In 2024, the EU Emissions Trading Scheme (EU ETS) will begin regulating CO2 emissions from large ships entering EU ports. This addition represents another carbon market expansion: shipping vessels carry more than 80% of global trade and represent approximately 3% of global emissions. Compliance costs are expected to be material—but not high enough to cause immediate switching to more expensive, cleaner-burning fuels. Lower-emitting ships are expected to benefit.

Beginning in January 2024, the EU will cap CO2 emissions from large container-, bulk-, and liquid-carrier vessels (5,000 gross tons and above) entering or departing EU ports. EU domestic voyage emissions will be fully covered by the EU ETS, while 50% of international voyage emissions will be covered.

Shipping fleet operators will be required to comply by surrendering European Union Allowances (EUAs).  Operators have reported their emissions since 2018 and in January 2024, a phased compliance structure will be implemented under which firms must surrender allowances for 40% of emissions in 2024, 70% in 2025, and 100% from 2026 onward.

Shipping operators and independent charter fleets are preparing for these obligations, and larger entities are establishing EUA trading capabilities for hedging purposes.  Most shipping brokers and freight-forwarding agencies are already offering compliance products and services; some large shipping operators are announcing rate hikes to account for the pass-through costs of this new compliance structure.

While not expected to significantly affect EUA market fundamentals initially, inclusion of shipping in the EU ETS marks a notable carbon market expansion. It is seen as a precursor to broader maritime industry regulation by other jurisdictions, while the International Maritime Organization itself is adopting wider-reaching regulations for decarbonizing the industry.

Carbon surcharges may lead to dynamic opportunities for skilled firms to minimize their emissions, and therefore the cost of their compliance obligation, by rerouting ships or subcontracting out cargo based on differential carbon costs among ports, voyage speed, fuel and propulsion systems, and hedging capabilities.

This new compliance obligation is notable for ECP because it will open structured investment opportunities into new shipping methodologies that will arise to help firms lower their emissions, and their compliance costs, as EUA prices appreciate in the long-term.