Shipping companies need to act now to take advantage of carbon credits

By Carly Fields

 

A delay in securing carbon offsets could lead to shipping stakeholders losing out on the benefits of credits, a Baltic Exchange seminar audience was told.  

Instead, companies should embrace the opportunities to hedge and use regulation lead-in time to get familiar with EU Allowances (EUA).

Martin Crawford-Brunt, panel moderator for the Baltic Dry Freight & Commodities Forum and emissions lead for the Baltic Exchange, set the scene at the event, explaining that there is a great deal of complexity currently on the regulatory side of shipping. But while shipping has been painted as part of the problem when it comes to decarbonisation, Crawford-Brunt said there are also opportunities for shipping to be part of the solution. 

“There are many things that we can do as a shipping industry to advance in terms of real emission reduction. It starts with optimising what you have and doing better with the ships that we already have on the water. It’s then about using hydrocarbons - which will be with us for some time - in a more efficient way. And it is the third element of finding alternative fuels and procedures and safety measures.” 

He said the sector needs to be doing all three of those things; “it's not an either/or type situation”. “We need more joined up ways of looking at this because otherwise we will get a bunch of unintended consequences.” He gave the example of the IMO’s Carbon Intensity Index (CII) in terms of how it will operate in commercial markets and the fact that it might be deeply misunderstood. “One of the challenges with CII is it uses deadweight tonnes as a proxy, so it's just total distance divided by the size of the ship. Therefore, if you go very long and very slow, you can sort of reset your CII counter, but that doesn't tell you anything in terms of efficiency.” 

Another unintended consequence could see the most efficient ships put on the shortest runs and the least efficient on the long routes. “That doesn't make any sense but that might be where we go ultimately. The regulators don't foresee the unintended consequences following from the regulation when they don't generally understand supply chains.”

We need more joined up ways of looking at this because otherwise we will get a bunch of unintended consequences

Compliance challenges

Panellist Richard Wilson, managing director and head of European sales at Incubex, noted that while carbon is a buzzword today, the compliance market has been around since the arrival of the EU Emissions Trading Scheme (ETS) in 2005. In Europe, compliance is going to hit at the beginning of 2024, and companies are actively looking at offsets, he said. 

“This is coming,” Wilson said, urging the shipping world to be involved “in both sides”. For Europe, there is the mandate to reduce from 2024, but there is also the global side to consider. “The offset market is becoming more and more paramount because the insurance world won't touch you, the financial world won't particularly touch you, and then there are large insurance brokers that have been forced to insist on coal cargoes being offset now. 

“It's here to stay so instead of actually looking like a tax or a buzzword at the moment, it is becoming more and more mandatory.”

James Voyle, overseeing carbon solutions at Affinity, agreed that the EU has had shipping in its sights for some time. He said the beauty of the EU ETS and voluntary carbon is that it is simply a symbol of how many tonnes of you have emitted and the price of that. However, he noted that there is a “serious cost” attached to offsetting with EU ETS. “At E70-71 per tonne that would equate to a non-eco handy performing a cross-Med voyage of about $5,000 per day,” he calculated. “There are opportunities to hedge here, and this should be viewed as a commercial opportunity if treated correctly.”

Wilson said that Maersk will be looking at over a E1 billion a year to be compliant in the EU ETS, based on a price of $65. “It's a significant number,” he said, and encouraged companies to start trading soon. “You don't really start to learn a market until you start trading. The EUA that you buy today will be around and can be used at any time up until 2030. You can trade futures through the curve. And until you actually own 10 lots or 10,000 you're not going to watch it.”

Charterers and operators were cautioned against waiting until March to try and buy EUAs and to instead think about buying ahead of time.

There might be an interesting conflict between CII and EU ETS. It'll be interesting to see which ones charterers prioritise

Understanding the market

Voyle noted that the EU ETS is not a market designed for shipping; it was designed for power generation, making it a complicated market to understand. He advised owners to be monitoring emissions on a regular basis and making sure that even if they are not procuring or do not have a hedging strategy, at least make sure they are talking to their charterers and talking to people who can deliver the EUAs. “If you're a charterer you need to make sure that the ship owner knows what they're doing,” he added.

Data is key to all these decision-making processes, added David Watts, vice president of business development and partnerships at The Signal Group. “But data in itself doesn't often help; it's just lots of numbers, and you have to really unravel what the data means. A key part of that is how does that vessel you choose to charter perform from a CO2 emissions perspective? How has it performed in the past? Where has it been in the past? All these sorts of key areas of data will really help you to understand what your emissions profile looks like.” 

There is also the paradox of the CII to consider. Because 100% of the emissions of a ship on a cross-Med voyage will need to be abated, that is where the most efficient tonnage will be used, pushing inefficient tonnage into other parts of the world. “What we'll probably see is a premium on ships trading in Europe, but because those ships trading in Europe will be spending a lot more time in port, their CII ratings are going to be hit. 

“There might be an interesting conflict between CII and EU ETS. It'll be interesting to see which ones charterers prioritise,” said Voyle. 

And then there are other carbon initiatives that further muddy the waters for charterers and operators. While CII is a known quantity, the Poseidon Principles – the global framework for responsible ship finance – and the Sea Cargo Charter – the framework for assessing and disclosing the climate alignment of ship chartering activities around the globe – both use different metrics. “Those have a real impact on your pocket,” Watts said. “If you've got a bank that's a member of the Poseidon Principles group and your vessel is not good in terms of its CII rating, your credit terms will become much more expensive. 

“They will hit you in the pocket to make your ship green. It's not just the cost of carbon, it's also the cost of finance,” he said.