New regulations on shipping environmental protection drive up industry operating costs

Since the beginning of this century, regulatory regulations for the shipping industry have been intensively introduced, continuously driving up industry costs. The specific impact varies depending on the type of ship, route, and operating region. Shipping brokerage firm Gibson pointed out in its latest weekly report that the shipping market has been under tremendous regulatory pressure over the past few years. Since the implementation of the IMO 2020 sulfur restriction five years ago, a series of new environmental regulations have emerged one after another. The cost burden faced by different types of ships and asset classes varies greatly, and the severity of regulations in different regions is also different, especially in the European Union. After the sulfur restriction came into effect, the price difference between high sulfur oil and low sulfur oil (Hi-5 price difference) was once high, making the installation of scrubbers a wise choice for ship owners. Data shows that since 2020, the average annual revenue of ships refueling in Singapore has been about $2.3 million higher than refueling in Rotterdam. In Rotterdam, the Hi-5 price difference is showing a narrowing trend, and the average price in Rotterdam has fallen from a high of nearly $100/ton in 2023 to just over $50/ton this year.
Gibson further analyzed that starting from 2023, IMO will introduce the Carbon Intensity Index (CII) and the existing Ship Energy Efficiency Index (EEXI) to enhance the carbon efficiency and operational effectiveness of ships. The key is that CII standards can be achieved through operational means such as reduced speed navigation, while EEXI compliance rules must rely on the physical modification of the vessel itself. Although the actual impact of these new regulations is difficult to quantify accurately, it is generally believed that their impact is smaller than expected. But it can be certain that compliance costs have already been incurred, and the burden on old ship owners is particularly heavy. In 2024, the European Union Emissions Trading System (EU ETS) will be officially implemented, applicable to all ships over 5000 gross tons. According to the EU ETS, ship owners are required to purchase EU carbon quotas to offset some of their carbon emissions during their stay at EU ports. The system is implemented in stages, with compliance costs increasing year by year from 2024 to 2026, and emissions from non EU routes also need to bear half of the offset obligation. This has brought significant cost pressure to shipowners, although most of the costs will eventually be passed on to lessors. According to estimates, the cost of complying with EU ETS regulations for a single voyage of an Aframax tanker (TD25 route) from Houston to Rotterdam this year is approximately $150000. If calculated based on round-trip flights, this cost will climb to approximately $200000 by 2026.
Gibson pointed out that this year, the EU Marine Fuel Regulation and the Mediterranean Emission Control Area (ECA) have been implemented, both of which have higher requirements for marine fuels. Starting from May 1st, the Mediterranean ECA requires all ships sailing in the region to use fuel with a sulfur content not exceeding 0.1%, or install equivalent exhaust gas cleaning systems, or use low sulfur alternative fuels such as marine gasoline or LNG. Given that the current cost of installing scrubbers for VLCC has exceeded one million US dollars, and the average cost of refueling marine gasoline in Rotterdam is about 150 US dollars per ton more expensive than low sulfur fuel oil, these additional costs should not be underestimated. The EU Marine Fuel Regulation focuses on the greenhouse gas emission intensity of fuels, and its limit standards will become increasingly stringent over time. This regulation is similar to the application logic of the EU ETS, which calculates compliance requirements based on 50% of emissions for voyages entering and leaving EU ports. Traditional fuel oil or marine gasoline needs to be mixed with biofuels to meet the standards. According to estimates, this year a TD25 route vessel designed with Eco and burning low sulfur oil will have a single voyage cost of approximately $35000 to meet regulations, which will soar to over $100000 by 2030 and approach $250000 by 2035. However, compliance calculations can be based on the entire fleet. This means that if the shipowner uses low-carbon intensity fuels such as liquefied natural gas, it can offset the emissions generated by other ships in the fleet using conventional fuels.
In April of this year, the 83rd session of the IMO Marine Environment Protection Committee (MEPC 83) established a net zero emissions framework. This framework introduces greenhouse gas fuel intensity standards and is complemented by a dual layer carbon trading mechanism, aimed at imposing carbon fees on high emission ships while rewarding low emission and zero emission ships. If the framework is approved at the MEPC meeting in October 2025, the violation costs will officially take effect from 2028. At that time, the compliance cost of a single voyage of an Eco type VLCC using low sulfur oil from AG to China will exceed $150000 by 2028 and approach the million dollar mark by 2035. Ships with excellent emission performance can receive surplus quotas for storage or trading. However, LNG, which is currently one of the mainstream low-carbon fuels, is expected to no longer meet the standards by 2031.
Looking ahead to 2026, the introduction of intensive environmental regulations will usher in a brief period of easing, but the compliance requirements of the EU Emissions Trading System will further increase, and the carbon intensity indicators of CII will also become more stringent. Although there are still variables ahead, if the IMO net zero framework is successfully passed in October, a positive signal for the industry is that the regulatory path for the next few years will eventually become clear.