the maritime sector, most of the shipping emissions in the EU will be covered.
The maritime emissions that will be covered by the EU ETS are currently around 83 Mt per year (estimated by Veyt based on MRV data, retrieved 31 July 2023). This is calculated based on monitored, reported, and verified emission data from 2018-2022, excluding emissions from journeys to small islands and overseas territories that are excluded from the scope. Emissions in 2018-2020 are estimated excluding UK emissions that were included in the MRV data in that period.
Different ship types have seen different emission pathways over the past five years, illustrated for selected ship types in Figure 2. Overall, emissions to be covered by the EU ETS from these ships were 90 Mt in 2019, dropped to 76 Mt in 2020, before rebounding to 83 Mt in 2022.
Passenger ships were heavily affected by the corona pandemic and emissions from these ships dropped significantly in 2020, before rebounding in 2021 and 2022.
Container ships, tankers, and cargo ships have seen a modest decrease in emissions over the five-year period. The explanation is complex – partly due to the pandemic, but also less trade, congested supply chains, efficiency gains, as well as effects of the war in Ukraine. News of lower Chinese exports in 2023 could add to the fall. As shown in Figure 2, container ships and tankers are the ship types contributing most to the overall emissions from shipping.
Gas/LNG carriers are the only segment that shows a clear upwards trend for the period as a whole, with a sharp increase in 2022 when European demand for overseas gas jumped in reaction to the near-stop of piped Russian gas flows in 2022.
For the first year of compliance, 2024, 40 percent of emissions must be accounted for, i.e., some 33-34 Mt. The ratio increases to 70 percent for 2025 emissions, then 100 percent for 2026 and onwards.
Figure 3 shows our default scenario for how the inclusion of maritime emissions will affect the overall EUA balance out to 2035. The dark blue line represents the net number of allowances that are added annually, the cap increase. Starting at 78 m in 2024 we will see a dip in 2026 and 2027 when supply is adjusted for the higher-than-necessary issuance in the two first years. From 2028 onwards the number of shipping-related EUAs will be reduced by the linear reduction factor in the same way as the rest of the EUA cap.
On the demand side, this scenario assumes a business-as-usual trajectory under which the covered maritime traffic (intra-EU and 50% of incoming/outgoing) will be stable or grow on average 1% per year in line with what has been the case for international shipping over the last years. These demand-side assumptions are shown as the light blue line in the figure. The fanned range illustrates the difference between flat emissions and an annual 1 percent growth.
In short, we see it as likely that overall shipping activity to/from/within Europe will continue to increase slightly albeit subject to market fluctuations. Emissions will nevertheless be somewhat reduced by the above-mentioned abatement measures that are triggered partly by the Fuel EU Maritime Regulation (the EU), and partly by IMO’s carbon intensity indicator (CII), especially when we get closer to or after 2030. These and other abatement options to curb emissions from shipping will be covered later. The intention here is to show the cumulative demand from shipping before large-scale abatement options are rolled out.
As the gap between shipowners’ supply and demand grows bigger, the cumulative effect on the overall ETS balance will increase year by year, as shown by the green area in Figure 3, the fanned range reflects how sensitive the balance is to the assumption on annual emission growth (the light blue area).
From our analysis, we find that the ETS expansion to add the maritime sector will briefly add length in 2024 and 2025, before leading to an increasingly net shortening effect on the market balance (in which demand outstrips supply). In our trajectory, we see the shipping sector as net short by some 108 million tonnes worth of allowances in 2030, unless new abatement measures are introduced.
The scenario of flat/increasing emissions is less robust post-2030. If shipowners/operators manage to cut emissions, either by introducing alternative fuels, new technology, or operating more efficiently they will need fewer EUAs. If they don’t, the maritime sector will likely be a substantial source of demand for EUAs by the end of the decade.
Bunker is a large cost for operators; therefore owners of large ships have already been working for years to decrease the emissions from their fleet to become more competitive. Hence, there are not a lot of low-hanging fruits, and large emissions reductions require a transformation of the fleet, technology development, and innovation. This takes time and 2030 is only a few years out. In the next decade, alternative fuels should become more prominent.
Veyt specialises in data, analysis, and insights for all significant low-carbon markets and renewable energy.
