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ETS: ‘Quite a year’ for ship owners

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It has been “quite a year” for ship owners preparing for the EU Emission Trading System, according to Steve Laybourn, chartering manager at Ardmore Shipping. Describing the preparation as a “bit of a rollercoaster ride”, Laybourn urged laggards to move quickly and put in place proactive measures. “We’ve had to negotiate everything from our internal roles, responsibilities, workflows, and dealing with our technical managers. We’ve had to set up a trading account with our EU Administering Authority. We’ve gone through KYC and onboarding with our carbon trading partners, and we’ve gone through our commercial terms with our customers as well to allow for carbon pricing. And finally, after all of that, we’ve actually started trading EU Allowances (EUAs) as well.”

Laybourn was speaking at the Baltic Exchange’s annual Tanker & Gas Market Insights Forum, held as part of International Energy Week in late February.

The next issue, said Laybourn, is opening a Maritime Operator Holding Account (MOHA).

He added that there isn’t a great deal of time to deal with this. All shipping companies must now open a MOHA with their Administering Authority in their allocated Member State. The MOHA will be used to hold, surrender and trade EUAs. The MOHA must be opened within 40 working days of the publication of a list showing which shipping companies have been allocated to which Member State’s Administering Authority within the EU ETS. That list was published on January 31, 2024.

Laybourn said that an interesting aspect to the ETS from Ardmore’s view was how the market has adapted to carbon pricing. “We must have spent hours and hours in meeting rooms within Ardmore, trying to come up with charter party terms, thinking about how the market is actually going to adapt. In reality, what happened is it was just incorporated into freight.”

This approach offers pros and cons. “There are definite advantages from an owner’s perspective in terms of being in charge of our own destiny in terms of the EUAs; we’re not relying on others to transfer to us prior to the deadline. But if we take a step back and look at this from an environmental perspective – which is the intent of the ETS, of course – it does worry me slightly that were brushing carbon under the carpet.”

Being accountable

Moderating the Carbon Panel as part of the Forum, Martin Crawford-Brunt, emissions lead at the Baltic Exchange, echoed Laybourn’s sentiments, cautioning against the inadvertent dilution of environmental accountability. “If you roll the carbon into freight, you lose sight of it. You also lose the opportunity to differentiate between the better owners and operators, those people that are investing more,” Crawford-Brunt said.

Looking at the legal perspective, Philip Roche, a partner at Norton Rose Fulbright LLP, highlighted the legal complexities surrounding EU ETS implementation and MOHA establishment.
He underscored the issue of advising clients amid regulatory ambiguities. “It is very hard to advise because we don’t really know, nobody’s really thought very hard about it, and we can’t get very much clarity. So forgive your lawyer if he looks a bit uncomfortable sometimes.”

Laybourn noted that following the rule of law, ship owners must create one MOHA for each ship, “which is an absolute nonsense”. Ardmore has a joint venture technical manager who is responsible for each of its ships. “That’s a huge sigh of relief because I don’t need to worry about third party technical managers and their obvious reluctance to take on the obligations.”

Roche also stressed the importance of setting up trading accounts in lieu of a MOHA. “Nobody is going to be surrendering anything until September 2025. Everybody’s got their chance to get their ducks in a row. What is important now is making sure that you are collecting EUAs, and you’ve got a trading account that you can put them in.”
That said, the reality is that big blue-chip charterers will not be transferring EUAs until at least August of next year. “So really, you don’t even need to be worrying too much about trading accounts.” Instead, the focus should be on making sure the right clauses and contracts are in place, he added.

Price spike

Ioannis Papadimitriou, lead freight analyst at Vortexa, warned of potential price spikes and trade pattern shifts because of the ETS’ requirements. “If everybody waits and does not purchase any of the allowances until September then we might see a spike in prices. And this spike in prices will drive changes on trade patterns,” he said.

Papadimitriou also warned of the spectre of multiple tier markets where more efficient owners and more sophisticated ones – depending on the choice of propulsion – choose to operate only in European routes, and less sophisticated owners operate in the non-European ones.
“That’s one of the unintended consequences of this. Right now, the ETS charges are too low for them to have a meaningful effect, but this could change over time. And obviously it’s the intent with a cap-and-trade system for this to start to bite at some point in the future. You have to prepare yourself for that eventuality.”
Source: The Baltic Exchange