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Shipping soon part of the ETS – time to bring expertise on board

From 2024, shipping is to be included in the EU Emissions Trading System (ETS), with major effects on the industry. “The time is high for shipping companies to start preparing. We will help set up a tailor-made strategy for your company”, says Aleksander Christensen, Head of Commodities Sales at SEB. 

Maritime transports cause about 4 percent of the EU’s carbon emissions. In the strive for climate neutrality by 2050, the EU is looking to include the shipping industry in its Emissions Trading System (ETS). That process is nearing its final stages – and shipping companies now need to gear up for the various complexities that come with the system. But let us start from the beginning.

The ETS was initiated in 2005. In short, it is based on setting a cap on how much greenhouse gases that can be emitted by those covered by the system. Furthermore, the companies within the system need to surrender European Emission Allowances (EUA) for every tonne of carbon they emit. The EUAs can be bought – and sold – in various trading venues.

“The EU ETS is designed so that physical emissions are reduced where it is most cost-efficient to do so. Given that the amount of EUAs in circulation is cut every year it should, in principle, give companies a financial incentive to act on their emissions”, Aleksander Christensen says. 

In its initial phase, the ETS focused on sectors such as energy and manufacturing. A few years later, aviation was included – and next up is, as already mentioned, shipping. This entails a major cost-increase for the industry, Richard Arnesen, Commodities Sales Specialist at SEB, explains. 

“In 2024, shipping companies will only have to buy EUAs for 40 percent of their emissions. But the number will be adjusted yearly, and from 2027 they are going to need EUAs covering all emissions. Financially, this corresponds to an up to 50 percent increase in fuel costs, so the shift is quite dramatic.” 

The EUAs are released yearly by the European Union and auctioned off on the trading venues. But purchasing these is not something that can be done in a flash – in fact, several strategic and risk considerations need to be made. Luckily, there is also expert help readily available.

Dual expertise when it comes to shipping and the ETS

Once included in the ETS – the shipping companies will have to register for an account where their EUAs can be stored and surrendered from. With that in place, the complexities of trading and hedging begin.

“Firstly, the trading platforms are based on collateral, with all members providing securities, should any market participant default. In other words, you have to tie up a lot of capital with the platform, which constitutes both a liquidity issue and a financial risk. Secondly, the EUAs are sold in fixed batches, and you may have to buy allowances for 2 000 tonnes, even if your emissions will be 1 300 tonnes”, Richard Arnesen says.

Aleksander Christensen adds: “There are also different strategic challenges, depending on what part of the shipping industry you operate in. Tankers typically operate more in the spot market, while dry bulk companies – shipping ores and grain – have longer planning. Car carriers tend to have contracts stretching over several years. This calls for different approaches to hedging and the trading of EUAs.”

What is the role of SEB, a bank, in all this?

“We have access to the exchanges, so that our clients don’t have to set up a membership. This means we carry the financial risk for our clients and help them free up capital. Our clients can also buy EUAs on a credit limit, plus the exact amount of EUAs they need – matching delivery and payments with their physical contracts. All in all, we aid with a tailor-made hedging and procurement strategy”, Aleksander Christensen says.

Richard Arnesen: “As a bank, we have been involved in the trade of EUAs for several years, designing different purchasing and hedging strategies. In addition, we are the leading shipping bank in the Nordics, with a profound understanding of the industry. So, you could say we have a dual expertise when it comes to shipping and the ETS.”

Time to act

Shipping companies operating within the EU will be subject to the ETS, regardless of the flag they fly. When sailing from one EU port to another, all emissions need to be covered by EUAs – when one of the ports is outside of the union, only half. But what effects will this have on maritime transports?

“Since we are looking at a big cost increase related to emissions, companies with more modern ships will become more competitive. It therefore provides an incentive to decarbonize maritime transportation, which is precisely what the EU has set out to achieve. In the long-term it is, however, hard to predict what this will mean in terms of the technical development within shipping”, Aleksander Christensen says. 

At this point – with the ETS-inclusion moving closer – what would your advice to shipping companies be?

“Turn to us. The time is high to start getting an understanding of the system and setting up the infrastructure that suits your company’s specific needs.”

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