Charles Dubouix

Last update 12/12/2023

Regulations: The Emissions Trading System

What is ETS?

The Emissions Trading System (ETS), established in 2005, is a major part of the European climate strategy for achieving carbon neutrality by 2050. It's the largest regulated carbon market globally, operating on a "cap and trade" principle. The system sets a limit on companies' greenhouse gas emissions, requiring them to obtain allowances corresponding to their emissions. The number of allowances decreases annually, raising the price and motivating companies to reduce emissions for profitability.

Who is affected?

The ETS primarily targets energy-intensive heavy industries, including power and heat production, refineries, manufacturing (like iron, steel, paper, glass, aluminum), cement, chemicals, fertilizers, hydrogen, intra-European aviation and, since 2023, maritime transport.

Recent developments

In May 2023, the EU increased its 2030 GHG emission reduction target from -43% to -62%. The ETS's ambitions are bolstered with plans to speed up the removal of free quotas and expand to new sectors.

Since October 2023, to protect European industry and counteract carbon leakage from the gradual withdrawal of some free quotas, the EU introduced the Carbon Border Adjustment Mechanism (CBAM).

For more information, watch our October webinar.

How does ETS impact logistics chains?

Aviation

Included in the system since 2012, the financial impact remains limited. Only flights within the European Economic Area are affected, and most quotas are allocated for free. The EU voted for a gradual withdrawal of free quotas between 2024 and 2026 and considers including flights between the EU and the rest of the world.

Maritime Transport

From January 2024, ETS applies to all maritime services with a stop in the EU:

• 100% of emissions for journeys between two EU ports
• 50% of emissions for journeys between EU ports and non-EU ports

Shipping companies must report their emissions and buy an equivalent amount of quotas on the EU ETS market, progressively:

• in 2024, 40% of reported emissions must be converted into quotas
• in 2025, 70% of reported emissions
• from 2026 onwards, 100% of reported emissions

Road Transport

Road transport will be included in the ETS from 2027, through a parallel market (ETS II).

What are the consequences for shippers?

The inclusion of maritime transport in the ETS leads to costs for shipping companies, which are passed on to shippers as "ETS surcharges".

Furthermore, the Carbon Border Adjustment Mechanism (CBAM) requires European importers, starting in January 2024, to submit quarterly reports and will have a financial impact starting in 2026 with the obligation to purchase CBAM certificates.

OVRSEA's Perspective on the Directive

The Emissions Trading System (ETS) is seen by OVRSEA as a powerful tool for reducing the carbon footprint of a sector responsible for 7 to 11% of global greenhouse gas emissions. There are three main reasons for this:

• Incorporating carbon emissions as a negative externality into costs aligns environmental and financial decisions, motivating the adoption of greener logistics solutions.
• The CO2 measurement and reporting required of carriers will improve the precision and uniformity of carbon data available to shippers and freight forwarders, aiding in the evaluation and enhancement of environmental performance in their logistics chains.
• The targeted reinvestment of funds from the ETS and the Carbon Border Adjustment Mechanism (CBAM) will hasten the development and adoption of cleaner technologies in the transport sector.

The challenges and concerns surrounding the ETS's implementation foreshadow major transformations the sector must undergo to comply with the Paris Agreement.

Going further: other carbon markets?

Beyond the European perimeter, the vision of the ETS and the CBAM is to lead the way and encourage other regions of the world to set up carbon markets. While initiatives are multiplying around the world, they cover only 23% of global emissions and carbon prices are highly fluctuating, ranging from a few cents to $130/tC02.

It is still too early to tell whether the expected dissemination will occur or whether circumvention measures will be preferred by third countries.