Shipping is struggling with compliance complexity
LESS than 40% of shipping companies required to submit verified emissions reports under the EU Emissions Trading System managed to hit the initial deadline in April.
The widespread failure to meet the first round of reporting requirements confirms long-held suspicions that shipping companies — particularly small- to medium-sized ones — are unprepared for the incoming demands of carbon reporting regulations.
But it also supports a growing body of anecdotal evidence suggesting those same companies are struggling to deal with compliance complexity generally.
When Lloyd’s List ran a survey earlier this month asking whether the ‘average’ shipping company was equipped with sufficient technical expertise to navigate regulatory compliance over the next five years, two-thirds of respondents answered no.
The same survey also revealed that 60% of respondents view emissions reporting requirements as a compliance cost, rather than a commercial opportunity to engage in trading.
The survey was run in advance of a Nor-Shipping event examining the winners and losers of carbon pricing, where the consensus view among the expert panel was that scale, access to data and partnerships were all key to compliance, but many companies were struggling.
“What is very clear is that the industry itself is already not quite fully on top of the regulatory requirements for the EU ETS and I think this could be quite a big problem,” said Paula Van Laningham, director of carbon research at the London Stock Exchange Group.
The final cut-off to surrender EU ETS allowances, which are based on the missing emissions reports, is not until September 30. However, the prospect of extensive fines for shipping companies unprepared for the new regime is now considered to be highly likely.
“The shipping industry, like many industries, is not necessarily fully prepared for the complexities of this market,” Van Laningham said, speaking at the event held in Olso, adding there are significant penalties for late surrendering in the EU ETS scheme.
While emissions reporting has picked up significantly since the April deadline was missed by 60% of the industry, there no indication from the EU authorities that leniency is on the agenda for those who fail to meet obligations.
“It’s really not the EU’s vibe around this sort of thing; the fines are absolutely something that can be enforced and will be.”
Steep penalties await those who fail to surrender allowances, with potential sanctions including exclusion from ports and jurisdictions, as well as vessel detention being a real possibility for extreme cases.
The costs of carbon are set to ramp up significantly over the course of the next couple of decades. Only 40% of shipping emissions are covered in this first year of reporting, but that will increase over the coming years.
Emissions costs for shipping in the EU ETS this year will total around $6bn. By 2028, that cost increases to $34bn — and by 2030, it gets closer to $51bn, but there is potentially more to come.
“We know there is a Türkiye ETS coming and the UK is including shipping emissions into their trading system and there are even talks about the US proposing something, at least on import cargoes,” said Geir Olafsen, co-founder and chief development officer at Siglar Carbon.
“But if you add all those emissions bills up together and you price it at European level, we’re talking about a potential tax revenue for legislature in the region of $100bn.”
These surging costs will ripple through supply chains, driving up freight rates, influencing fuel choices, and potentially reshaping global trade patterns. But the more immediate impact appears to be increased complexity for smaller shipowners, who tend to be less prepared for the incoming requirements.
“It is absolutely about scale,” said Lars Pedersen, a senior member of John Fredrisken’s Seatankers Group and chief technology officer of Frontline.
“I mean these are very, very complex questions we are talking about, with costly investment cases and you need muscles for that.
“We are a large group — we have control of more than 300 ships — so we have the muscles to do it. But for owner operators with three or four ships, well, let’s be honest, they struggle,” added Pedersen.
According to Siglar chief executive Sigmund Kyvik, as regulations tighten and environmental costs climb, carbon pricing is no longer a peripheral concern, but some players are more ready than others.
“This is a value chain issue, so if we are talking about winners and losers, I would say that these massive costs that we know will hit the industry will be distributed down the line, and I guess the losers will be the ones that don’t understand that and don’t have the insight to handle it,” he said.
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