In this article, Alvin Forster, Loss Prevention Executive, North P&I Club, talks about the EU’s intention to include shipping in its mandatory carbon trading system in 2023.
The European Union is set to include shipping in its mandatory carbon trading system in 2023. With this covering only a minor proportion of the world’s fleet and the absence of an international scheme or global fuel levy, is there a place for a voluntary carbon market for shipping?
The EU’s Emissions Trading Scheme (EU-ETS) works on the ‘cap and trade’ principle. A cap is set on the total amount of greenhouse gases allowed to be emitted, which is reduced over time so that total emissions fall. Carbon credits, called ‘EU Allowances’ (EUA), are purchased and every year, each emitter will surrender the required number of EUA to cover its emissions.
Voluntary offsetting
Voluntary carbon markets work on a similar principle but there is no regulatory cap. Instead of purchasing credits from a regulatory body, such as the EU, emitters can either buy carbon credits from projects that remove or reduce greenhouse gases from the atmosphere, or, from other emitters who have been able to reduce their emissions to a level below their set targets.
When the credit is used to offset carbon emissions, it is placed in a ‘retirement’ register and cannot be traded again.
A further key difference is that while the current compliance carbon markets (or those in the pipeline) are specific to a region, voluntary markets are not constrained by such boundaries and have the potential to be much more flexible and adaptable.
Identifying a need for a voluntary market
Companies across all industries are under pressure to reduce carbon emissions and many are committing to net-zero, initiated by commercial demands or a company pledge. However, if significant financial investment in technology is required to achieve the required reductions, those costs may be prohibitive. Voluntary off-setting provides an alternative means that allows companies to declare the achievement of their carbon-reduction targets (such as net-zero), whilst continuing to burn fossil fuels.
Those considering going down the voluntary route should be aware of the risks. According to management consultancy McKinsey, there is a need for a voluntary carbon market that is large, transparent, verifiable, and environmentally robust. Currently, the voluntary carbon market remains fragmented and complex, where some credits have turned out to represent emissions reductions that were questionable. They also raise concerns on the limited pricing data that is available, making it difficult for buyers to know whether they are paying a fair price.
Voluntary offsetting in the shipping industry
Mandatory carbon reduction schemes in shipping are likely to be dictated by international legislation from the IMO or /national regulations such as the EU-ETS.
Currently, the IMO has adopted new rules on the Carbon Intensity Indicator (CII)and Efficiency Existing Ship Index (EEXI) to ensure shipping meets the target of reducing total greenhouse gas emissions by 50% by 2050. It should be stressed that engaging in any voluntary offsetting program will not help shipowners meet their obligations under the CII or EEXI.
Looking ahead, it is not unreasonable to expect that the IMO will consider introducing some sort of market-based measure (MBM) supported by the IMO Data Collection System (IMO-DCS) at some point in the future, which may take the form of a compliance carbon trading scheme.
But what about shipping companies who have set net-zero targets, going above and beyond the current IMO ambitions? What mechanism can they use to help them achieve their pledge?
As things stand, there are very few options for stakeholders in the shipping industry to engage in voluntary carbon offsetting. The maritime market has not reached the same levels of maturity to that of other industries.
One early example of voluntary carbon trading in our sector was the issuance of carbon credits by theGold Standard Foundationto those shipowners using AkzoNobel’s Intersleek hull coating, which is claimed to have been proven to reduce fuel consumption and, as a result, CO2emissions.
In the United States, the maritime investment, chartering and financing consultancy Marsoft has launched theirGreenScreen™program, which enables shipowners to earn carbon credits through retrofitting their vessels. Similar to the AkzoNobel program, this has been recognised by the global carbon registry Gold Standard.
Charterparty comment
We have started seeing clauses introduced into charterparties to capture emissions data and share such data between the parties, which is considered essential to gain understanding of the emission impact of their chartering activities and to enable efficiencies to be made. However, we are yet to see much in the way of agreements or clauses in charterparties between shipowners and charters whereby a voyage is to be carbon neutral.
This may be because individual companies deal with such carbon off-setting at company level, depending on their company’s net-zero goal and strategy.
As the pressure to achieve net-zero as soon as possible continues to increase, we may start seeing agreements between owners and charterers which aim to achieve a carbon neutral voyage. An example being the purchase of certain carbon credits, although how this would interplay with freight and hire rates would remain to be seen.
