Carbon taxes could lead to significant competitive disadvantages

Opinion: Carbon taxes could lead to significant competitive disadvantages

-From SHIPPINGWATCH

17 Feb 2023

The coming carbon taxation will likely pose major changes and challenges to industry players, writes analyst Lars Jensen.

 

The coming carbon taxation rules for shipping in the EU in 2024 will have a significant impact on the container shipping networks, and as a consequence also on European importers and exporters.

 

Strictly speaking, this is part of the Emissions Trading System (ETS), but the term carbon tax reflects the spirit as well.

 

At first glance, it might appear simple in the sense that it implies an added cost for the shipment of goods. In essence, it is no different than if fuel prices were to go up. This in itself should not give rise to material changes or concern.

 

But looking more closely at the rules, it becomes clear that major changes and challenges will ensue.

 

Deployment uncertainties

First it is important to notice that the carbon tax is levied on the vessel for a specific voyage to or from ports in the EU. It is based on the emissions data reported by the shipping lines under the EU MRV regulation.

 

You need to pay tax on the full carbon emissions for voyages between EU ports and pay tax on 50 percent of the emissions on voyages to or from ports outside the EU into or out of the EU.

 

The actual cost of this is somewhat unclear as it depends on what the pricing for carbon credits is going to be. Maersk attempted to estimate this in July 2022 and arrived at an expected surcharge of EUR 170 EUR per forty-foot-equivalent (FFE) from Asia to North Europe as an example. This example can serve as a reference point for one of the first problems to arise.

 

An example could be Maersk’s AE1 service which goes directly from Tanjung Pelepas in Malaysia to Rotterdam. This is a journey of approximately 8,300 nautical miles which is subject to the carbon tax. If the schedule was changed to include a port call in Jeddah in the Red Sea, then it is only the 4000 nautical miles from Jeddah to Rotterdam which is taxable.

 

This would theoretically reduce the cost from EUR 170 per FFE to EUR 82 per FFE. On a vessel loaded with 9,000 FFE, this is a hypothetical saving of EUR 40m annually if 50 voyages per year are applied.

 

Intermediary port calls

Equally theoretical, if this saving is applied to all cargo moving from Asia to Europe, the potential savings are almost EUR 700m annually across the entire industry. In reality, the potential saving will be lower as some services indeed already call such intermediary ports, but the scope for cost savings is high.

 

This means carriers are strongly incentivized to add such intermediary port calls on all services to and from the EU. This will not lower emissions, but it will lower the carbon taxation. It will, however, increase the transit times for customers due to the extra time spent on port calls.

 

It might, on he other hand, serve to dramatically increase the connectivity to global networks enjoyed by countries conveniently located for such intermediary port calls. Incidentally, the regulations stipulate that calls in transshipment hubs within 300 nautical miles of the EU do not “count” as last stop outside the EU ruling out the usage of, for example, Tangiers in Morocco.

 

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A carrier might elect to not engage in such behavior as it might be construed as greenwashing, however if competing carriers do apply such network changes it will create a significant competitive disadvantage.

 

The carriers are highly likely to introduce a carbon surcharge to pass on this new cost. The problem will be one of transparency. Bunker surcharges are already quite intransparent, but they at least have the simplicity that they only depend on the price of fuel.

 

However, as an example, these surcharges are linked to the cost of low-sulphur bunker fuel despite the fact that 32 percent of the world’s fleet capacity is equipped with scrubbers allowing them to use the cheaper traditional fuel.

 

As the carbon tax depends on the precise routing of the vessels, it will become very difficult to create a surcharge with any level of transparency.

 

It appears unlikely that a shipper booking a container with a direct service from Shanghai to Rotterdam will be faced with a different surcharge than another shipper also booking from Shanghai to Rotterdam but on a vessel which happens to have a port call in the Red Sea along the way.

 

And will this again be a different surcharge for the customer on the vessel making a stop in Colombo in Sri Lanka along the way?

 

And do not forget in this context that each carrier will have to devise their own surcharge formulas. Just as is the case with the bunker surcharges, carriers are not allowed to devise common aligned surcharges as this would be a violation of the competition rules in the EU.

 

Shared capacity

It also creates a challenge within vessel sharing agreements. For simplicity, assume a vessel sharing agreement where one carrier owns and operates 10 vessels for an Asia-Europe service and another carrier owns and operates 10 vessels for an Asia-USEC service. The vessels are of equal size and they share space equally. Each carrier handles its own operating costs.

 

From 2024 the problem is that the carrier operating the Europe-bound vessels is subject to the carbon tax, but the partner operating the US service is not subject to such costs. The carriers therefore need to now also agree on how to charge each other within the vessel sharing agreements for the carbon tax.

 

The regulation is set to gradually come into effect with 2024 applying to 40% of the emissions, 2025 ramping up to 70% and then a 100% implementation in 2026.

(source: Opinion: Carbon taxes could lead to significant competitive disadvantages — ShippingWatch)

 

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