EU ETS operates on a “cap-and-trade” principle. A limit is set on the total amount of greenhouse gas emissions that can be emitted by factories, power plants, ships, and other regulated entities. This cap is reduced over time, driving a gradual decrease in total emissions.

How It Works

Within the cap, entities purchase EU Allowances (EUAs), which can be traded. At the end of each year, each entity must surrender a number of allowances equal to its annual emissions, with each EUA representing one tonne of CO₂.

  • Price fluctuation: The EUA price is determined by market supply and demand, so it changes over time.

  • Market incentive: Entities that reduce emissions can keep surplus allowances for future use or sell them, encouraging investment in decarbonisation technology.

Inclusion of Shipping

The maritime sector is included in the EU ETS from 1 January 2024. Shipping companies performing cargo voyages into or out of the EU must buy and surrender EUAs equal to their verified annual CO₂ emissions.

Emission calculations are based on:

  • 50% of emissions from intra-European voyages

  • 50% of emissions from voyages into or out of the EU

Initially, only CO₂ emissions are covered, but other greenhouse gases are expected to be included from 2027.

 

Implementation Considerations

Many operational details are still being agreed and will be communicated ahead of the implementation date. It is important for companies to monitor regulatory updates and plan accordingly.

 

Baltic Exchange Guidance

To illustrate the likely cost of compliance, the Baltic Exchange provides example calculations in the Dry Bulk and Tanker tables.

  • These are based on standard Baltic routes into and out of Europe.

  • They assume a EUA price of USD 100 per allowance.

  • Actual EUA prices will vary, affecting the cost of compliance.

Note: These figures are a rough guide only and are not intended for carbon accounting or compliance reporting.