The world’s largest carbon market set for a historic revamp

This week, the European Union expects to propose an unprecedented overhaul of its carbon market. Attempting for the first time to put a price on shipping emissions. And the region’s shipowners have legitimate worries.

On Wednesday, the European Commission, the EU’s executive arm, will present its green fuel law for EU shipping. It is part of a larger reform package that aims to meet the EU’s revised climate targets.

To be sure, the EU has committed to reducing net carbon emissions by 55% (compared to 1990 levels) by 2030. They intend to become climate neutral by 2050. According to the EU, this will necessitate a 90% reduction in transportation emissions over the next three decades.

World’s most extensive carbon trading program

To meet these targets, the EU intends to undergo the most extensive overhaul of its Emissions Trading System since the policy’s inception in 2005. The ETS is already the world’s most extensive carbon trading program. Now they are likely to expand to include shipping for the first time. According to Lars Robert Pedersen, deputy secretary-general of BIMCO, the world’s largest international shipping association, the industry is concerned about the EU’s plans. He argued that the proposal was “not conducive” to global policy. It would fail to reduce regional carbon emissions. This would ultimately drain money from the shipping industry that could otherwise reduce emissions in the fleet.

The commission’s spokesperson declined to comment on the draft proposal. The EU has stated that action to address EU international emissions from navigation and aviation is “urgently needed”. They insist that initiatives to address these issues will increase production.

The final reforms would first need to be negotiated by EU member states and the European Parliament. The analysts estimate that this could take up to two years.

Environmental disaster

Soren Toft, CEO of the Mediterranean Shipping Company, the world’s second-largest container carrier, has also slammed the EU’s proposal. Toft warned The Financial Times last month that the proposals would have the opposite effect of their intentions in the absence of readily available low-carbon fuels.

According to Transport & Environment, the leaked draft of the commission’s proposal is an “environmental disaster” because it does not incentivize investment in low-carbon fuels like renewable hydrogen and ammonia. Instead, it claims that the proposal promotes liquefied natural gas and “questionable” biofuels as alternatives to marine fuel oil.

The European Union’s Emissions Trading System (ETS) is the bloc’s primary tool for reducing greenhouse gas emissions that cause climate change. It requires high-polluting industries, ranging from aviation to mining, to purchase carbon permits to create a financial incentive for firms to pollute less. The EU expects to address this issue, potentially implementing the carbon border adjustment mechanism as early as 2023. The policy aims to level the playing field in carbon emissions by imposing domestic carbon pricing on imports.

EU’s proposal impacts carbon prices

“How shipping incorporates into a pricing regime is critical,” said Roman Kramarchuk, head of future energy analytics at S&P Global Platts, in an email to CNBC.

The Carbon Offsetting and Reduction Scheme for International Aviation initiative is a United Nations agreement. The Carbon Offsetting design assists the aviation industry in meeting its “aspirational goal” of making all new international flights “carbon neutral” by 2020.

The impact of the EU proposal on carbon prices will also be “critical,” according to Kramarchuk. He predicts an end-of-year target for the EU’s benchmark carbon price of 60 euros per metric ton. According to Kramarchuk, higher carbon prices will likely raise concerns about the competitive decisions shipping companies will make regarding fuel choice.

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