EU carbon allowances could equal 50% of fuel cost: Yara

The cost of fuel in shipping's energy transition will rise alongside the costs of compliance and the price implications of EU carbon emissions could be equivalent to 50% of fuel costs, an official at Yara Marine Technologies said.

The EU Emissions Trading System is scheduled to be extended to cover maritime transportation from 2024 and introduce the FuelEU Maritime regulations on the greenhouse gas intensity of bunker fuels from 2025.

Operating costs, particularly those related to fuel, will increase, as will the cost of compliance with regulatory limits on greenhouse gas emissions, Aleksander Askeland, CSO of Yara Marine Technologies, a subsidiary of Yara International, told S&P Global Commodity Insights.

Yara anticipated that in some cases the cost of EUA credits could even be equivalent to 50% of the fuel cost, Askeland said.

"While it is impossible to make long term predictions for the market, we believe that shipowners should be making every effort to reduce their exposure to variable costs for bunkers and carbon credits and invest in technologies that can reduce both, fuel costs and emissions, over the lifetime of the vessel," Askeland said.

Volatile carbon costs

Carbon prices in Europe have experienced a volatile 2023 amid a backdrop of reduced power generation along with a passage of several key EU climate bills.

European Allowances under the bloc's Emissions Trading System started the year in a bullish phase, with prices rising to record highs above Eur100/mtCO2e ($107/mtCO2e).

Platts, part of S&P Global Commodity Insights, assessed EUA contracts for December delivery at Eur78.70/mtCO2e on Nov. 10

EUAs averaged Eur81.17/mtCO2e in 2022 and Eur53.52/mtCO2e in 2022 and 2021 respectively, S&P Global data showed.

Traders and analysts expect prices to recover by end-2023: "In the coming months, EUA prices are expected to rise due to supply constraints and higher winter heat demand. We anticipate prices to range between Eur80-90/mtCO2e," S&P Global analysts said in a recent note.

Managing the costs

Small and medium-sized companies will be worst-placed to struggle with the growing costs and compliance burden, according to industry sources.

"There is no doubt that the costs will need to be passed on to the consumer, especially in the case of SMEs that have limited resources," Askeland said. "It would make sense for smaller companies to work with external service providers (such as classification societies) who specialize in the areas such as measuring and reporting in order to keep the overall cost of compliance low."

Risk is also a factor to consider, with one player in a supply chain potentially affecting others' exposure, sources said.

The exposure depends on the specific contractual regulation of rights, obligations, and liabilities for costs in the agreement between the parties, Askeland said.

"Exposure can be limited, through well-defined clauses and by maintaining strong relationships with partners – where information is shared freely to support appropriate planning and response to changing market conditions."

Fuel solutions

Demand for low-carbon ammonia from the maritime industry will reach 166 million mt in 2050 due to decarbonization requirements, according to S&P Global.

But the current production of "green" methanol and ammonia is small, and many industry participants said high prices and limited availability could delay their uptake.

Based on its current project pipeline, Yara has estimated it could have access to 4 million mt/year of clean ammonia supplies by 2030 to decarbonize its own production and supply external clients in shipping and other sectors.

Ammonia is a low or zero-emission fuel when generated from clean sources, but it is highly toxic and corrosive, and ammonia-fueled marine engines for deep-sea trade are not expected to be commercially available before 2024-2025.

Analysts at S&P Global forecast Oct. 5 in their reference case that in 2030 alternative bunker fuels, excluding LNG and LPG, will account for 2.2% of marine fuel demand. Of this, 34.3% will be methanol, 16.8% will be hydrogen, 14.7% will be ammonia and 6.2% will be biofuel, they said.

Platts assessed conventional methanol as a bunker fuel on a calorific basis at the port of Rotterdam at $18.07/Gigajoule Nov.10, compared to $13.78/Gj for 0.5% sulfur fuel oil, the prevalent bunker fuel at present. Green fuels could be at least three to five times higher than the conventional sort, Diane Gilpin, CEO of Smart Green Shipping, told S&P Global.