EU ETS
TIMELINE
Already enforced for power stations, energy-intensive industries, and civil aviation. Final design of the inclusion of the maritime sector is still pending, the EU is intending to implement from January 2023, member states including the biggest (Germany) are pushing for this to be delayed and as recently as November 2022 giving little ground. The extension will include all emissions on voyages intra-EU as well as 50% of voyages either starting or ending in the EU. Ultimately this is projected to cover around two thirds of maritime transport emissions. It will be phased in over 3-4 years, starting at 20% of verified emissions in year 1 (2023), 45% in year 2, 75% in year 3, and 100% in year 4 (2026) onwards. 1 Expected release in late 2022 of the final ETS shipping industry rules, depending on progress being made at trialogues between the EU Commission, EU Parliament and EU countries.
MECHANISM
Companies need European Emission Allowances (EUA) to cover their carbon emissions under a “cap-and-trade” approach, for every tonne of CO2 they emit, and they can buy and trade these EUAs via the Emissions Trading Scheme (ETS). Companies can also buy credits from emission-saving projects under the Kyoto Protocol’s Clean Development Mechanism in developing countries. 2 A free allocation of allowances is based on benchmarks for low-carbon or zero-carbon technologies (e.g. green hydrogen) but the latest legislation is there will be no free allowances for shipping. 3 Financial settlement for 2023 will be due in early 2024, and so on for future years.
PRICING
Current EU ETS carbon price is about eur75 and hit a high of eur97 in August 2022. If companies don’t have sufficient allowances, they are fined (eur100 per excess tonne – and presumably this value will adapt to the carbon market).
Example calculation: A modern (2016 blt) eco-MR doing a voyage of approx. 40kt oil products from 2 ports in the Middle East to 2 ports in the Mediterranean is projected to release approximately 1,819mts CO2 emissions subject to the exact voyage including ballast leg, time spent in port and specific tank preparation procedures. Based on a carbon price of eur75, applicable to 50% of the overall emissions (as the voyage ended in the EU), this equates to approximately eur68,000, or usd71,000 exposure when fully phased in, in 2026. Under current proposals, this would be usd14,226 in 2023 for the voyage, increasing each year until 2026.
IMO Carbon Levy
TIMELINE
Unknown. IMO EEXI and CII regulation is in effect from January 2023 but this does not include any carbon price. New regulations to be announced could include a large-scale mandatory emissions trading scheme with nothing expected to be announced before the next IMO meeting in Spring 2023. Previous UN meetings and the current geopolitical and economic climate do not suggest that a consensus will be easily reachable on any proposals.
PRICING
At COP27 in Egypt in November 2022, the IMF chief has said that the price of carbon needs to average at least $75/pmt globally by 2030 for global climate goals to succeed.
FLEET REGULATION VIA IMO (NON-LEVY)
The main impact of other IMO CII/EEXI regulation, entering into force 1 Jan 2023, is that less carbon efficient vessels (older and running conventional fuels) will need to slow down, by varying degrees.
This is at a time when dry bulk charterers are requesting vessels speed up, as a consequence increasing carbon intensity, representing in a higher annual efficiency ratio for some carriers fleets in 2021 compared to 2020.
In the tighter tanker market, owners prefer higher speeds as it is better for their TCE. A showdown between better TCEs and better carbon efficiency looks likely. And can owners reasonably try to put any differential in higher direct carbon costs (EU or other levy) for doing faster speeds (if applicable) onto charterers, in pursuit of their own better TCEs? Engine, hull or other technical modifications can also be used to bring older, less efficient vessels in line with IMO CII/EEXI. This could marginally affect the availability of the fleet while certain vessels are in the yard (similar to scrubber retrofitting). Ships burning biofuels is another way to bring older conventionally-propelled vessels in line with regulation. Shell’s announcement to acquire 3.25bn litres of ethanol is the latest big movement in this area.
OTHER REGIONAL CARBON REGULATION (NON-SHIPPING CURRENTLY)
(A) China has the world’s largest ETS covering polluters from the power sector (which account for 40% of the country’s total emissions), expected to expand to financial institutions and industry in 2022, but not shipping. The price of carbon on the Chinese market is very low
(~$10 pmt).
(B) California has a Cap-and-Trade program covering electricity generators and large industrial facilities.
(C) Canada has carbon offset market and has set a large increase in carbon pricing for 2030
Chartering Mechanisms
If a charterer knows a ship will be waiting on demurrage at a port if it arrives too early, below is a clause whereby charterer instructs vessel to slow down en route, in which case the time between the “virtual arrival” and the actual arrival is compensated by charterers to owners at a rate lower than the demurrage rate, to account for bunkers saved by slow steaming. Some principals with specific climate drivers/KPIs may be interested.
BIMCO JUST IN TIME ARRIVAL CLAUSE FOR VOYAGE CHARTER PARTIES 2021
(A) The owners and charterers shall use their best endeavours to obtain and share information regarding the Vessel’s arrival time, this shall include, but not be limited to, information from, or required by, any relevant third party. Any port specific requirements shall be met.
(B) Notwithstanding any other clause in this Charter Party, the charterers shall be entitled to request the owners in writing to adjust the Vessel’s speed to meet a specified time of arrival, or closest thereto, at a particular destination. Such request shall always be subject to the owners’ consent which shall not be unreasonably withheld and, in the case of an approach voyage, also subject to agreeing an amended cancelling date. The charterers shall not be entitled to request an adjustment of speed outside the normal safe operational limits of the Vessel.
(C) Extra time used on a sea voyage as a direct consequence of the Vessel adjusting speed pursuant to the charterers’ request shall be the difference between:
(i) the “estimated time of arrival” as provided by the Vessel prior to the charterers’ request to adjust the Vessel’s speed to meet a specific time of arrival, or closest thereto, at a particular destination; and
(ii) the “actual time of arrival” at that particular destination, or closest thereto. Such extra time shall be compensated by the charterers to the owners at USD ___ per day pro rata or as otherwise agreed by the parties which shall take into account the savings in fuel by the owners and shall be payable by the charterers to the owners, prior to completion of final discharge.
(D) Where the Vessel proceeds at a speed adjusted in accordance with subclause (B), this shall constitute compliance with, and there shall be no breach of, any obligation as to despatch and shall not constitute a deviation.
(E) The charterers shall ensure that the terms of the bills of lading, waybills or other documents evidencing contracts of carriage issued by or on behalf of the owners provide that compliance by owners with this Clause does not constitute a breach of the contract of carriage. The charterers shall indemnify the owners against all consequences and liabilities that may arise from bills of lading, waybills or other documents evidencing contracts of carriage being issued as presented to the extent that the terms of such bills of lading, waybills or other documents
evidencing contracts of carriage impose or result in the imposition of more onerous liabilities upon the owners than those assumed by the owners under this Clause.