Carbon cost doubles for intra-EU bunker use with tighter regulation, bullish EUA

Compliance costs for shipping companies using conventional, oil-based fuels nearly doubled under the EU Emissions Trading System in January, with Brussels tightening regulations on maritime greenhouse gas emissions amid a bull run of European carbon prices, according to Platts global bunker cost calculator(opens in a new tab).

The cost for ships operating in intra-EU trades rose to $178/mt for very low sulfur fuel oil and high sulfur fuel oil consumed last month, from $90/mtVLSFOe in December, while that for marine gasoil jumped to $166/mtVLSFOe from $84/mtVLSFOe, based on calculations by Platts, part of S&P Global Commodity Insights.

HSFO prices averaged $455.73/mt in Europe's largest bunkering hub of Rotterdam last month, but total expenses associated with the fuel would reach $633.96/mt -- a 39% increase from the flat price -- when the compliance cost was taken into account.

The cost would halve for ships in voyages between an EU port and a non-EU port and does not apply to ships trading outside the bloc.

Higher compliance costs partially resulted from Brussels' regulatory design, with the EU raising its coverage of ship emissions from 40% last year to 70% this year before a planned further hike to 100% from 2026.

Also, EU Allowance contracts rose to Eur78/mtCO2e ($81/mtCO2e) on average in January from Eur68/mt in December, according to Platts data, with strong gas prices providing power plants with more incentive to burn coal -- more carbon-intensive -- to meet peak demand during winter.

"The financial burden of compliance costs associated with traditional fuels may push operators to consider cleaner alternatives like LNG more seriously," said Fotios Katsoulas, research director for alternative fuels at S&P Global Commodity Insights.

"As for biofuels and green methanol, while they offer environmental benefits, the current cost dynamics and availability may limit their adoption compared to LNG."

Premium fuels

When the EUA cost is taken into consideration, the January average LNG bunker price was $846.35/mtVLSFOe in Rotterdam and UCOME B30 biobunker fuel was $955.32/mtVLSFOe based on Platts calculations for intra-EU trades. Gray methanol was $983.21/mtVLSFOe, and green methanol could be at least double that based on industry estimates.

In comparison, the price for VLSFO -- the most common bunker type -- was $720.73/mt.

LNG bunker prices had been lower than VLSFO for some months before mid-2024, and industry participants said vessels shifting to LNG earlier have few incentives to switch back to VLSFO with financial gains insufficient to cover tank-cleaning expenses.

"When you factor in emissions savings in the EU, LNG could still be more economical," a market source said. "Not everyone wants to risk cooling down their tanks."

Rotterdam's LNG bunker sales amounted to 263,068 cu m in the fourth quarter, a significant hike from 148,933 cu m in the same period last year, the port authority said.

"The compliance cost advantage for LNG and other lower carbon fuels has obviously increased," said Niels Rasmussen, chief shipping analyst at industry association BIMCO. "With regards to LNG dual-fuel ships, I suspect they already use LNG most of the time."

More regulation

Furthermore, the EU has introduced FuelEU Maritime rules to mandate shipping firms to reduce the GHG intensity of marine energy use by 2% from 2025, 6% from 2030, 14.5% from 2035, 31% from 2040, 62% from 2045 and 80% from 2050, against 2020 baselines.

Ships burning conventional fuels will be penalized based on their usage, while vessels shifting to fuels with lower emissions intensity can record surplus compliance units that might yield financial returns, according to shipping analysts.

Joe Bettles, a market analyst at the Maersk Mc-Kinney Moller Center for Zero Carbon Shipping, suggested FuelEU Maritime and ETS rules together could incentivize a shift to alternative fuels and energy-saving measures.

"LNG again will be well-placed to comply with emissions reductions," Bettles said. LNG's life-cycle GHG could be 10%-20% lower than VLSFO, and classification organization DNV estimates a ship could stay compliant with FuelEU Maritime until 2044 as burning the fuel can generate a compliance surplus over the next decade.

Shipowners generally would seek to pass compliance costs onto charterers, which could weaken arbitrage economics and change cargo flows, though some market observers said such a trend is not yet obvious.

The additional compliance costs will likely impact freight rates, as shipowners may need to pass on some of these costs to shippers," Katsoulas said. "This could disrupt some oil arbitrage flows, especially if the cost increase is substantial and persistent."

"However, the ability of tanker shipowners to absorb these costs will vary based on their operational efficiencies and market conditions," Katsoulas added.