The EU ETS works using a "cap-and-trade" principle. A cap (limit) is set on the total amount of greenhouse gas emissions that can be emitted by the factories, power plants, ships and other entities that are included. Over time this cap is reduced, resulting in a gradual reduction of total emissions.

Within the cap, the different entities buy allowances which they can trade between themselves. At the end of each year, all entities must hand in allowances, called EU Allowances (EUA’s) equal to their emissions. In this, each allowance counts for one tonne of CO2. Since both the greenhouse gas emissions allowed in the cap as well as the greenhouse gas emissions from the entities are not fixed numbers, the price per allowance is not fixed but fluctuates according to the market demand and supply of emission allowances.

As a market-based measure, the concept allows for an entity that reduces its emissions to keep spare allowances for future needs or sell these to others. The intention is that the carbon price promotes and rewards investment in decarbonisation technology.

The maritime industry it set to be included into the EU ETS from 1 January 2024. At a high level the new legislation requires shipping companies, performing cargo voyages into and out of the EU, to buy and surrender EUA allowances equivalent to their annual carbon emissions annually.

The calculations for carbon emitted on a voyage basis will be based on the emissions produced for 50% of all intra-European voyages and 50% of the carbon emitted related to voyages in and out of the EU.

In the European Commission's current ETS proposal, only CO2 emissions will be included from the start, however it is likely that other GHG’s will be added from 2027.

It is important to note that much of the detail on how this is to be interpreted and implemented in practice is yet to be agreed. This will be communicated in the run up to the implementation date.

The calculations available in the tables under Dry Bulk and Tankers are provided as a rough guide only to illustrate the likely cost of compliance with this regulation for standard Baltic routes into and out of Europe with an assumed EUA allowance price of US $100. The price of these allowances will vary over time and therefore the associated cost estimates for the standard voyages.