Jesper Sørensen, Head of Alternative Fuels and Carbon Markets at KPI OceanConnect, looks at the EU Emissions Trading System and explains how even operators that visit the region only occasionally should be well-prepared to deal with the system:

Ships arriving at ports in the European Union (EU) since the start of the year must pay the EU for a portion of the carbon emitted during their voyage under the EU Emissions Trading System (ETS). The EU ETS, which has regulated emissions from European industries, energy producers and aviation for more than a decade, came into effect for shipping vessels over 5000GT on 1st January this year. Owners and operators should rethink how they approach and manage their fuel strategies, with the introduction of the EU ETS meaning they will now need to consider the cost of their carbon emissions. 

The EU ETS regulation is changing the way shipping handles its emissions. Until now, the International Maritime Organization (IMO) focused on operational and technical aspects of existing and future fleets to reduce carbon emissions. Europe’s emissions trading system instead puts a price on carbon and requires owners or operators of vessels that call in EU ports to pay for their emissions. With greenhouse gas emissions linked directly to costs, owners and operators will want to consider emissions trading as they plan and develop their fuel strategies. 

The process of engaging with EU ETS is complex. All vessels visiting EU ports will be familiar with the monitoring, verification and reporting (MRV) standards related to the EU ETS that have been in place since 2018. These MRV standards underpin the compliance process for the EU ETS, providing the data that determines the number of EU Allowances (EUAs) an operator needs to buy and surrender. Less familiar to ship owners and operators will be the entirely new processes of buying, holding and surrendering EUAs. 

Operators subject to EU ETS must register with the Union Registry, the body responsible for guaranteeing accurate accounting for all allowances issued under EU ETS. The Union Registry offers two types of accounts for holding EUAs. The first of which is the Operator Holding Account (OHA) from which operators surrender EUAs to cover their emissions. EUAs can only be surrendered to administering authorities through an OHA. The other type of account is a Trading Account (TA). Any business can open a TA, and it allows them to buy and receive EUAs, whether their activities are subject to the EU ETS or not. EUAs purchased through a TA must be transferred to an OHA for surrendering. 

Both types of accounts are opened with individual countries through the Union Registry. The process for opening accounts is complex, and the information required varies between countries. Opening an account can take several months, so even for irregular visitors to EU ports, it is worth doing this as soon as possible. 

In an open market for carbon credits, operators will want to pay attention to when they buy EUAs and the prices they pay. As operators become more familiar with EU ETS, some may choose to develop more sophisticated fuel strategies, considering the likely cost of any carbon credits they will need to surrender alongside their fuel cost. However, in the first year of operation for EU ETS, we anticipate companies will prioritise compliance and building capacity and experience with the system. 

In February, shipping companies that operate frequently in the EU will learn which country will host their OHA. Operators will be allocated to the country whose ports they visit most often, so they are likely to have a good idea of which country they will be registering with. However, shipping operators whose vessels visit EU ports less frequently will be required to open their OHA in the country of their first European port call in 2024. Given the complexities of registration, operators need to be well prepared to work with the country authorities where their first vessel makes port. 

KPI OceanConnect sees working with clients to handle the demands of the EU ETS as an extension of our partner role in the bunkering industry. Our team has already supported many customers with their EUA questions and transactions. Operators need to think carefully about how they will manage EU ETS and be aware that there is support for covering the many areas of preparation. 

Legal teams should review contracts to make sure it is clear who will be responsible for different aspects of compliance in the value chain. Agreements between technical managers and owners must clearly assign responsibilities, and clauses in contracts between the owner and the charterer and the charterer and the cargo owner need to be clear. 

Internally, shipping companies need to assign responsibility for managing engagement with EU ETS in ways that work best for them. A strategy for buying EUAs when low-carbon fuel is expensive may work for some companies, but it is important to understand which team is responsible for working this out. Internal clarity at this level can make working with the EU ETS easier for shipping companies. 

Ultimately, no matter how many port calls an operator makes in the EU, it is important to ensure compliance. Regardless of any low-carbon fuel buying strategy adopted to minimise exposure to the EU ETS, operators must purchase enough EUAs to cover vessel emissions during the reporting year. If they miscalculate, they will be fined and must still come up with the right number of EUAs. Serious non-compliance may lead to vessels being banned from calling at EU ports.

KPI OceanConnect recognises that marine energy users need to adapt to this complex system and ensure they tailor their fuel strategies to accommodate the new influence of emissions trading. We have long worked in partnership with our suppliers and clients to share knowledge and experience of the bunkering industry. As the shipping industry moves forward to a future that includes carbon trading under EU ETS, partnership and knowledge sharing across the industry will be important for delivering a successful energy transition. 

Photo credit: KPI OceanConnect
Published: 13 February, 2024