Carbon Costs on the Horizon: 5 Ways to Soften the ETS Hit

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Carbon costs are no longer a future concern for shipowners, they are here and already reshaping voyage economics. With the EU Emissions Trading System (ETS) now extended to shipping, every tonne of CO₂ emitted on covered voyages translates directly into an obligation to buy and surrender allowances. This has turned emissions into a line-item cost alongside fuel, port charges, and crew. For fleets trading to or within Europe, the question is not whether the ETS will impact profitability, but how to manage and soften the financial hit.

1️⃣ Contractual Pass-Through of ETS Costs

ETS compliance can swing voyage profitability by hundreds of thousands of euros per year. The cleanest way to protect margins is to ensure costs flow to the party consuming the fuel, typically the charterer. BIMCO’s ETS clauses give shipowners the contractual backbone to allocate allowance purchases, transfer timing, and documentation requirements.

ETS Cost Pass-Through via Contracts
Strategy	Solution	Department Owner	KPI to Monitor
BIMCO ETS Clauses in Time Charter	Assigns EUA responsibility to charterers consuming the fuel. Prevents disputes and shields owners from volatile EUA prices.	Legal, Chartering	% TCs with ETS clause; recovery ratio of EUA costs
Voyage Charter & COA Clauses	Ensures voyage charterers cover ETS costs linked to cargo movement. Creates predictability for repeated liftings.	Legal, Commercial	% voyage/COAs updated; disputes per 100 fixtures
Allowance Transfer & Audit Trail	Defines timing (e.g., monthly transfer), accepted EUA types, and proof of surrender. Reduces credit risk and verification disputes.	Legal, Treasury, Compliance	On-time EUA transfer %; compliance audit success rate
Note: ETS clauses should be aligned with bunker adjustment clauses and other cost pass-through mechanisms to avoid gaps.

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2️⃣ Cutting Surrendered Tonnes: Operations, Technology, Shore Power

Reducing ETS exposure starts with reducing emissions. Practical levers include speed and route optimization, hull and propeller efficiency, wind-assist and other energy-saving devices, and using on-shore power at berth so auxiliary engines do not generate reportable CO₂. The aim is simple: fewer tonnes emitted, fewer EUAs surrendered.

Cut Surrendered Tonnes: Ops, Tech, Shore Power
Strategy	Solution	Department Owner	KPI to Monitor
Smart speed and route optimization	Lowers fuel burn without missing laycans; cuts ETS-reportable CO₂ on both EU and extra-EU legs.	Operations, Voyage Planning, Analytics	gCO₂/tonne-nm, fuel per day, schedule adherence %
Hull cleaning, propeller polishing, premium coatings	Reduces hull resistance and shaft power; sustained fuel savings that reduce surrender volume over time.	Technical, Drydock, Maintenance	Speed-power curve shift, fuel-per-nm trend, days since last clean
Energy-saving devices (ducts, fins, sails, rotors)	Adds permanent efficiency; wind-assist and appendages deliver 5–20% fuel cuts depending on route and metocean.	Technical, Capex Committee	Verified fuel saving %, payback period (years), CO₂ avoided per voyage
On-shore power (OPS) at EU ports	Cuts at-berth emissions within ETS scope by switching auxiliaries to grid power where available and required.	Port Ops, Technical, Compliance	% EU calls using OPS, kWh from shore vs. gensets, CO₂ avoided at berth
Engine tuning, waste heat recovery, BOG/reliquefaction	Optimizes SFOC and reduces methane/CO₂; better boil-off handling preserves cargo and lowers fuel demand.	Technical, Engineering	SFOC g/kWh, BOG utilization %, reliquefaction uptime %, CO₂e per day
Digital voyage optimization linked to MRV	Aligns route decisions with verified emissions data; avoids reconciliation disputes and supports EUA planning.	Operations, ESG/Compliance, IT/Data	Data accuracy %, verified MRV voyages %, forecast vs actual EUAs
Note: Prioritize measures with short payback on EU-heavy trades. Feed measured savings into EUA procurement so allowance purchases track the reduced surrender need.

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3️⃣ Biofuels and Zero-Rated CO₂

Certified sustainable biofuels can be treated as having a zero emission factor under the EU ETS, provided they meet RED sustainability standards and the chain-of-custody is documented. For shipowners, this means every tonne of compliant biofuel consumed is a tonne of CO₂ that does not require EUAs. Supply and price remain challenges, but where available, biofuels can significantly reduce ETS exposure.

Biofuels and Zero-Rated CO₂
Strategy	Solution	Department Owner	KPI to Monitor
Certified biofuel bunkering	Replaces fossil fuel with RED-compliant biofuel; zero ETS CO₂ factor if sustainability proofs are verified.	Operations, Bunkering, ESG	% of bunkers biofuel; CO₂ tonnes avoided; cost delta vs VLSFO/LNG
Proof of Sustainability (PoS) and chain-of-custody	Required to claim zero CO₂. Provides verifiers with evidence under RED II/III; prevents rejection of zero-rating.	ESG/Compliance, Legal	% voyages with valid PoS; verifier acceptance rate; audit compliance %
Blended fuel strategies	Allows partial substitution where full biofuel is unavailable; proportion of voyage emissions zero-rated accordingly.	Bunkering, Technical	% blend biofuel; ETS surrender reduction; cost premium €/t biofuel
Partnerships with suppliers and cargo owners	Locks in future supply and may secure premium freight from cargo owners with ESG mandates.	Commercial, ESG, Procurement	# of biofuel supply contracts; freight premium %; cargo owner ESG uptake
Note: Biofuel pricing and regional availability vary widely. Financial modelling should compare premium cost vs EUA savings on a per-voyage basis.

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4️⃣ EUA Procurement and Hedging Programmes

Buying and surrendering EU Allowances (EUAs) is not just a compliance obligation, it is a financial exposure. Without a structured procurement and hedging programme, shipowners risk last-minute purchases at volatile prices. Aligning EUA procurement with MRV deadlines, treasury policy, and risk appetite can smooth costs and protect margins.

EUA Procurement and Hedging Programmes
Strategy	Solution	Department Owner	KPI to Monitor
Structured EUA purchasing policy	Defines timing, volume, and approval flows for EUA purchases. Prevents ad hoc buying and reduces cost volatility.	Treasury, ESG/Compliance	Avg EUA purchase price vs benchmark; % planned vs unplanned purchases
Hedging with forwards, swaps, or futures	Locks in EUA prices ahead of surrender deadlines. Protects against spikes during high-demand periods.	Treasury, Risk Management	% EUA exposure hedged; hedge effectiveness; mark-to-market variance
Align EUA purchases with MRV cycle	Links verified emissions data (due 31 March, confirmed by 1 April) with allowance surrender (by 30 September). Reduces reconciliation disputes.	Compliance, Treasury	On-time surrender %; audit pass rate; variance between verified CO₂ and surrendered EUAs
Define allowable EUA types and custody	Specifies which allowances are acceptable (spot vs forward) and how they are transferred/stored. Reduces counterparty and settlement risk.	Legal, Treasury	Counterparty default rate; EUA eligibility compliance %
Note: EUA procurement should be treated like bunker fuel or FX exposure — a major input cost requiring policy, risk limits, and board oversight.

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5️⃣ Route and Fleet Deployment Within ETS Rules

ETS costs depend not only on emissions but also on how voyages are routed and which ships are deployed. The system covers 100% of intra-EU voyages and port calls, and 50% of emissions on extra-EU legs. For shipowners, this creates incentives to plan routing carefully, avoid “false savings” from non-eligible transshipment ports, and assign the most efficient vessels to EU-heavy trades.

Route and Fleet Deployment Within ETS Rules
Strategy	Solution	Department Owner	KPI to Monitor
Deploy efficient ships on EU-heavy trades	Reduces surrendered EUAs by placing eco tonnage where ETS coverage is highest. Captures charter premium for compliance-ready vessels.	Fleet Planning, Chartering	% eco tonnage on EU routes; ETS cost per tonne-mile
Route optimization to reduce covered miles	Plans voyages to minimize ETS-covered legs while still meeting schedule and cargo obligations.	Operations, Voyage Planning	ETS tonnes/voyage; distance reduction %; avoided EUA cost
Avoid non-eligible “port-hopping”	EU designates neighbouring container transshipment ports where calls still trigger ETS coverage. Prevents wasted diversions.	Commercial, Legal	# of port calls flagged; % compliant routes
Pair cargoes and voyages to maximize efficiency	Bundles cargo flows and return legs to reduce ballast emissions counted under ETS.	Chartering, Operations	Ballast ratio; ETS cost per loaded voyage; utilization rate %
Note: ETS exposure is not just about total CO₂ but where it is emitted. Deploying eco tonnage on EU trades and avoiding invalid port detours are among the most effective ways to cut surrender obligations.

The extension of the EU ETS to shipping is already reshaping voyage economics. For shipowners, the impact is not optional, every tonne of CO₂ emitted on covered routes now carries a cost. The five strategies outlined here show the most practical ways fleets are adapting: shifting allowance obligations through contracts, reducing fuel burn and surrender volumes, using certified biofuels, professionalizing EUA procurement, and planning fleet deployment within the rules.

These approaches differ in complexity and cost, but each directly influences profitability. While regulation will continue to evolve, shipowners who treat carbon exposure as a managed cost. on par with bunkers or finance, will be best positioned to protect margins in the years ahead.

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