Emission regulation for shipping is becoming increasingly impactful and complex. Much of the focus these days is on how to navigate regional regulation like the EU Emissions Trading System (ETS) and FuelEU Maritime.

We are in the early days of the implementation of EU ETS, having not yet completed the first reporting and surrendering cycle. Allowances for 2024 emissions associated with EU voyages will need to be purchased and surrendered in September 2025.

FuelEU Maritime, which introduces new trading elements and is based on the well-to-wake intensity of fuel burned (the entire process of fuel production, delivery and use onboard ships, and all emissions produced therein), applies to EU associated voyages from 1 January 2025. This regulation aims to accelerate the adoption of low carbon fuels by introducing a penalty for the burning of each tonne of conventional marine fuel. 

Amid the complexity of these regulations and ensuring shipping players remain compliant, there are important market factors that are often misunderstood or overlooked. Shipping companies and cargo interests, particularly those based outside the EU or who don’t trade regularly with the EU, have some way to go in understanding how to mitigate the associated operating and commercial risk.

A focus on forums

To support shipping companies and help them understand these risks, Baltic Exchange hosts regular forums around the world to support members and the market.

As an example, Baltic Exchange’s recent seminar event in July in Shanghai, which was held in collaboration with Shanghai OTC Commodity Derivatives Association (SOCDA), China Economic Information Service Shanghai Branch, MCS Group and Bank of Ningbo, focused on the market implication of emissions regulation and carbon mechanisms. 

The event generated a great deal of debate, and the discussion continued long after the session closed formally. There was great interest in understanding the impact of the regulations beyond the ability to demonstrate compliance with them or the detail of the regulations themselves.

A common question at these forums held outside Europe is “Why should EU emissions regulations matter to me?” During our Shanghai seminar, we explored this theme in the context of Chinese companies, touching upon the global nature of our industry and the mutual benefit of facilitating global trade.

Global perspective

From a regulatory perspective, what happens in the EU is being closely watched by other jurisdictions around the world. This also feeds into the ongoing process at the International Maritime Organization as the global regulator develop market-based measures aimed at reducing emissions in shipping.

There are more direct consequences of these regulations that effectively incentivise the ‘export’ of the less efficient and more polluting ships out of EU trades. As a result, voyages not associated with EU could be carried on less efficient ships, with the charterer or cargo interest left to pay more for their freight.

Equally, a ship owner preparing a voyage estimate without including ETS or FuelEU costs may find themselves with a cost exposure they didn’t expect. This could have other commercial or reputational implications, including counter party risk and their cash flow.

While the cost impact is not well understood by the contracting parties, the temptation to conservatively increase these costs, by rounding up or even doubling, exists.

Calculating your emissions

To better help the industry navigate and understand these cost impacts, Baltic Exchange has built a series of resources that enable market participants to better understand the broader implications of increasingly impactful emissions regulation and their associated costs.

Baltic Exchange’s Emission Calculator is a freely available tool for the wider maritime sector, enabling shipping companies to calculate their expected costs associated with various emissions regulations. Crucially, by using an indicative set of CO2 emission reference points for Baltic dry and tanker routes based on standard Baltic ship descriptions, these benchmarks will provide a valuable point of reference as the market seeks to factor in carbon emissions alongside charter rates.

For more detailed and specific calculations, the Emission Calculator can compare any vessel type against Baltic standard by entering its particulars. The result is a useful comparison of that vessels emissions and costs, against the Baltic standards by route or ship type.

Click here to access Baltic Exchange’s Emissions Calculator and understand more about the wider impacts of emissions baselines on operating costs. 

Building understanding

Consistent baselines are crucial to building a mutual understanding of “what good looks like” in terms of efficiency and emission reduction. This is an essential ingredient in more effective performance-based agreements between owners and charterers, which incentivise increased investment to deliver real gains in efficiency.

A market perspective on the implication of emission reduction measures is essential for capturing the opportunities and reducing the risk of unpleasant surprises along the way.

Baltic Exchange continues to offer the wider shipping industry the tools it needs to advance its understanding of emissions cost calculations, as well as offering the forums the industry is looking for to understand crucial matters related to emissions, compliance and risk management.

If you have any feedback, suggestions or questions, please email emissions@balticexchange.com.

Author

Martin Crawford-Brunt is CEO of Lookout Maritime and appointed Emissions Lead for the Baltic Exchange.