Shipping companies should be looking at carbon strategies – both compulsory and voluntary – today as impactful legislation is fast approaching.

That was the message from a joint Baltic Exchange-Institute of Chartered Shipbrokers webinar, where expert speakers examined the carbon markets and their impact on freight.

James Blunt, head of voluntary carbon, shipping and aviation, at Redshaw Advisors, outlined the two main current carbon compliance markets that shipping needs to be aware of: the European Union Emissions Trading Scheme (EU ETS) and the UK ETS, which he described as an “upshot of Brexit”.

The EU ETS is a cap-and-trade system that sets an annual cap to a sector which then filters down to organisations within that sector. Over time, that cap tightens. “It’s designed to encourage companies to implement emission reduction strategies,” Blunt explained. The trade element of it allows companies that come under the cap to control their emissions by buying and selling allowances related to the EU ETS. “The trading element gives you more flexibility as a business and in many cases, it’s seen by companies as more attractive than a tax system – which would be the alternative to cap and trade.”

But shipping firms need to pay equal attention to voluntary carbon markets as well, Blunt said. “The voluntary market is a very different animal. You have no obligation to act in the voluntary space but there is pressure,” he said, adding that there is a degree of evidence now that is compelling companies to get more involved in decarbonisation strategies. “I would encourage companies to consider it. It’s relevant, and it does have impacts that a lot of companies perhaps haven’t thought about, particularly from a reputational standpoint.”

Voluntary work

The voluntary market can be broken down into two areas: carbon avoidance and carbon removal. Carbon avoidance covers many of the projects that have already been developed around the world to date, where companies look to offset their physical emissions by buying carbon credits. However, longer term, there is a desire to move to renewable projects, where carbon is captured and then stored or removed from the atmosphere for the longer term. “That is deemed to be the more effective way of reducing emissions in the atmosphere.”

Whereas the compliance market carries legal obligations to act, the voluntary markets are not obligatory. “The two systems are separate markets, they don’t overlap,” said Blunt. However, the voluntary markets are “equally important” and offer opportunities.

The EU ETS has been in place since 2005, initially covering static installations such as utility companies, and iron and steel works – the major emissions emitters. Maritime is anticipated to join the scheme in 2024.

Blunt added that there are other compliance markets in the world of note for shipping. “North America is quite active in this space and also the Far East. There are various ETS systems being created – probably not as developed as the European and the UK systems – but they are very much coming to the fore now and a number of them, particularly in the Far East, have suggested that they may include maritime in their rules and regs going forward.”

When it comes into force in 2024, shipping will be impacted at a number of touchpoints: in EU ports, in intra-Europe trade, and on voyages where only one of the ports of call is in the EU. “It’s going to have a fairly major impact on the sector,” Blunt said.

But he added that while shipping is expected to be included in the EU ETS from 2024, there will be a phase-in period, which is expected to required accounting of 30% of total emissions from a ship during 2024, 70% in 2025, rising to 100% for 2026.

One risk that needs mitigating is the volatility in the price of carbon, which was E10 in 2018 and almost breached E100 in 2022. “You can see clearly the trajectory would appear to be upwards in terms of getting your head around what sort of impact this is going to have on you and individual ships that you may own or operate.”

More challenges

Martin Crawford-Brunt, decarbonisation lead for the Baltic Exchange and CEO at Lookout Maritime, noted that the maritime operating landscape is getting more challenging. “Customer market expectations are improving, and we need to deliver emission reductions,” he said, adding that he is keen for shipping to be seen as “part of the solution, not part of the problem”. He also sees shipping as a “vital instrument” for reducing the carbon intensity for industry, countries and nations.

Regulation, including the planned EU ETS, is both complex and ambiguous, he said, which presents a big challenge because it’s not understood and it’s very difficult to implement.

Crawford-Brunt urged ship owners to start by minimising emissions from their existing fleets by introducing operational measures. Added to that, the industry needs to look at how it can remove split incentives and contractual bottlenecks. “A lot of these are preventing us as an industry from doing better.” Part of this is reaching an understanding of “what good looks like”. “We need to improve the indicators, the data, the metrics, so that we aiming for the right thing – we need to be clear on what green really is.

“We need to avoid the unintended consequences. We need to understand the full lifecycle benefits and costs. And then we need to find a good way to measure and report progress,” he said.

He supported the qualified use of carbon offsetting through the voluntary market as well as schemes that facilitate reinvestment, or insetting.

“There is a suite of solutions that we need to consider. It’s really not a one-size-fits-all and the carbon markets need to be viewed in the context of a credible sustainability plan,” Crawford-Brunt said. “The operating environment is getting challenging and customer market expectations have grown in terms of what needs to be done on emission reduction. The regulatory environment is complex and can’t be relied on on its own, so the market is going to have to play a role in aiding the investment and supporting the outcomes to get to a better place.”
Source: Baltic Exchange