Institutional Barriers to Decarbonising EU Shipping

Among the biggest challenges facing the shipping industry is how to continue functioning as a major trading route without damaging the environment and warming the planet. To address carbon emissions from maritime transport, the EU included the latter in its Emissions Trading System. Applying to large ships of 5000 gross tonnage and more, the ETS requires ships to cover their emissions by using allowances.

Depending on where the sailing happens, the ETS will apply to either all greenhouse gases emitted during the voyage (if all ports-of-call are in the EU/EEA), or only half of them (if ports-of-call are in the EU/EEA and third countries).

The ETS maritime will be implemented in stages, with a portion of emissions for which ships need to surrender allowances increasing each year: 40% of emissions reported in 2024, 70% of emissions reported in 2025, and finally 100% emissions reported in 2026 onwards.

These EU allowances (EUAs) are basically carbon credits that allow companies to emit a certain amount of CO2e. If verified emissions exceed EUAs, the excess amount needs to be covered by purchasing more EUAs from auctions (e.g. European Energy Exchange) or on secondary markets.

The inclusion of maritime transport in the ETS signals EU’s strong commitment to decarbonising shipping. However, the success of ETS maritime is hindered by institutional barriers identified through our interviews with key industry actors.

There are different kinds of institutional barriers that affect power dynamics between cargo owners (shippers) and vessel owners (shipping companies), and that impact emission-reduction strategies and decision making in the shipping value chain.

Learn more about them by expanding the headings below.

Institutional barriers

Actor eligibility

The barrier happens when rules and processes limit the ability of certain actors to play a meaningful role in governance.

Rules about who participates and how can become a barrier when actors critical to the effective ETS implementation, such as shippers, have limited opportunities to influence decision-making processes. A representative of the shippers association said in an interview:

“Shippers are not involved in decision-making and implementation processes. This makes it difficult for us to be heard on the subject, and there is no designated contact person... Lack of organisation on the part of [EU] institutions and/or ministries to answer clearly about the problems undermines the ability to implement concrete solutions within a defined timeframe. So, getting the right information, and making sure everyone plays the game is a problem”.

Lack of participation makes it difficult for this group to clearly understand how their challenges are being addressed. This creates fears and uncertainties about the future outcome of the ETS.

Actor roles and responsibilities

The barrier is caused by inadequate rules and processes for regulating the roles and responsibilities of governance actors.

Lack of clarity about roles and positions among actors limits their capacity to act on issues at the right time. It can create instances where powerful actors may take up an institutional role for which they are not authorised (Oberlack, 2017). For instance, the quest for green transition through greener fuels has sparked investment in research by shipping giants like Maersk, something that smaller shipping companies are not well-positioned to do. Such voluntary commitments to environmental performance and green transition may serve as a bargaining chip that gives shipping giants some leverage to pursue their corporate interests, allowing them to have a greater say in shaping the rules of the global shipping environmental policy agenda (see Adjei and Andrews, 2023, in the case of CSR from oil giants in Ghana). It may also blur the role of the state, or regulatory bodies in charge of providing directives on alternative fuels, as corporate bodies exert substantial agency.

A crucial question regarding the implementation of ETS measures in shipping is who is responsible for the green transition in this sector, and for paying for the extra EU allowances. Like the EU MRV, the ETS currently defines the responsible company “as the shipowner or any other organization or person, such as the manager or the bareboat charterer, which has assumed the responsibility for the operation of the ship from the shipowner” (Floden et al., 2024, p. 4). Shipping regulation focuses directly on ship owners. It gives them power to decide who should become the responsible company with regards to the ETS requirements.

Interview respondents indicated that instances where bareboat charterers or ship managers assume the role of the ‘responsible company’ may lead to split incentives:

“There tend to be split incentives for the ship owner and the shipper/shipping company that has assumed the role of the company responsible for managing the ship. For instance, when a ship owner needs to invest in the ship, but the fuel bill is paid by the charterer. In that case, the incentive for the ship owner to invest in alternative/energy-efficient fuels is reduced… also, there is a high risk that fuelling will occur outside the EU if the charterer is responsible for complying with the regulations”.

Lack of clarity as regards roles and responsibilities can be a barrier because, in the absence of clear rules on green transitions, or on who should pay for the cost of emissions, ship owners may have to bear the extra cost should a charter or shipper fail to comply with the ETS. Whilst the ETS assumes the ship owner to be primarily responsible for ETS regulations, it may also give undue power to ship owners to push emission cost to the shippers. All this creates confusion about the nature of the task and the specific outcomes being pursued, which may decrease motivation.

Actor control

The barrier is caused by a power imbalance which allows dominant groups to exert control over governance outcomes at the expense of those with less power.

The inclusion of shipping in the ETS is changing power distribution among actors. Large companies can impose their commercial priorities onto other actors in the shipping value chain (Lister, 2015). Interviews conducted by the case study team revealed that the power asymmetry that had existed in the shipping industry was not improved by the revised ETS. The new policy appears to be favourable to ship owners who can now pass on the cost of emissions to shippers/cargo owners. Interviewees referred to the ETS as ‘very carrier-oriented, less shipper-oriented’ measure, by indicating:

“The shippers/cargo owners are not involved in either the [ETS] decision making or implementation process. There is a strong feeling that the ship owners’ lobbying has a lot of impact on authorities. We’ve argued for a long time that there is a really strong imbalance of power between carriers and shippers. We have no way of getting back to a balanced relationship”.

Another respondent indicated that surcharges levied by ship owners are a clear manifestation of such imbalance:

“You don't know what those surcharges are made of. There is no way of getting to the bottom of those surcharges to really negotiate them with your contractor, which is the carrier [ship owner]. As such, you don’t have any leverage. This is the main issue for us”.

Claims about power imbalance were substantiated in a recent report by Transport and the Environment, which showed that large shipping companies are taking advantage of the ETS through various surcharges. Transport and Environment finds that European container shipping companies in particular are likely to make significant windfall profits by setting these surcharges higher than their ETS costs.

The issue of actor control and power imbalance among stakeholders in maritime transport is a barrier insofar as it gives big players the leverage to lobby, manoeuvre and select rules for their own benefit. The lack of transparency and traceability of surcharges reduces trust and cooperation needed to make progress on decarbonisation in shipping.

Actor accountability

The barrier happens when rules and processes are not working well enough to hold governance stakeholders to account.

The lack of transparency around ETS surcharges makes it difficult to hold ship owners accountable by shippers or charterers. One shippers' representative lamented in an interview:

“I think that the thing with the ETS is that it was bit obscure, for us, because we knew we had to bear the cost and we knew the consequences were coming, but it was the functioning and the whole implementation mechanism that was a bit obscure…We [shippers] know how it [ETS] is supposed to work, but in fact its more complicated than it should be. Do you know what exactly is the formula for calculating ETS? And do you know if this formula is common formula to every carrier?

Respondents argued that the lack of clarity in the calculation of the ETS surcharges on freights has given room for ship owners to manoeuvre their way into applying ETS surcharges without any clear explanations or justification.    

As the primary actors responsible for meeting the demands of ETS regulations, ship owners may implement various technical measures (e.g. hull and propeller cleaning, onboard power management) and operational measures (e.g. speed and routing choices, ballasting) to try and reduce carbon emission, and also make choices that best serve their interests. As indicated by a shipper in an interview:

“The ETS applies to trades going to and from Europe. Decisions are influenced by routing choices made by carriers [ship owners] as well as transshipment locations. Shippers do not have any power”. 

In terms of routing choices and the resultant surcharges, another respondent said:

“There is no agreed approach to invoicing regarding trade routes. Some shipping companies say that the EU ETS will apply to all services, comprising at least one port of call in the EU. Some only mention bookings for ocean journeys located in the EEA. Some say that each trade will have its own charging structure for inbound/outbound voyage. There is no consensus. It's really a mess”.

Although ETS seeks to help ship owners and ship managers to reduce emissions, it does not seem to be addressing well the complexity of power relations within the shipping value chain, especially between shippers and ship owners. The latter must pay for and surrender ETS allowances. Recent studies suggest that ship owners overcompensate for this responsibility by setting high surcharges for shippers. In addition, ETS may push vessel operators to seek transhipment hubs outside the European Economic Area (EEA) in order to avoid surrendering their allowances, a decision which could lead to carbon leakage and a revenue loss for the EU ETS (Pons et al., 2021; Wu et al., 2024).

Conflict mechanisms

The barrier is caused by a missing or underdeveloped mechanism or a suitable authority to effectively regulate, prevent and resolve conflicts among stakeholders.

Lack of conflict-redress mechanisms can create misunderstandings and objections among key actors in maritime transport, such as shippers/cargo owners and ship owners. In an interview with leaders of the shippers association, one respondent stated:

“We have no dedicated way of addressing our concerns about ETS. We just hope to find the right person who is willing to listen”.

Another respondent added:

“…We just need to make sure that it [surcharge] is calculated in the right manner; that would be the preferred way for us”.

Another representative of the shippers association compared the situation with the redress mechanisms between the EU and the US:

“You want a redress because you think that something that is claimed as a surcharge is used to cover something else or does not reflect a specific cost. In Europe, shippers somehow have less means of redress than their counterparts in America. Available avenues in the European Union seem to be limited to either the national judge or policy makers. Swaying the latter’s opinion may prove difficult given the prominence of large shipping companies. And without a sound economic analysis, which can be time-consuming and difficult, uncorroborated arguments against surcharges will carry little weight. In the US, they do this via the Federal Maritime Commission. Shippers can engage with it through a dedicated web page and, if necessary, share their concerns with a click of a button. By contrast, no similar institutional regulator is available in the EU for the ‘common shipper’.

The lack of an effective conflict redress mechanism is an institutional barrier because it limits shippers’ trust in the ETS system. It may further exacerbate unequal power relations in the maritime value chain e.g. between shippers and ship owners, between large shipping companies and small ones. Feeling hard done-by, sidelined actors may be less inclined to view ETS as an effective means to decarbonise shipping. Currently, the EU is lacking a suitable, cost-effective means of redress through which ‘common shippers’ can address their grievances about things like surcharges. In this regard, a note-worthy example is the Federal Maritime Commission in the US, which provides easily accessible avenues for shippers to raise their concerns.

Development and use of knowledge

The barrier is caused by inadequate provisions for equitable co-production of knowledge and a limited information supply on critical operational or policy-related decisions.

Lack of established channels for producing and communicating knowledge can limit social acceptance and effective implementation of marine policies. With regards to ETS, key barriers identified through interviews are a) marginalisation of relevant actors, such as shippers, and b) absence of established channels of communication, especially for expressing grievances. As one representative of a shippers association said in an interview:

“There is a feeling that shippers’ considerations, needs and rights are overall neglected. It seems that decision making is unilateral and we were not sufficiently involved in any legal aspects or regulatory improvements that had to be made”.

Another respondent added:

“What could be really useful is access to data. That is, quantifying the costs incurred by the ETS mechanism and the costs that are invoiced to shippers. This way we could see how much financial benefit is derived by carriers [ship owners] from the ETS. Currently, we have no visibility on that”.

Interview results suggest that power dynamic between shippers and ship owners are partly influenced by the lack of transparency surrounding ETS-related surcharges. The policy may be pursuing a noble aspiration to decarbonise shipping, but the way it is being implemented and communicated creates a lot of fear, mistrust and institutional ambiguity among actors (Van Leeuwen et al., 2012).

Scale of institutions

The barrier is caused by a mismatch between the scale of an issue and governance arrangements put in place to address it.

The EU ETS is a regional attempt to decarbonise maritime transport. However, given the scale of carbon emissions from shipping, the IMO is generally considered to be more appropriately positioned to deal with the global challenge (Shi and Gullett, 2018). The effectiveness of the ETS may therefore be undermined by a mismatch between the scale of the problem (global) and the scale of governance arrangements the EU has put in place to address it.

Several studies and position papers highlight carbon leakage and risks to competitive advantage of the EU (port) economy as potential negative impacts of the ETS implementation (ESC, 2024; Flodén et al., 2024; Wu et al., 2024; Wang et al. 2021).

These issues were highlighted by a shipper in an interview:

“Because of this European regulation, ships may choose to call at ports implementing a lower or no carbon pricing policy”.

The mismatch between the scale of carbon emissions from shipping and the EU-driven ETS gives room for shipping companies to manoeuvre in dealing with the ETS directive. The institutional barrier risks promoting evasive practices where shipping companies may call at non-EU/EEA ports to reduce their emission costs.

If cargo is loaded and unloaded between ports-of-call in the EU/EEA, 100% emissions are subject to the ETS. But if one of the ports-of-call is outside the EU/EEA, the ETS applies only to 50% of emissions. And if no cargo is loaded or unloaded in EU/EEA ports, but ships still dock there for repairs or refuelling (which aren’t considered port-of-call activities) before continuing their journey, then 0% emissions are subject to the ETS, even though the vessel was present at the EU/EEA port.

A study by Wu et al. (2024) shows that carriers/shipping companies may evade the ETS by adding a non-EU/EEA port-of-call to their journey. Furthermore, carriers have a stronger incentive to adopt the port-of-call strategy when the carbon quota price is high.

Whilst this practice may be legal, from an environmental perspective it means that carriers will likely cover more distance, emit more carbon, but then pay less or save their emission allowances from the whole route (Wang et al. 2021; Wu et al., 2024). Wu and colleagues conclude that the ETS may not always be effective in reducing emissions and may, in some cases, even increase carbon emissions.

Within the IMO, discussions focus on a more gradual approach to dealing with emission from shipping. MRV (monitoring, reporting and verification) of emissions is considered a necessary first step, while further efficiency improvements in ships, and market based mechanisms such as the ETS, are seen as measures to be implemented in the medium to long term.

Institutionalised incentives

The barrier is caused by inadequate or missing incentives (e.g. financial reward, increased autonomy, redistribution of powers) to embrace innovation.

Traditionally, ships have been powered using petroleum-based fuel oils with high sulphur content. To reduce pressure on the environment, alternative fuels, such as LNG (Liquefied Natural Gas), methanol, ammonia, hydrogen and biofuels, have been proposed as a replacement.

That shipping companies will immediately embrace alternative fuels (and other green technologies such as wind-assisted propulsion) is not a given, especially if incentives for doing so are weak. Companies would consider trade-offs between a) the cost of investing in new fuels and b) bearing the cost of the ETS, before making a decision – to switch or not to switch. If incentives to change are cost-prohibitive (i.e. alternative fuels are expensive), then shipping companies would rather pay the carbon tax. As one of the interview respondents noted:

“…If you have a price point of the ETS which is not that high versus the higher cost of adoption of new technologies, there is more incentive to pay tax than to embrace innovation. Financially, there's still no benefit to use biofuel, for example. The system is not incentivising carriers to switch. Using biofuel is more expensive than paying the [carbon] tax. If you [shipping company] now use biofuel, you will save a hundred per cent of the EU ETS because it's not going to be taxed. But you would pay considerably more for using biofuel than if you just paid tax. The ratio could be something like 150 to 20. Nobody [in policy] seems to care about that. If the situation continues, nobody is going to pay for it [biofuel]. This is market economics. That's a little bit of a challenge we are all facing in this kind of sustainability transition, I would say”.

Another respondent added:

“More incentives are needed to switch to new, sustainable vessels. If it’s too expensive to get the methanol ship into the market, companies might do it for publicity purposes, but not for real implementation.

The analysis of institutional barriers is based on the framework co-developed with PERMAGOV stakeholders.