Shipping firms in wait-and-see mode as newbies in EU carbon trade

Shipping companies have shown little appetite in accumulating EU emission allowances despite their prices near multi-year lows, adopting a risk-averse approach instead as newcomers to the European compliance carbon trade, market participants said in some International Energy Week events.

To help counter climate change, Brussels has extended the Emissions Trading System to cover maritime transportation from this year, requiring companies operating ships of 5,000 gross tons or more to pay for greenhouse gas emissions during voyages to, from or between EU ports.

Geir Olafsen, chief information officer at emissions analytics firm Siglar Carbon, said there hasn't seemed to be "too much purchase activity from shipowners" so far.

"Some of them are still learning and understanding these complex regulations, the commercial impact," Olafsen said in an IE Week event Feb. 28. "It's still a bit 'wait and see'."

Industry players said shipping firms would generally seek to limit their exposure to volatile EUA prices and refrain from speculation, at least in their first few months in the market.

Steve Laybourn, manager for carbon and new markets of tanker operator Ardmore Shipping, suggested his company has in principal not attempted to profit from European carbon trade via speculating on EUAs after beginning to trade last December.

Instead, Ardmore would estimate its emissions arising from a voyage charter inclusive of port waiting time, offer a Worldscale rate with EUA cost taken into account based on spot prices, and complete transactions to purchase spot EUAs within two days, according to Laybourn.

"We're taking the minimal timing risk on the price of the EUA," he said in another IE Week event Feb. 26, referring to the two-day gap.

Market swings

The EUA contract for December delivery rose 3.88% to Eur57.84/mtCO2e ($62.69/mtCO2e) Feb. 28, according to Platts, part of S&P Global Commodity Insights. This came after the EUA hit a 31-month low of Eur52.36/mtCo2e Feb. 23.

Recent weakness resulted from lower emissions forecast from power plants, soft gas prices and the EU's "front-loading" program to bring forward some allowance auction volumes to 2023-2026 from 2027-2030, according to market participants.

"We're in almost a perfect storm of bearish news," Laybourn said. "There will be a payback at some point ... within 18 months, two years, it will be a very, very different picture."

In their latest monthly market outlook, S&P Global analysts expect average EUA prices to fall from Eur85.3/mtCO2e in 2023 to Eur54.5/mtCO2e in 2024 before recovering to Eur82/mtCO2e in 2025.

The EU has only required shipping companies to surrender EUAs for the first time in September 2025 for this year's emissions, which, according to some, could be a reason behind the industry's limit EUA purchases in recent weeks.

"We've yet to see a huge amount of buying interest from shipowners in part because ... the compliance deadline for shipping companies to submit their allowances is not until late next year," said Paula VanLaningham, director of carbon research at London Stock Exchange Group.

In the Feb. 28 event, VanLaningham said the shipping industry overall is "likely to be a price taker rather than a price maker" as its total GHG emissions are relatively small.

The EU has estimated its ETS could cover 90 million mt/CO2e of maritime emissions per year, and shipping companies only need to pay for 40% of their reported emissions in 2024, 70% in 2025 and 100% from 2026 onward.

Based on LSEG's estimates, VanLaningham said maritime firms would account for 6% of the total volume covered by the EU ETS.

"This makes it the third-smallest industry" in the compliance market, VanLaningham added. "Larger than pulp/paper and aviation, smaller than oil and gas."

But the market could still see in boost in short-term liquidity next year if many shipping companies come out to buy EUAs ahead of the September deadline, according to VanLaningham.

"6% is still significant enough to cause an impact...if everybody rushes to but it at once," VanLaningham said.