What’s the shipping industry’s number one concern in 2024? Emissions charges

February 26, 2024

Bastien Declercq, from global financial services platform Marex, explains how the maritime sector’s inclusion in the EU’s emissions trading scheme could affect your costs and risks.

Joining the EU’s emissions trading system (ETS) is a big step for the shipping industry.

From January 2024, the ETS will cover CO2 emissions from all large ships entering EU ports, regardless of the flag they fly.

But, unlike many land-based companies already in the ETS, such as heavy industry and refiners, shipping operators have far less predictable fuel needs. They must assess and manage risk on a voyage-by-voyage basis – including emissions risk.

This means the ETS will make it even harder for shipping operators to plan for changes in cost – and you’ll have to prepare for fluctuating prices.

What drives price fluctuations?

The key drivers for price fluctuations in the secondary EU emission allowances (EUA) market are EU politics and global energy demand.

The ETS launched in 2005, and during the phase one trial period from 2005-07, virtually all EUAs were allocated to companies for free, rather than auctioned. This let participants find their feet.

Hopes were high that a realistic price for carbon would emerge during the second phase (2008-12). But the global financial crisis complicated matters.

EUAs were allocated on activity forecast before the economic slowdown; and as production lines shut down and energy demand fell, participants had EUA surpluses – and prices crashed.

Throughout most of phase two, it was cheaper to buy an allowance to emit a tonne of carbon emissions in Europe than it was to buy a Big Mac!

To address this, the EU revised the ETS a lot for phase three (2013-20). While some EUAs were still allocated for free, member states’ auctions became the default mechanism for companies to acquire EUAs.

Also, to manage supply, stimulate the market, and encourage companies to invest in lower carbon, the EU introduced a ratchet mechanism to reduce the total number (cap) of EUAs each year.

Looking ahead through phase four (2021-30) the EU-wide supply of EUAs will reduce by 90 million in 2024, and by 27 million in 2026. There will also be an annual reduction of the overall cap by 4.3% from 2024 to 2027 and by 4.4% from 2028 to 2030, according to the European Commission.

So how can you manage your costs in the face of price volatility?

Our shipping clients now tell us their number one concern is EUA (carbon) price volatility.

An unpredictable EUA price, they say, adds unexpected costs to a charter, making it difficult to set budgets.

So, to comply with the ETS, and to manage your costs and risks, you’ll need to trade EUAs in a more agile way.

This is where we can help you. Marex has been helping shipping companies hedge and manage risk for over 10 years, so we know the industry intimately.

This shipping heritage, combined with our experience in carbon trading, means we have a clear view of the risks you will face as a shipping operator participating in the ETS – and how you can manage them.

To get a handle on price fluctuations, contact environmental@marex.com today.

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