Starting next year, the thousands of shippers that carry commodities into, from or between EU ports may notice an additional 3-4pc expense on their freight bills.

That is because next year marks the first year of shipping’s inclusion in the EU’s Emissions Trading System (ETS), a cap-and-trade program that requires companies in certain sectors operating in the EU to pay for their carbon emissions. The regulation is the first mandatory carbon cost for commercial shipping and is designed to help reduce the segment’s carbon footprint. The 100,000-large global shipping fleet, the vast majority of which runs on oil-based fuel, produces 2-3pc of global carbon emissions.

Regulators around the world will be studying the rollout closely, thinking it may serve as a blueprint for other carbon-reducing measures, and shippers will be paying the costs and looking for ways to mitigate them.

Argus publishes daily assessments for these costs and calls them Carbon Costs of Freight (CCF).

EU shippers of all commodities will be affected

Many unknowns remain on how the shipping industry will digest this new regulation, such as whether the costs will be passed down to buyers, whether a two-tier shipping market will emerge, or if the changes will accelerate a shift to low-carbon marine fuels. But one question that has been resolutely answered: extra costs are coming, and someone will pay.

The average cost of complying with the EU ETS would have been about 3.25pc of the freight cost, according to Argus data of 37,000-280,000t cargo shipments from mid-September 2022 to mid-September 2023.

Take for example crude oil shipments on Aframax tankers from the US Gulf coast to Europe, a trade that has blossomed after European refiners sought to replace sanctioned Russian barrels. Freight rates for 70,000t cargoes on the route averaged $5.61/bl, equivalent to $3.06mn per voyage, from September 2022 to September 2023, during which time the route’s CCF averaged 15¢/bl or about $85,000 per voyage.

Oil traders, producers, and refiners will need to factor in CCF costs to accurately gauge the economics of shipping US crude into Europe.

Fluctuations in these costs, which will come in addition to moving freight rates, can make or break a trade. The Worldscale Association, which publishes port-to-port flat rates that underpin much of spot tanker chartering, has opted to exclude EU ETS compliance costs in their flat rates.


While the CCF represents only a small fraction of a single voyage freight cost, when you expand the scope, the costs do not seem so insignificant. Considering the route’s 1.5mn b/d Aframax crude flow, the trade’s daily cost to comply with the ETS will be $225,000/d and $82mn/yr.

And it is not just crude shipping that will be affected. Keep in mind that Aframaxes carrying US crude into Europe are only a fraction of Europe’s crude oil shipping activity, and only the tiniest slice of Europe’s overall shipping activity, nearly all of which falls under the new regulation.

Other segments for which Argus publishes CCFs include propane, grain, petroleum coke, iron ore, gasoline, and diesel. Traders, shippers, operators, and producers in those markets will be affected as well.

Shipping contracts will need to be adjusted

Shipowners whose vessels operate in the EU will need to comply with the ETS, but they will not necessarily be the ones bearing the costs, says ship classification society DNV.

“All stakeholders through the transport supply chain will have to make sure that the [ETS] costs are covered through contracts between ship managers, owners, charterers and cargo owners,” DNV said.

Under the law, shipowners are entitled to reimbursement by the entity that bears responsibility for the fuel purchase and/or the ship’s operation.

“In practice, this means that those costs will be passed down through the contractual chain from the shipowner to the charterers and sub-charterers,” said law firm Clyde and Co.

A shipper’s exposure to these costs is likely to depend on the type of contract the vessel is chartered on. In a tanker spot charter, the shipowner may be on the hook because they are the party that typically purchases the fuel on such charterers. Whereas for a tanker time charter, the charterer makes that decision.

“Owners and charterers should start to think about how they are going to deal with [the ETS’s] requirements," said shipping protection and indemnity (P&I) club Gard.

To reduce their costs, shipowners may start to swap their older, inefficient vessels out for modern vessels in their EU trades. But even for the most modern vessels, shipowners will generally still have to pay something into the ETS. Only a small share of the global fleet – 6.5pc according to DNV – has the option of running on alternative fuels. And for most of that 6.5pc the alternative fuel is LNG, which emits carbon and is not exempt from the ETS.

Compliance costs will rise with the phase-in

While EU ETS compliance costs will only add on average 3-4pc to the freight bill next year for ships running on oil, those costs will rise as the regulation phases in for shipping.

Shippers are required to cover only 40pc of their emissions next year, and that figure increases to 70pc in 2025 and 100pc thereafter, under the regulation.

So even if you assume market fundamentals remain the same, that 3-4pc will move to 5-7pc in 2025, and 8-10pc from 2026 and on.

But that is not the only reason the CCF, or compliance costs, could rise. The price of an EU allowance (EUA), which is what a shipper must buy to be “permitted” to emit a ton of carbon under the ETS, may increase as fewer EUAs become available over the years.

“The number of allowances put on the market will be reduced by 4.2pc per year, which means that the price can be expected to increase further,” said DNV.

The Argus EU ETS December 2026 contract assessment was assessed at €97.51/t of CO2 equivalent (CO2e) on 22 September, €12.01/t CO2e above the front-year December 2023 contract’s assessment of €85.50/t CO2e.

Even a modest increase in the EUA price could eventually see the CCF routinely creeping above 15pc of a voyage’s freight cost.

Author Nicholas Watt, Editorial Manager, Freight

Subscribers of Argus Tanker Freight, Argus Gas Freight and Argus Dry Freight 
Use this link to download limited edition content