EU Emissions Trading Scheme & Shipping: Carbon Pricing and ETS Expansion

Discover how the EU Emissions Trading Scheme expansion impacts shipping. Explore carbon pricing, compliance, challenges, and future decarbonization trends.

Introduction

In January 2024, European shipping entered a new era. For the first time, vessels calling at EU ports became part of the European Union Emissions Trading Scheme (EU ETS)—one of the world’s most ambitious carbon markets. For decades, shipping had been described as the “hard-to-abate sector,” with international negotiations at the IMO moving slowly. But with growing climate urgency, the EU decided to act regionally.

The ETS, a system that puts a price on carbon by requiring companies to purchase allowances for their greenhouse gas emissions, has already transformed industries like aviation, power generation, and steelmaking. Now, it has been extended to maritime transport, covering CO₂ emissions from large vessels operating within, to, and from EU ports.  This expansion is not just a regulatory adjustment—it’s a paradigm shift for global shipping. Carbon now has a price in one of the world’s largest trade regions, and that price is shaping shipowner decisions, chartering contracts, fuel strategies, and port competitiveness.

This article explores the why, how, and what’s next of the EU ETS in shipping, focusing on key developments, challenges, real-world examples, and future trends.

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Why This Topic Matters in Maritime Operations

A Growing Share of Global Emissions

Maritime shipping accounts for nearly 3% of global greenhouse gas emissions (IMO, 2023). Without intervention, this share could rise to 5–8% by 2050.

EU’s Regional Leadership: While IMO negotiations on a global carbon levy continue, the EU has acted unilaterally by expanding its ETS. For ship operators, this means that even without a global agreement, they face carbon costs on EU-linked voyages.

Economic Stakes: The carbon price in the EU ETS has fluctuated between €70 and €100 per ton of CO₂ in recent years. For large containerships or bulk carriers, this translates to millions of euros annually in new costs.

Compliance Pressure: Ship operators must track, verify, and report emissions under the EU MRV Regulation (Monitoring, Reporting, and Verification). Failing to comply could lead to hefty fines or even denial of port entry.

Strategic Relevance: Ports, charterers, and shipowners must rethink their fuel strategies, route planning, and investment decisions. The EU ETS is pushing companies toward alternative fuels, energy efficiency technologies, and even green corridors.

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Key Developments, Innovations, or Technologies

Expansion of the EU ETS to Shipping

The inclusion of maritime transport in the EU Emissions Trading System (ETS) marks one of the most transformative regulatory shifts the shipping industry has faced in decades. Originally designed to cover land-based sectors such as power generation and heavy industry, the ETS was extended to shipping in January 2024, creating a direct financial cost for greenhouse gas emissions. For the first time, ship operators are required not only to measure and report emissions but also to purchase allowances to cover them.

The regulation applies to vessels over 5,000 gross tonnage (GT), which captures the vast majority of commercial shipping. Its scope includes:

  • Intra-EU voyages (full coverage of CO₂ emissions).

  • Incoming voyages from non-EU ports to EU ports (50% of emissions covered).

  • Emissions while at berth in EU ports (100% covered).

This wide scope ensures that both short-sea and long-haul operators calling at EU ports are included, making the ETS not just a European policy but one with global implications.

Gradual Phase-In and Future Expansion

To avoid a sudden financial shock, the ETS has been introduced in phases. In 2024, shipping companies were required to purchase allowances covering 40% of verified CO₂ emissions. This rises to 70% in 2025, and reaches 100% by 2026, aligning shipping with other fully regulated sectors.

The system is also expanding beyond carbon dioxide. From 2026 onwards, methane (CH₄) and nitrous oxide (N₂O)—two greenhouse gases with far higher global warming potential—will also fall under the ETS. This is particularly significant for LNG-fueled ships, where methane slip during combustion and handling can substantially erode the climate advantage over traditional fuels.

This phased inclusion of additional gases is forcing operators to think more carefully about long-term fuel choices, since technologies that reduce CO₂ today may still face costs in the near future if they fail to address methane or nitrous oxide emissions.

MRV and Digital Compliance Tools

The ETS builds on the EU Monitoring, Reporting and Verification (MRV) framework, in place since 2018. Every ship calling at EU ports must submit verified annual emissions reports, which now feed directly into ETS obligations.

To meet these requirements, operators are turning to digital emissions monitoring platforms that automatically integrate data from voyage plans, engine performance logs, and fuel consumption records. Major providers include Wärtsilä’s Fleet Optimisation platform, DNV Veracity, and ABS’s My Digital Fleet, all of which help streamline compliance by generating verified emissions reports and forecasting allowance needs.

Beyond compliance, these platforms offer strategic benefits. They can model carbon exposure across different routes and fuel options, allowing companies to simulate how many allowances would be required if, for example, they switch from heavy fuel oil to LNG or methanol. This data-driven approach is reshaping both fleet management and chartering decisions.

Fuel Choices Under ETS Pressure

The introduction of carbon pricing is already influencing the fuel landscape. Operators are now weighing the ETS cost of carbon-intensive fuels against the capital expense of alternative fuel technologies.

  • LNG vs Methanol vs Ammonia: While LNG reduces CO₂ emissions compared to heavy fuel oil, the inclusion of methane from 2026 diminishes its long-term appeal. Methanol and ammonia, while currently more expensive and less available, may become economically viable sooner as ETS costs push carbon-intensive fuels higher.

  • Biofuels & e-Fuels: Certified sustainable biofuels and synthetic e-fuels could offer shipowners partial or full exemption from ETS costs, depending on EU classification. This makes drop-in fuels an attractive short-term option for operators who want to minimize carbon costs without major retrofits.

  • Scrubbers & Efficiency Technologies: Ships fitted with exhaust gas cleaning systems (scrubbers) still pay ETS costs for CO₂, but they remain attractive for sulfur compliance. Meanwhile, Energy Efficiency Existing Ship Index (EEXI) upgrades—such as propeller retrofits, hull coatings, and waste-heat recovery—help reduce absolute emissions, lowering both ETS costs and Carbon Intensity Indicator (CII) penalties.

The net result is that fuel choice is no longer just a technical or environmental question—it is increasingly a financial strategy shaped by carbon markets.

Contractual Innovation: Sharing the ETS Burden

The ETS has also triggered a wave of contractual innovation in shipping markets. A key challenge is deciding who should pay for emissions allowances: the shipowner, who controls the vessel, or the charterer, who determines where it sails and what it carries.

To resolve this, BIMCO (Baltic and International Maritime Council) has introduced standardized ETS clauses in charter parties. These clauses specify how carbon costs are allocated between owners and charterers, often requiring charterers to reimburse allowance purchases for voyages they control. Early adoption is already visible in time-charter agreements, where clarity on ETS costs has become a prerequisite for securing deals.

This contractual shift is creating a new carbon cost layer in freight negotiations, much like bunker adjustment factors (BAFs) did for fuel price fluctuations in the past. Over time, this may lead to the development of carbon-indexed freight rates, where charterers directly account for ETS liabilities when selecting ships.

Strategic Implications for Shipping

The expansion of the ETS into maritime transport fundamentally changes the business case for decarbonization. Instead of being driven only by environmental pressure, shipowners now face direct economic incentives to cut emissions. A ship running on heavy fuel oil could face millions of euros in annual ETS costs by 2026, while an operator investing in e-methanol, ammonia, or hybrid retrofits could significantly reduce exposure.

The ETS is also a test case for global carbon pricing. Other regions, including the UK, China, and even the International Maritime Organization (IMO), are watching closely. If replicated globally, carbon markets could accelerate the industry’s transition far beyond Europe.

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Challenges and Practical Solutions

Financial Burden on Shipowners
The carbon costs associated with emissions regulations can impose significant financial strain on shipowners, particularly in tramp shipping where fuel options are limited. These costs can accumulate to millions annually, creating operational challenges. To mitigate this, shipowners can adopt efficiency-enhancing technologies such as air lubrication systems, wind-assist propulsion, and slow steaming. These measures help reduce fuel consumption and emissions, thereby lowering the number of allowances required under regulatory schemes.

Market Distortion Risks
A major concern with region-specific measures like the EU ETS is the potential diversion of shipping traffic to nearby non-EU ports, such as those in Morocco, the UK, or Turkey. This could undermine the effectiveness of emissions policies while distorting trade patterns. To address this, regional cooperation should be strengthened—for example, by aligning policies across Mediterranean countries. Additionally, advocating for a global carbon pricing mechanism through the IMO would create a more level playing field and prevent carbon leakage.

Complexity of MRV and Compliance
Many smaller shipping operators lack the technical expertise required for accurate emissions monitoring, reporting, and verification (MRV). This can lead to compliance challenges and potential penalties. Simplifying this process can be achieved through digital platforms that automate data collection and reporting. Outsourcing verification to accredited bodies and providing crew training on proper fuel and emissions logging can also enhance compliance while reducing administrative burdens.

Charter Party Conflicts
The introduction of carbon pricing mechanisms may lead to disputes between shipowners and charterers over who bears the cost of ETS allowances. Without clear contractual terms, these conflicts could result in legal complications and operational inefficiencies. To prevent such issues, standardized contractual clauses, such as those developed by BIMCO, should be adopted. These clauses ensure transparency by clearly defining the allocation of ETS-related costs and responsibilities between parties.

Impact on Competitiveness
Higher freight costs resulting from emissions regulations could reduce the competitiveness of EU exports, particularly for industries reliant on maritime transport. To counterbalance this, revenues generated from ETS auctions should be reinvested into green shipping initiatives. Funding research and development for low-carbon technologies, as well as expanding alternative fuel infrastructure, can help the shipping industry transition sustainably while maintaining economic viability.

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Case Studies / Real-World Applications

Maersk and Methanol in ETS Context

A.P. Moller-Maersk has invested heavily in methanol-powered containerships. By cutting CO₂ intensity, Maersk can reduce exposure to ETS costs and position itself as a premium green carrier.

Grimaldi Group and Short-Sea Shipping

Italy’s Grimaldi Group has optimized short-sea shipping routes in the Mediterranean to minimize emissions per ton-mile, reducing ETS exposure while staying competitive.

Port of Antwerp-Bruges Strategy

The port is building hydrogen and ammonia terminals while lobbying for ETS revenues to be reinvested in green port infrastructure, creating a virtuous cycle.

Future Outlook & Trends

  1. Global vs Regional Carbon Pricing
    The IMO may adopt a global carbon levy by 2030, but until then, the EU ETS will serve as a laboratory for carbon pricing in shipping.

  2. ETS Revenue Recycling
    Billions in ETS revenues could be redirected to fund zero-carbon fuels, shore power, and R&D programs.

  3. Green Corridors
    Partnerships between EU and international ports will accelerate standardized low-emission routes.

  4. Digital Carbon Accounting
    Blockchain and AI-based monitoring tools will enhance transparency in emissions reporting.

  5. Long-Term Fuel Shifts
    ETS will make conventional fuels more expensive, accelerating the transition toward hydrogen, ammonia, and e-fuels.

Frequently Asked Questions (FAQ)

1. What is the EU ETS in shipping?
It is a carbon pricing system requiring ship operators to buy allowances for CO₂ emissions linked to EU voyages.

2. How much of emissions are covered in 2024?
40% of verified emissions, rising to 100% by 2026.

3. Does the ETS apply to non-EU ships?
Yes, if they call at EU ports, with 50% of emissions from extra-EU voyages covered.

4. Which gases are included?
Currently CO₂, with methane and nitrous oxide added from 2026.

5. Who pays the ETS costs—owners or charterers?
This depends on the contract, but BIMCO clauses provide guidance for allocation.

6. What is the carbon price today?
It fluctuates but has recently ranged between €70–100 per ton of CO₂.

7. How will ETS revenues be used?
The EU plans to direct revenues toward climate and innovation funds, potentially supporting maritime decarbonization.

Conclusion

The expansion of the EU Emissions Trading Scheme to shipping marks a historic step in the industry’s journey toward decarbonization. For the first time, carbon pricing has become a daily operational reality for shipowners, charterers, and ports operating in Europe.

The challenges are immense—rising costs, compliance burdens, and competitive risks. Yet the opportunities are equally significant. By investing in efficiency, alternative fuels, and transparent reporting, shipping companies can turn regulation into a catalyst for innovation.

The EU ETS is more than a financial mechanism. It is a signal to the global maritime community that decarbonization is not optional but inevitable. The question is no longer if shipping will decarbonize, but how fast—and who will lead the way.

References

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