The inclusion of the maritime sector in the EU Emissions Trading System (EU ETS) requires shipowners and operators to integrate carbon pricing mechanisms while adopting effective decarbonization strategies. With increasing regulatory scrutiny, achieving compliance in a cost-efficient manner is essential.
This article provides an in-depth guide on short-term and long-term compliance strategies, including operational changes, fuel switching, retrofits, and carbon trading mechanisms.
At VURDHAAN, we help maritime stakeholders navigate EU ETS compliance by offering strategic guidance, AI-driven emissions monitoring, and sustainable shipping solutions.
Short-Term Measures for Compliance
1. Operational Changes for Fuel Efficiency
Shipping companies can significantly reduce emissions and fuel costs by implementing operational best practices, which also support compliance with IMO and EU ETS regulations.
- Speed Optimization: Reducing speed improves fuel efficiency, as fuel consumption increases exponentially with speed. Even minor speed reductions yield substantial carbon savings.
- Weather Routing: Optimizing routes based on weather conditions reduces fuel consumption and improves safety, cutting emissions over time.
- Continuous Descent Approaches (CDA): Originally used in aviation, this technique ensures optimized port approaches, reducing fuel consumption during docking.
- Other Fuel-Saving Operations: Methods such as optimized cargo loading and engine efficiency management can further enhance emissions reductions.
2. Impact on EU ETS Monitoring and Reporting
Operators must accurately define and track voyages to ensure emissions reporting aligns with EU ETS and MRV (Monitoring, Reporting, and Verification) requirements.
- Voyage Definition: A voyage begins at the last berth or ship-to-ship transfer at a port of call and ends at the next berth or ship-to-ship transfer.
- Port Calls: Only stops where cargo is loaded/unloaded or passengers embark/disembark are considered under the EU MRV system.
- Strategic Behavior Risks: Some operators may attempt to bypass EU ETS coverage by adding extra port calls outside the EU. However, defining port calls by cargo-handling activities minimizes evasion risks.
- Monitoring Time at Sea: Activities such as drifting or tank cleaning are counted as part of the voyage if they occur before arriving or after departing a port.
- Flexibility in Methodologies: Different monitoring techniques, such as bunker delivery notes, flow meters, or direct CO2 measurement, can be used as long as data gaps and double counting are avoided.
Strengthening Monitoring Plans
1. Updates and Written Procedures
- Annual reviews ensure that monitoring plans align with operational changes, such as new fuels, equipment, or routes.
- Written procedures supplement monitoring plans, allowing flexibility without requiring frequent formal amendments.
- Control systems must be in place to ensure accurate data collection and error mitigation, requiring a risk assessment to identify vulnerabilities in emissions reporting.
Evasion Strategies and Their Limitations
Despite compliance costs, some shipping companies may attempt to reduce EU ETS exposure through strategic workarounds. However, these often have financial and operational drawbacks.
- Avoiding EU Ports: Ships may add non-EU port calls, such as in the UK or Morocco, but higher operational costs often outweigh ETS savings.
- Modal Shift Risks: Shifting cargo to rail, road, or inland shipping may be impractical due to infrastructure constraints.
- Using Smaller Vessels (<5000 GT): Operating smaller, non-regulated ships is not feasible for most long-haul cargo transport.
- Selective Ship Assignments: Some companies allocate fuel-efficient ships for intra-EU voyages while deploying less efficient vessels elsewhere, but this strategy is limited by fleet availability.
Case Studies: Route Adjustments
- Maastricht Maersk Route: Adding a Felixstowe port call reduced EU ETS costs but increased operational expenses.
- MSC Santa Rosa Route: Reordering port calls, such as visiting Felixstowe before Bremerhaven, proved cost-effective even without ETS considerations.
Medium-to-Long-Term Measures for Decarbonization
1. Fuel Switching Strategies
The EU ETS and related policies financially incentivize low-carbon fuels, helping bridge the cost gap between fossil fuels and sustainable alternatives.
- Biofuels & Renewable Fuels: Sustainable biofuels and RFNBOs (Renewable Fuels of Non-Biological Origin) qualify for zero-rated CO2 emissions, reducing allowance costs.
- Liquefied Natural Gas (LNG): While LNG lowers CO2 emissions, methane slippage remains a concern. Effective boil-off gas (BoG) management is essential to maximize ETS benefits.
- Alternative Fuels Infrastructure (AFIR): The AFIR regulation ensures the availability of alternative fuels in EU ports, supporting the maritime sector’s transition.
2. Investing in Zero-Carbon Technologies
- Hydrogen and Ammonia: Recognized as future zero-emission fuels, these alternatives require infrastructure investment for widespread adoption.
- Battery-Electric Solutions: Suitable for short-sea shipping, battery power can significantly reduce reliance on fossil fuels.
- EU Innovation Fund: Twenty million ETS allowances, valued at approximately €1.6 billion, are allocated for maritime decarbonization projects.
Retrofitting for Energy Efficiency
- Wind-Assisted Propulsion: Reduces fuel consumption by five to twenty percent, offering a cost-effective emissions reduction strategy.
- Hull Modifications & Propeller Upgrades: Enhancing hydrodynamics improves vessel efficiency.
- EU ETS Incentives: The carbon price signal encourages investment in energy-efficient retrofits, making upgrades financially attractive.
Carbon Management and Emissions Trading
1. Approaches to Buying/Selling Allowances
Shipping companies must strategically manage carbon costs by participating in the ETS allowance market.
- Primary Market (Auctions): Companies can buy EU Allowances (EUAs) via the European Energy Exchange (EEX).
- Secondary Market (Derivatives & Hedging): Standardized futures contracts help mitigate price volatility.
- Banking Allowances: EUAs issued after 2013 do not expire, allowing companies to store allowances for future use.
2. Compliance and Surrender Process
- Operators must surrender allowances equal to verified emissions by September 30 each year.
- Penalties for non-compliance are severe, making accurate emissions monitoring essential.
- Market oversight is managed by the European Securities and Markets Authority (ESMA) to ensure transparency in ETS transactions.
Compliance Strategies: Internal Teams vs. External Support
1. Internal Compliance Teams
- In-house teams manage emissions tracking, reporting, and allowance trading.
- Requires expertise in EU ETS frameworks and financial risk management.
2. Brokers and Consultants
- Brokers assist in allowance trading, reducing financial risks from carbon price fluctuations.
- Third-party consultants handle monitoring plan updates and verification.
3. Key Considerations
- Training Programs: Staff should be trained on EU ETS compliance procedures.
- Written Procedures & Risk Assessments: Essential for regulatory transparency and control.
Conclusion: Transforming Maritime Operations for a Low-Carbon Future
EU ETS compliance is not just a regulatory requirement but a pathway to competitive sustainability. By adopting:
- Efficient operational practices
- Alternative fuels and energy-efficient retrofits
- Strategic emissions trading and cost management
Shipping companies can reduce costs while leading the industry’s decarbonization efforts.
At VURDHAAN, we provide expert consultancy and AI-driven solutions to help operators navigate EU ETS compliance and sustainability.
Together, we chart a course toward a greener maritime future.