Navigating EU ETS: How Shipping Can Manage Carbon Costs
The inclusion of shipping in the European Union Emissions Trading System (EU ETS) will lead to increased operational costs for shipping companies. These costs stem from the need to purchase carbon allowances, invest in emissions monitoring, and potentially retrofit fleets with greener technologies. Maersk recently stated that it expects the emission surcharge in 2025 to be nearly double that of 2024. Smaller operators, which generally have fewer financial and technological resources, may face even greater challenges, potentially leading to sectoral consolidation.
The EU ETS is designed to cap and reduce greenhouse gas emissions from power plants, manufacturing industries, and, more recently, aviation and shipping. The maritime shipping industry will be phased into the EU ETS with this schedule:
2024: Shipping companies must monitor and report their emissions.
2025: They must surrender allowances for 40% of their reported emissions from 2024.
2026: They must surrender allowances for 70% of their reported emissions from 2025.
2027 onward: Shipping companies must surrender allowances for 100% of their reported emissions.
As of 2024, large shipping companies will be brought into this market-based mechanism. Vessels of more than 5,000 gross tonnage conducting intra-EU voyages, as well as 50% of emissions from voyages beginning or ending in an EU port, will fall under the system's scope. For example, a transatlantic shipping company operating routes to and from EU ports will be required to purchase emission allowances for half of all carbon dioxide (CO₂), methane (CH₄), and nitrous oxide (N₂O) emitted during their operations.
To illustrate, an average container ship emitting approximately 100 metric tons of CO₂ during a voyage within EU waters would require 100 European Union Allowances (EUAs) to cover its emissions for that journey. Given the current carbon price nearing €70 per EUA, this could translate to an additional €7,000 (price as of July 18, 2025) for a single trip, depending on the vessel's efficiency and fuel type. For bulk carriers or oil tankers, which typically have higher emissions rates due to their size and fuel consumption, the cost could be significantly higher.
COtwo Advisors Physical European Carbon Allowance Trust (NYSE Arca: CTWO) allows shippers to hedge their exposure in a balance sheet- and tax-efficient manner without setting up complicated custody arrangements. CTWO holds predominantly (approximately 99% of its assets) physical EUAs, thereby providing the needed exposure and bypassing the need for shippers to open accounts on the European Union Registry (the only location that can custody EUAs).
Furthermore, by holding EUAs in the form of shares in CTWO, shippers do not have to carry their exposure as inventory; rather, they can record their ownership as marketable securities. This helps avoid mismatches between their liabilities and the assets they hold. In essence, it is more advantageous for shippers with obligations under EU ETS to hold CTWO than it is to own physical EUAs.