DOSSIER

 

EU ETS requires a practical approach… and the right data


Despite persisting uncertainty around what changes EU ETS will bring for shipping’s finances and contracts, companies can already carve their own pathway to success under the new legislation. This requires adopting a proactive approach and a digital mindset, says Philippos Giannakos, Senior Sales Manager at NAPA Greece. Shipping may have officially fallen under the scope of the European Union Emissions Trading System (EU ETS) at the start of the year, but many in the industry are yet to figure out what this will mean for their businesses and operations, now and for years to come.

What is currently missing for several shipowners and charterers is the practical workflows not only to comply with their new obligations related to buying and surrendering allowances, but also to ensure that emissions calculations are accurate. This leads to a lack of certainty on cost, which presents a potential financial risk for those companies.


A new playbook

One thing is already clear: EU ETS brings a new layer of administrative complexity, with additional tasks around the process of buying, managing, and surrendering allowances. An important question will be how companies work out a strategy for the purchasing of EUAs: do they buy allowances throughout the year paying the market price at that time, or do they time purchases to potentially seize opportunities to buy them when market rates are lower?

We can also expect companies to adapt their operations and voyage planning to account for calls at transshipment ports which may impact what proportion of their emissions needs to be covered by EU Allowances (EUAs).

Beyond this, EU ETS has triggered wider questions about how costs and responsibility are shared between the different parties involved in shipping; more specifically shipowners, charterers and managers. How the industry incorporates these new dynamics in contracts, through the framework put forward by Bimco or otherwise, will be determinant. This will have profound implications for shipping and beyond, impacting how costs are passed down through supply chains and ultimately to customers.


It all starts with data

In terms of reporting requirements, most companies already have the data that they need to ensure compliance, which they are already collecting under the EU’s Monitoring, Reporting and Verification (MRV) system. But compliance is one thing; using this data proactively to achieve better business outcomes is where the true potential lies.

An essential starting point to maintain successful businesses under EU ETS is for companies to have a comprehensive and objective understanding of their operational patterns and associated emissions. This requires making the most of their fleet’s data by choosing the right partners that can deliver highly accurate models and reliable analysis.

In practice, data analysis and simulation tools enable owners and charterers to predict emissions (and associated EU ETS payments) for every vessel, accounting for their specific profile and voyages. They can even model what measures, from weather routing to installing wind propulsion, will have the most impact on the specific routes where their fleet is operated. This equips everyone, from bridge to boardrooms, with critical knowledge. Perhaps the most obvious is helping them identify how they can optimize their operations to minimise their emissions, so they have fewer allowances in the first place.

But this data-driven picture also helps inform other more indirect, but equally important, aspects of a company’s strategy. Knowing precisely how many allowances will be required for each voyage and throughout the year enables companies to beat high price volatility and buy EUAs strategically when markets are favourable. Furthermore, having a neutral assessment of emissions for each voyage informs cost-sharing by bringing shipowners and charterers on the same page.


Money talk

The cost of EU ETS is (quite literally) a billion-dollar question, and will vary enormously depending on the ship type and segment. We also won’t see the full financial impact immediately, because the system will be phased in in the next few years. According to analysis from Clarksons Research based on 2022 trading patterns and an EUA price of $90 per ton, a VLCC sailing from Ras Tanura to Rotterdam will need an estimated $200,000 in allowances this year, which represents 4% of current freight costs. This is expected to rise to 10% in 2026 when EU ETS is in full swing. Those figures demonstrate the magnitude of the financial incentives created by EU ETS to reduce GHG emissions in the short term. They also highlight the importance of making the most of existing and proven technology that can improve fuel efficiency now. Indeed, every % of fuel saved will make a difference on the EU ETS bill for companies, helping them remain competitive. This strengthens the business case for voyage optimization, which can help companies kill two birds with one stone: minimizing fuel consumption and emissions for every sea passage, while also bringing more predictability on future fuel consumption and costs. This should be a no-brainer, as those systems can already be deployed with little to no CAPEX and save an average of 10% fuel consumption on some routes, offering benefits even on shorter intra-European routes. Crucially, weather routing can be tailored to help maximise the fuel savings delivered by wind propulsion systems or alternative fuels, helping achieve even better environmental and financial outcomes.Being able to track and proactively manage performance at a vessel and fleet level must be a key pillar of companies’ strategies for reducing their emissions in line with tightening requirements of EU ETS, but also FuelEU which is around the corner. As the saying goes, change begins with oneself. Strategies adopted by companies to future-proof their operations under new regulations will collectively build a more efficient and sustainable shipping industry. This shows that with the right data-driven insights, doing good business and doing good for the planet can go hand in hand.


Source: By Philippos

 

 

 

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