The inclusion of shipping markets in the EU's Emission Trading System at the start of 2024 will add an estimated $25,000-$100,000 in carbon emission offsetting costs to freight on dirty and clean tanker round-trip voyages from the US Gulf Coast to EU and European Economic Area ports, as Americas tanker markets are set to continue their volatile and bullish trends seen since early 2022.
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Register NowBullish factors prominent in 2023 are expected to further exacerbate tonnage dislocation heading into 2024. Notably, ton-mile demand will remain elevated amid diversions of sanctioned Russian hydrocarbon exports to East of Suez, Latin American and African markets. Previously, the West of Suez market was the main importing region before sanctions forced the displacement of Russian barrels.
Longer voyages have also become prominent with transiting issues at major waypoints such as the drought-stricken Panama Canal and attack-ridden Red Sea.
Considering the ton-mile impacts on freight, carbon emission offsetting costs from the EU ETS are miniscule, but they do add to already buoyant tanker rates.
The EU ETS requires shipowners operating ships over 5,000 gross tons to offset carbon emissions by 100% on voyages where both load and discharge ports are located in the EU/EEA regions and requires owners to offset 50% of emissions for voyages involving EU/EEA ports while sailing to the disport location.
The carbon offsetting costs will be phased in gradually. In 2024, 40% of actual carbon emissions considered on voyages involving EU/EEA ports need to be offset through the purchase of EU emission allowances, increasing to 70% in 2025 and 100% from 2026 onward. Shipowners will be required to purchase the allowances by September of the following year.
Had the EU ETS been applicable to USGC-UK/Continent Aframax voyages in 2023, average carbon emission offsetting costs would have averaged $2.97/mt at a 100% charge, $2.08/mt at a 70% charge and $1.19/mt at a 40% charge of the 50% of carbon emissions to be offset on voyages involving both EU/EEA and non-EU/EEA ports, S&P Global Commodity Insights data shows. These averages take into account the EUA Nearest-December average price of Eur85.43/EUA or $92.33/EUA.
So far in 2023, owners have mostly taken on the responsibility for EUA costs on voyages booked to unload in the EU in 2024. Freight negotiations have been split between those inclusive and exclusive of EU ETS costs, either adding a specific premium to the achieved rate or simply negotiating freight without a separate premium attached, to then break out the EU ETS charge later.
In the crude midsize and clean Medium Range tanker sectors, a 2.5 Worldscale-point carbon offsetting premium has been added onto freight, whereas Very Large Crude Carrier rates have seen around $100,000 premium.
Upsizing increases EU ETS cost efficiency
A major shift in ship class preference has been in play amid increased trans-Atlantic crude movements. In the fourth quarter of 2023, the number of VLCCs taken on USGC-Europe crude export runs increased by 14% from the third quarter, while the number of midsize tankers on the voyage plummeted by over 30% over the same period.
Freight economics remain most favorable on VLCCs and Suezmaxes, with EU ETS efficiencies on the bigger ships adding fuel to the fire.
"A Suezmax is more efficient in theory," a shipbroker said. "So w2.5 Aframax points in lumpsum are less than w1.5 points on a Suezmax lumpsum."
Sustained production cuts by OPEC+, a coalition of OPEC and other oil producers, through March 2024 are expected to be offset by increased production in the Americas. S&P Global analysts expect the Americas will contribute 70% to global crude supply growth in 2024. The shift in crude exporters to the Americas from the Arab Gulf thus increases ton-mile demand.
Trans-Atlantic product exports see no impact
On the Americas clean tanker sector market, sources do not expect the carbon charge to disincentivize naphtha and diesel exports to Europe in 2024.
"For now, it's a relatively small amount of money compared to the freight for the route," a shipowner said.
For the MRs, carbon offsetting costs have ranged between w2.5-w5, or lumpsum $25,000-$35,000, through Dec. 21, but that cost is set to double to over $60,000 once voyages fully operate in 2024.
The Worldscale Association said that it will take 700-730 EUAs to offset carbon emissions on the trans-Atlantic route.
Yet the expectation of persisting bullish clean tanker fundamentals will increase shipowners' bargaining chip to pass on EU ETS costs to the charterer.
Severe Panama Canal transit limitations will continue impact the market as shipowners consider making 10- to 11-day longer ballasts through the Magellan Strait to circle back to the prime USGC loading area.
Additionally, a growing export share of US diesel to Europe, as Brazil continues sourcing lower-priced barrels from Russia, will add to ton-mile demand growth.
Product tanker ton-mile demand in 2024 is forecast to grow 5.5%, transporting 3.5% more cargo volume, BIMCO's chief shipping market analyst Niels Rasmussen said in a fourth-quarter clean tanker shipping market outlook.