EU ETS Loophole or How the EU ETS compliance cost can be reduced significantly

Decarbonization
,
1

EU ETS Loophole or How the EU ETS compliance cost can be reduced significantly

A. Background

Starting in 2024, the EU ETS requires commercial ships above 5,000 GT to adhere to specific emission surrender requirements for different types of voyages.

  • 50% of emissions apply to ships departing from an EU/EEA port and arriving at a non-EU/EEA port.
  • 50% of emissions apply to ships arriving at an EU/EEA port from a non-EU/EEA port.
  • 100% of emissions apply to ships performing voyages between EU/EEA ports.
  • 100% of emissions apply to ships at berth in an EU/EEA port.

The EU ETS regulations apply to the following port calls having commercial operation:

  • ports of call from and to all EU Member States,
  • ports of call from and to the nine EU outermost regions (Açores, Madeira, Canarias, Guadeloupe, French Guyana, Martinique, Mayotte, Saint Martin, and Reunion)
  • ports of call from and to EEA States (Norway, Iceland).

Currently, the price of carbon permits on the EU carbon market is 90 € per tonne of CO2 and is expected to potentially increase in the future.

B. Are ship-to-ship transfers considered ports of call according to EU legislation?
According to Article 3 of the EU MRV/ETS Regulation:

  • Ship-to-ship transfers within the port limits of a non-EU/EEA Member State are considered “ports of call”.
  • Ship-to-ship transfers outside the port limits of a non-EU/EEA Member State are NOT considered “ports of call”.

C. Equations
The CO2 emissions are calculated based on the following equation:
image

The allowances to be surrendered are calculated based on the following equation:
image

image
image704×235 6.25 KB

D. Vessel Description
For the scope of the current study we selected a modern SOx scrubber-fitted suezmax tanker sailing on an average speed of 12 knots with an approximate daily consumption of 40 tonnes in laden condition.

E. Now let’s explore a potential loophole in the EU ETS Regulation with two case studies.
There are countries adjacent to the EU that are not EU Member States, such as Montenegro, Albania, Tunisia, Morocco, and Algeria.

Case Study 1 (Saudi Arabia to Italy and Saudi Arabia to Italy via Albania)

Assuming that the subject suezmax tanker needs to transport a certain amount of crude oil from Ras Tanura, Saudi Arabia (non-EU/EEA), to Trieste, Italy (EU).

The voyage from the departing port of Ras Tanura, Saudi Arabia (non-EU/EEA) to the arrival port of Trieste, Italy (EU) sailing on an average speed of 12 knots lasts approxi-mately 16 days. For this voyage, the ship will have approximately 640 tonnes of heavy fuel oil consumed. The CO2 emissions for this amount of fuel oil are equal to 1,992.96 tonnes. Taking into account that 50% of emissions apply to ships arriving at an EU/EEA port from a non-EU/EEA port, the emissions under the EU ETS to be considered are 996.48 tonnes of CO2. Therefore, the overall expenditure increase due to the EU ETS compliance cost for this voyage is equal to 89,683 €.

image
image704×508 55.2 KB

But consider an alternative scenario:
An alternative pathway for the crude oil to be transported starting from Ras Tanura, Saudi Arabia (non-EU/EEA) and arrive at the final port of destination Trieste, Italy (EU) via an intermediate call to a Floating Storage Offloading (FSO) unit within the port limits of Vlore, Albania (non-EU/EEA). We assume that another suezmax tanker loads the cargo from the FSO unit and transports the cargo to the final destination of Trieste, Italy (EU).

image

In this case, the voyage leg breaks into the following two parts:
a. Ras Tanura, Saudi Arabia – Vlore, Albania
For this part, none of these two ports are EU/EEA, therefore there is no need to surrender any allowances for the EU ETS scheme.
b. Vlore, Albania – Trieste, Italy
For this part, the CO2 emissions for this amount of fuel oil (80 tonnes) are equal to 249.12 tonnes. Taking into account that 50% of emissions apply to ships arriving at an EU/EEA port from a non-EU/EEA port, the emissions under the EU ETS to be considered are 124.56 tonnes of CO2.Therefore, the overall expenditure increase due to the EU ETS compliance cost for this voyage is equal to 11,210 €.

In the alternative scenario, the EU ETS compliance cost to transport the same amount of cargo between the same departure port and final destination port is reduced by 88% and the allowances to be surrendered are only 11,210 €.

Case Study 2 (Nigeria to Portugal or Nigeria to Portugal via Morocco)

Assuming that the subject suezmax tanker needs to transport a certain amount of crude oil from Bonny, Nigeria (non-EU/EEA) to Sines, Portugal (EU).

The voyage from the departing port of Bonny, Nigeria (non-EU/EEA) to the arrival port of Sines, Portugal (EU) sailing on an average speed of 12 knots lasts approximately 13 days. For this voyage, the ship will have approximately 520 tonnes of heavy fuel oil con-sumed. The CO2 emissions for this amount of fuel oil are equal to 1,619.28 tonnes. Taking into account that 50% of emissions apply to ships arriving at an EU/EEA port from a non-EU/EEA port, the emissions under the EU ETS to be considered are 809.64 tonnes of CO2. Therefore, the overall expenditure increase due to the EU ETS compliance cost for this voyage is equal to 72,868 €.

image

But consider an alternative scenario:
An alternative pathway for the crude oil to be transported starting from Bonny, Nigeria (non-EU/EEA) and arrive at the final port of destination Sines, Portugal (EU) via an intermediate call to a Floating Storage Offloading (FSO) unit within the port limits of Tanger, Morocco (non-EU/EEA). We assume that another suezmax tanker loads the cargo from the FSO unit and transports the cargo to the final destination of Sines, Portugal (EU).

image
image789×682 67.6 KB

In this case, the voyage leg breaks into the following two parts:
a. Bonny, Nigeria – Tanger, Morocco
For this part, none of these two ports are EU/EEA, therefore there is no need to surrender any allowances for the EU ETS scheme.
b. Tanger, Morocco – Sines, Portugal
For this part, the CO2 emissions for this amount of fuel oil (40 tonnes) are equal to 124.56 tonnes. Taking into account that 50% of emissions apply to ships arriving at an EU/EEA port from a non-EU/EEA port, the emissions under the EU ETS to be considered are 62.28 tonnes of CO2. Therefore, the overall expenditure increase due to the EU ETS compliance cost for this voyage is equal to
5,605 €.

In the alternative scenario, the EU ETS compliance cost to transport the same amount of cargo between the same departure port and final destination port is reduced by 92% and the allowances to be surrendered are only 5,605 €.

Conclusion / Implications

The conclusion is straightforward.
The EU ETS compliance cost is significantly reduced if intermediate calls in non-EU countries neighboring EU Member states are introduced.
This loophole might be considered a business opportunity for several parties (non-EU countries, ship management companies, oil trading companies) and lead to a change in the oil import/transportation landscape of Europe, revenue loss for the EU ETS and carbon leakage.

Annex

image
image1009×402 13 KB

Note:
Distance calculations for the voyages and screenshots were made using https://app.searoutes.com/

Download the full Article here:
Queseas - EU ETS Regulation Loophole.pdf (1.0 MB)

4 Likes
2

This is very interesting. Thank you so much for sharing.

1 Like
3

Indeed very interesting!

4

I wonder what the final difference would be when accounting the time and costs of loading and unloading in the in-between stations.

1 Like
5

The vessel that will discharge the cargo on the FSO inside the port limits of a non EU country would not have to load it again in order to re-discharge it at the EU port.
Another vessel would load it from the FSO and then discharge it to the EU port.
In the case that the EU allowances have a value over 90 Euros per tonne CO2 (the value is expected to raise) - then the described scenarios will make sense and are expected to change the oil import landscape of Europe. A new market will eventually emerge.

1 Like
6

How do you think the new markets will eventually be? What I was considering was this. Who takes the extra cost of loading unloading the cargo in the FSO. Will it be 50% in the first owner to unload and 50% on the second owner to load? Let’s stay this is the case. The first vessel is in the clear for the ETS. However the second one is not. So for the near distance it makes sense to invest in zero emissions vessels.

1 Like
7

Very interesting scenario, thanks for sharing.
@Iro taking into account the BIMCO clause that the party providing and paying for the fuel under the time charter is the party that is responsible for providing and paying for emissions trading allowances, I expect this may benefit the charterers.

8

I would like to ask something that I saw in DNV webpage:

QUESTION: Is a port stay for bunkering considered a port call for EU-MRV?

ANSWER: No, only ports where cargo is loaded or unloaded or where passengers embark or disembark are considered ports of call. Consequently, stops for the sole purpose of refuelling, obtaining supplies, relieving the crew, going into dry dock or making repairs to the ship and/or its equipment, as well as stops in port because the ship is in need of assistance or in distress, stops for ship-to-ship transfers carried out outside ports and stops for the sole purpose of taking shelter from adverse weather or rendered necessary by search and rescue activities are excluded.

Source: FAQs - EU MRV - DNV

So with the above, only ship-to-ship transfers inside the port limits are considered “port of call”, right?

1 Like
9

Hi @lalis98,

A voyage is considered from the last berth or ship-to-ship transfer within a port of call
to the first berth or ship-to-ship transfer in the following port of call.

MRV Regulation defines ‘port of call’ as the port where a ship stops to load or
unload cargo or to embark or disembark passengers.

10

Another way to reduce CO2 emitted under the EU ETS scope would be by making use of an “assisting vessel” let’s say, that loads STS OPL near an EU port and brings the cargo from STS area to port. Subsequently this vessel would sail again to OPL area and await loading in order to repeat procedure. The majority of the emissions created by vessels that are discharging to the “assisting vessel” would not be accounted for under EU ETS. The tons emitted by the assisting vessel per actual transport work of cargo are minimal.
Not sure what implications above method may have as far as cargo origin issues and such is concerned.

4 Likes
11

Indeed @NikosPiperis this is correct!

1 Like