To tackle the issue of climate change and reduce carbon emissions, the European Union (EU) introduced the Emissions Trading System (ETS), which now includes the maritime industry. To comply with the ETS, shipping companies need to surrender EU carbon allowances (EUAs) for every ton of CO2 emitted from 2024, with 40% of MRV-verified emissions required to be surrendered in 2024, 70% in 2025, and 100% from 2026 onwards.
The industry is still debating who will eventually bear the cost of the allowances, but we argue it is in the best interest of DoC holders, owners, and operators to get as close to the market as possible. It seems sensible that at least each stakeholder group should be able to purchase and trade allowances on their own, even in a time charter scenario where DoC holders only surrender allowances, operators pay for them, verifiers verify the correct amounts, and shipowners only transfer EUAs from one stakeholder group to another.
The EU ETS market has many players, making it difficult for shipping companies to choose the best trading partner who can give them a straightforward route to market. In this article, we will discuss the various aspects that shipping companies need to consider when selecting a partner and compare three categories of trading partners: banks, ship brokers, and carbon brokers.
Picking a partner: five things to consider
- Expertise and experience: The trading partner should have a thorough understanding of the carbon market and the ETS regulation. They should have experience in trading EUAs and be able to provide guidance on the best trading strategies to minimize financial risk.
- Pricing: The pricing of EUAs can vary significantly depending on the trading partner. It is essential to compare the fee structure offered by different players.
- Depth of service level: A lack of direct exchange access and other shortcomings are some issues with some trading partners who are currently running around shipping companies. There are some players who have another large trading partner operating in the background, resulting in shipping companies paying double the fees since all parties are looking for a profit.
- Reputation and credibility: The trading partner should have a good reputation and be well-respected in compliance carbon markets. They should have a solid track record of working with the existing ETS governed industries.
- Individual trading strategies: The trading partner should provide excellent customer support and propose a trading strategy tailored to the fleet’s ETS exposure.
Relevant categories of trading partners
- Banks: Many banks offer EUA trading services to their clients, such as Unicredit, Berenberg, BayernLB, BNB Paribas, etc.. They have an extensive network of contacts and can provide access to the carbon market. Yet, shipping companies should keep in mind that EUA trading is generally not at the core of a bank’s business, and some players may see it as a way to cross-sell other services.
- Ship brokers: Clarksons, BRS, Affinity, and many more ship brokers offer EUA trading services to shipping companies, and it might seem quite reasonable to go with one of them as they have strong knowledge on the maritime industry. Despite this, some ship brokers lack direct access to the carbon market and work with another large player in the background. In addition, if a ship broker does not provide direct market access for EUA trading, but instead connects supply and demand sides, the required onboarding and KYC processes can be extremely challenging.
- Carbon brokers: In our opinion, shipping companies should work with carbon brokers (e.g., ACT, AFS, Aither, CF Partners, Belektron, etc.), since these brokers have in-depth knowledge of the EUA market and the ETS. While the maritime industry is new on the market, the market itself is the same as it is for aviation or stationary installations, so their experience in the carbon market is a big advantage. As a result, it's reasonable to assume that carbon brokers are a good choice for setting up trading strategies and gaining access to a variety of EUA products, such as those for hedging. Additionally, they offer competitive pricing, making them an attractive option for all sizes of shipping companies.
As prices rise and volatility increases, there is a strong market risk in the EU ETS market. Shipping companies should therefore be careful when choosing a route to market and understand the differences between the service offerings and pricing of different players. If you need assistance setting up market access and complying with EU ETS requirements, please feel free to contact our EU ETS experts via this link or directly via email friederike.hesse@zero44.eu / friedemann.nierhaus@zero44.eu. We’re here to help!
