With more and more decarbonisation regulations, the shipping industry is seeing a growing influence from carbon pricing mechanisms. The FuelEU Maritime regulation is the EU's most recent way of tackling shipping emissions, but it’s not the only one. Regulatory carbon markets, such as the existing EU Emissions Trading System (EU ETS), and other globally or regionally discussed systems are setting the stage for a future where carbon costs will shape maritime. This week, we explore how FuelEU Maritime interacts with existing carbon markets, the rise of other regional and global initiatives, carbon pricing’s potential for commercially viable decarbonisation, and what this means for shipping companies.FuelEU Maritime and the Future of Carbon Markets in Shipping
Understanding Carbon Pricing in Shipping
Carbon pricing refers to mechanisms that put a cost on carbon emissions, typically in the form of either a carbon tax or emissions trading systems (ETS). In regulatory carbon markets, governments set limits on total emissions and allow companies to trade allowances for emissions within those limits, incentivizing emissions reductions.
The EU ETS is a prime example of a regulatory carbon market extended to shipping. From this year, shipping companies operating to/from or within the EU must buy allowances for their CO2 emissions, covering 50% of international and 100% of intra-EU voyages.
FuelEU Maritime vs. EU ETS: What’s the Difference?
While FuelEU Maritime and EU ETS aim to reduce emissions, they differ in approach:
FuelEU Maritime focuses on reducing the GHG intensity of fuels used by ships, requiring companies to meet emissions targets through alternative fuels and with the help of compliance mechanisms like banking, borrowing, and pooling. The latter opens up a regulation-specific carbon market, where pooling can be performed B2B, between companies.
On the other hand, EU ETS is a cap-and-trade system, where companies must purchase allowances/credits for each ton of CO2 emitted. The EU caps the amount of allowances in the market, creating an artificial or regulatory market.
Global Carbon Pricing and Markets: Emerging Trends
The push for decarbonization is not confined to the EU. Across the globe, regulatory frameworks are emerging. Turkey is set to launch its own ETS, Japan, and the UK are considering national ETS schemes, while China and the US are debating carbon taxes. The US Clean Shipping Act closely resembles the EU’s FuelEU Maritime.
At the IMO, international efforts are underway to create a global system through mechanisms like a carbon levy and/or a fuel standard. These mechanisms fall under candidate mid-term measures of the IMO which will be discussed further at the upcoming Marine Environment Protection Committee (MEPC) 82 at the end of September this year.
One notable IMO proposal is the World Shipping Council’s (WSC) Green Balance Mechanism (GBM), a mid-term measure aimed at creating a global pricing system for GHG emissions. Under this system, fuels are grouped into zones based on their emissions. Ships using cleaner fuels receive financial benefits and ships using fossil fuels face penalties. WSC’s approach centers around a fee vs allocation principle based on a global fuel standard to equal out the increased fuel costs of cleaner fuels.
Selling Low-Carbon Shipping Solutions: Mass Balancing and Book & Claim
Another angle relevant for shipping when it comes to carbon markets is offering low-carbon transport solutions. Here, methods like mass balancing and book & claim are becoming crucial when offering sustainable logistics options to customers and can especially help make decarbonisation commercially viable.
In mass balancing, low-carbon fuels such as bio-LNG are blended with conventional fuels. While the physical fuel used to transport customers’ cargo might be conventional, the sustainability attributes of the biofuel portion are tracked and attributed to the customers’ cargo. This allows shipping companies to offer services where a proportion of the fuel used is certified as lower carbon, even if the customer receives conventional fuel. Mass balancing is already widely accepted under frameworks like the Global Logistics Emissions Council (GLEC) Framework.
The book & claim system decouples the physical asset from the sustainability benefits. Under this system, companies can buy certificates representing the carbon reductions achieved through the use of low-carbon fuels. These certificates can be claimed by customers, allowing them to demonstrate a reduction in their carbon footprint, regardless of the specific fuel used in their shipment. Although book & claim is not accepted under all frameworks, it is widely used in voluntary carbon markets.
Preparing for the Future: FuelEU Maritime and Carbon Markets in Shipping
As regulatory and voluntary carbon markets continue to grow, shipping companies must be proactive in aligning their decarbonisation strategies:
Invest in Alternative Fuels: Reducing emissions and GHG intensity through fuels like bio-LNG, methanol, and ammonia is essential.
Global Regulatory Affairs: As more countries adopt decarbonisation regulations with economic impact, companies should track international developments, beyond the EU.
FuelEU Surplus Trading: The creation of compliance marketplaces—such as BetterSea’s FuelEU Marketplace—enables the trade of FuelEU surpluses. Companies with excess compliance surpluses can sell them, gaining additional revenue, and providing cost savings for companies struggling to meet emissions targets.
Low-carbon products: By participating in voluntary carbon markets, companies can monetize their decarbonisation efforts by offering low-carbon transport solutions.
A Note on Additionality in Carbon Accounting
When selling low-carbon products, one key concept to consider is additionality. This principle requires that the carbon savings attributed to a product must represent an actual, additional reduction in emissions beyond what would have occurred without the intervention. Companies need to be cautious about how they account for carbon savings, particularly when using mechanisms like mass balancing and book & claim.
For example, biofuels used to comply with FuelEU Maritime may raise questions about whether the same carbon savings can be double-counted when offering low-carbon products to customers. Ensuring that the emissions reductions used for compliance are not also sold as low-carbon benefits in a different market can be essential for maintaining transparency and credibility. Companies should closely monitor their claims to avoid overstating the environmental impact of their actions.
Conclusion
Carbon pricing, whether through FuelEU Maritime, EU ETS, or upcoming global measures, will fundamentally alter the economics of shipping. Companies that act early, align with these frameworks and explore new technologies that will not only reduce emissions but also unlock new market opportunities.
Stay tuned for more insights on navigating these complex challenges in our upcoming newsletters. If you have any questions or need further guidance on how to engage in the different carbon markets, feel free to reach out!
Best regards,
The BetterSea Team
Contact Us: info@bettersea.tech
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