The topic sounds like a travel agency ad.

Global climate change and the related practices have introduced us such new expresions and abbrevations that we can’t even ring the the door bell of the subject without mastering them.

EU ETS Emission Trading Schme  (European Union Emission Trading Scheme) has been expanded as of 1 Jan 2024 to cover the Maritime sector. In short, EU aims is to cut the GHG (green house gases) emissions by 55% compared to 1990 by 2030 to comply with the EU Fit For 55 package.

I will try to make this subject more easy to understand by presenting a work of Drewry Maritime Research and Consulting Services together with my comments and case examples.

DRIVING FORCE OF DECARBONISATION

Regulatory pressures; the push from EU and IMO to reduce the emissions from ships.

Push from financial institutions; Adoption of the ‘Poseidon Principles’ by many banks, meaning that they will only finance projects which are climate aligned.  Charterers are also exerting pressure on shipowners by the adoption of the ‘Sea Cargo Charter.

Push from end customers;  the vessels must declare their emissions as the end customers want to know the emissions from products.

THE GLOBAL RAMIFICATIONS OF EU “FIT FOR 55”

In July 2021, the EU introduced its ambitious 'Fit for 55' package, aiming for a 55% reduction in greenhouse gas (GHG) emissions by 2030 across all industrial sectors.  As part of this package, the shipping sector will be subjected to four new regulations, with the EU-ETS extension to shipping set to begin from the start of 2024.

EMISSION TRADING SCHEME

EU-ETS is applicable to vessels trading intra-Europe or to/from Europe. Shipowners will have to surrender EUAs equivalent to CO2 emissions, designed to gradually phase in from 2024 and be in full effect in 2026. If the shipowner is left with excess EUAs, it can be traded in the European Energy Exchange (EEX). A similar regulation (UK ETS) is expected to come to the UK from 2026.

 

EU ETS, which was designed to make the air-polluters pay the price due to the fact that air is a public space, will provide revenues of 3.3/5.8 and 8.2 billion dollars in 2024/2025 and 2026, respectively.

EU ETS TIMELINE

The same cycle is to be continued for subsequent years with 70% and 100% of allowances required to be surrendered for 2025 and 2026 respectively.

 

VOYAGES SCOPE UNDER EU ETS

Emissions on voyages and port calls within the EEA ports are 100% subjected to the EU ETS. Meanwhile, emissions on voyages into or out of the EEA ports are 50% subjected to the EU ETS.

The EU shows a very well-directed attitude on global climate change, and has declared to the whole world that it will continue its practices with determination.  We hope that other countries and continents will continue this determination.

VOYAGES SCOPE UNDER EU ETS (CONTAINERS)

To avoid evasive behaviour, container ships stopping in transhipment ports outside the EU/EEA but less than 300 nm from an EU/EEA port, need to include 50% of the emissions for the voyage to that port as well, rather than only the short leg from the transhipment port. The EU will provide a list of transhipment ports.

ECONOMIES OF SCALE TO REDUCE THE EMISSIONS

The economies of scale are further improved by the additional cost of EU ETS. CO2/1000 MT is much lesser for bigger vessels, which means further cost/ton advantage for carrying cargo in bigger vessels to/from the EU (infrastructure permitting). This means that bigger vessels could replace smaller ones.

POSSIBLE CHANGES IN THE TRADE PATTERNS AND CHARTER RATES

Possible impact on trade patterns

Vessels with lower emissions may be deployed for trade in the EU to reduce the EU ETS cost.
New trade routes for emerging commodities – liquid Co2, liquid hydrogen or LOHC.
New trade routes may emerge for ammonia fuel and methanol fuel.
The prices of commodities from Europe will have some cost impact due to EU ETS, and some trade volumes may shift to other countries.

Possible impact on charter rates

Voyage Charter rates will be higher for vessels going to the EU (as ship owners will include  EU ETS cost in the charter rates).
There could be a 2 tier market in which vessels with a CII rating of A or B commanding a higher charter rates than vessels with lower ratings.

Note: Many trades have developed and grown due to ‘low transportation cost’ – we are now in an era of ever-increasing transportation ‘cost’- due to environmental regulations, carbon taxes, higher alternative fuel costs, higher capital costs for new vessel engines and vessel designs, etc. Therefore, some of these trades will no longer be commercially viable.

GREEN CORRIDORS: A CATALYST IN ACHIEVING NET-ZERO

As we start transitioning towards alternative fuels, the availability of fuels, their acceptability, etc. is expected to be challenging. Therefore, major stakeholders have joined forces to establish green corridors in some selected trade routes. In these corridors, alternative fuel will be available, thereby encouraging ship owners to deploy alternative fuelled vessels. Therefore, green corridors will have some effect on vessel deployment patterns.

Green Corridors As Of June 2023

CASE STUDY – POTENTIAL SHIFT OF BUNKERING HUBS IN FUTURE

The bunkering hubs in the future can shift to multiple new locations, especially taking into consideration that most of the zero-carbon fuels need more space and hence, either vessels will have to reduce cargo carrying capacity and reduce revenue or else bunker more frequently.  Hence the future bunkering patterns are expected to become more distributed. 

Going forward, the emergence of zero-carbon bunker fuels and the decoupling of the energy supply for shipping from crude oil reserves offer a unique opportunity for more countries to become bunkering hubs in the future.

The key driver of competitiveness in the production of zero-carbon fuels is the low cost supply of zero-carbon hydrogen (which depends on either low-costs of renewable electricity, or access to low-cost carbon capture and storage (CCS) technology.

Some developing countries are also suitable for the zero-carbon manufacture of ammonia. These countries are characterized by their low-cost renewable energy sources combined with other advantages, such as a combination of gas reserves and access to low-cost CCS technology.

The CCS technology also requires appropriate geological features to allow the safe and long-term storage of compressed CO2.
 Large capital investment within a short time will be required for the expansion in the production capacity of zero-carbon bunker fuels. These will require structured funding from various sources. 

EXAMPLE OF POTENTIAL ZERO-CARBON FUEL BUNKERING HUBS IN THE FUTURE

 

EXAMPLES OF CONTAINER FEEDERS AND CRUISE INDUSTRY

It has been noticed that some charterers have chartered heavy lift MPV which are exempted from CII and some cruise ships have included stops at ports near EU to reduce the exposure to EU ETS.  

Container Feeder Vessels

Managers at the world’s largest independent owner of container feeder ships have noticed that major charterers transported containers heavylift MPVs, which are exempt from CII.

Cruise Ships

Changes to the cruise ships are evident, with vessels including stops at nearby ports like Casablanca in Morocco to reduce the exposure to EU ETS.

Dry Bulk STS

In dry bulk, STS is not feasible between a Cape or Panamax and Handymax vessel due to air draft issues. However, its possible by using transhipment vessels or floating cranes or using a vessel with side-mounted cranes, but will involve additional costs. It is also possible to discharge the cargo at berth and load it into another vessel at the berth, but the cost impact needs to be evaluated.

CASE STUDY OF EU ETS LOOPHOLE: CORPUS CHRISTI TO FOS FOR SUEZMAX TANKERS

In option 1, the EU ETS compliance cost to transport the same amount of cargo between the same departure port and final destination port is reduced by 109,300 Euro. This comes to about 1 Euro per tonne.

Assumptions:

EU ETS cost 90 Euro charged at 50% rate.
Cost associated with the additional port of call for the same Suezmax tanker vessel or additional charges for the second Suezmax port of call is not considered.
Any additional cost of chartering the second vessel is not considered. 
Vessel fitted with scrubber.

It is expected that Port Said and Tanger Med will meet the criteria of 65% transhipment volumes and within 300 miles from EU and hence these ports will be regarded as EU ports for the purpose of EU ETS. However, vessels could call other ports near EU, whose present transhipment volumes are less than 65% to exploit the loophole.

 

Any additional port cost and any additional bunker cost are taken into consideration. Calculations for the feeder services that would relocate to Izmir as a result of the mainline hub relocation is not considered.

Let's make a calculation confirming the above graph for the subject of our title, namely İzmir Port.

Let's calculate how much EU ETS payment the ship will avoid by calling Izmir instead of Pireaus, considering only the Shanghai/Piraeus leg of Cosco's AEU3 rotation, which consists of the ports of Xingang / Qingdau / Dalian / Shanghai / Ningbo / Singapore / Piraeus / Rotterdam/Hamburg/Antwerp/ Shanghai/Xingang;

Shanghai / Piraeus ; 7895 miles

The sample vessel’ s average speed is 11.7 and burns 100 tons of bunker Daily.

In case the vessel called Pireaus Port;

28 days navigation x 100 tons fuel x 3.12 = 8736 tons of CO2 would be produced and emitted to the atmosphere.

8736 tons x 90 euro = 786.240 euro.

Considering 4 voyages annually; 786.240 x 4 = 3.144.969 euro

Payment to be made in 2024; 3.144.960 euro x 40% / 2 = 628.992 euro

Payment to be made in 2025; 3.144.969 euro x 70% / 2 = 1.100.739 euro

Payment to be made in 2026; 3.144.969 euro x 100% / 2 = 1.572.486 euro.

As you can see, with a single ship Cosco would save 3.302.217 Euros only from Shanghai / Izmir leg in three years by calling Izmir instead of Pireas.

Of course, the following aspects must be kept in consideration;

- Izmir Port to be declared as “Transhipment Port” by EU over time,

- Izmir port to reach the 65% handling limit which is the EU criterion versus its annual capacity of 600,000 TEU (Izmir port currently handles 600,000 TEU containers, which means it can handle 600,000 TEU x 65% EU criterion = 390,000 TEU additional containers without being subject to the rules and regulations of EU ETS),

- Türkiye to become a EU country during this course of time,

- One of container main lanes to choose Izmir Port instead of Port Said, Malta or Piraeus ports.

Considering all these aspects, it is quite possible to understand the appetite of foreigners on Izmir Port, isn’t it?

However, for containers that originate from or are destined to the Black Sea and are transshipped in Piraeus, Izmir is a more attractive hub location from a cost perspective due to geographical proximity.  Also, since Izmir is not in the EEA, the EU ETS revenues for feeder services serving the Black Sea would be either non-existent or very low.

Even though the EU ETS criteria are subject to adjustments over time, shouldn't the following possibility, namely Çandarlı Port, be taken into consideration?

Which criteria will be applied in a non-EU country port that has not yet been put into operation?

And also, as I stated at a conference that I had attended as a speaker in the Turkish Republic of Northern Cyprus; Famagusta Port will be the most important hub port of the Mediterranean in the very near future.  As long as we do not compromise our rights on the Turkish Republic of Northern Cyprus.

Though EU ETS is in an infancy stage yet, it the most important indicator of EU’s determination on global climate change.  I hope one day comes when we comprehend that this is not a joke. 

I would like to end my words with a phrase I always use; any country that can’t / don’t produce HYDROGEN from renewable energy is doomed to oblivion in time.

 

Levent Akson

Doğançay 12 January 2024