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The CO2 surcharge is coming

The shipping companies have started announcing the rates related to the upcoming EU environmental tax on maritime freight. But before we delve into that, it's worth taking a closer look at the current market situation.

Container Trade Statistics has released figures about container quantities in August 2023, and at first glance, it appears to be good news. Global cargo volumes, measured in TEU (Twenty-foot Equivalent Units), have increased by 3.7% compared to the same month last year. This is significantly better than the past 12 months, where growth ranged from a low of -10.6% at its worst to just 0.1% a month ago. In normal market conditions, a growth rate of around 3% would not raise eyebrows.

Is this growth typical

In a wider context, the interpretation of a growth rate of 3.7% is misleading. The percentage appears high because it is being compared to August 2022, the month in which the container volume had significantly declined. This means that in the next 5 months, we are likely to see very high growth percentages simply because we are comparing it to the very low figures of last year. However, if we instead compare August 2023 to August 2019, before the pandemic and the significant fluctuations in supply chains, we see that the volume has only increased by 4.3%. This amounts to an annual growth of only 1% over 4 years. In comparison, the capacity of the container ship fleet has increased by 20% during the same period.

In the decade before the pandemic, a handy rule of thumb was that container volume grew in line with the growth of the global economy, measured by the global gross domestic product (GDP). Since 2019, this has grown by 10%, meaning that the container market has 'lost 2 years of growth' since the start of the pandemic. This explains why freight rates are under pressure and, in some cases, lower than they were before the pandemic. However, not everywhere is experiencing slow freight growth. In the Indian subcontinent and the Middle East, the volume of export containers has increased by 25% since 2019, and imports have risen by 12%. The same is true for Africa, where exports have grown by 20%, and imports by 13% since 2019.

An individual shipper may experience very different market conditions locally than the global average. In the coming months, container shipping companies will need to cancel more sailings to counter the declining freight rates because the demand and supply ratio is not improving.

Uncertainty and challenges regarding the ETS (Emissions Trading System)

Last month, some shipping companies announced that they will introduce a new environmental surcharge starting in January 2024 in response to the upcoming EU Fee on CO2 emissions in the shipping sector, known as ETS. It is likely that other shipping companies will introduce similar surcharges.

The premise is that all shipping companies must report the CO2 emissions of their vessels and purchase corresponding carbon certificates. While this is new for the shipping sector, it has been the standard in many other industries in the EU for a long time. Shippers should not expect the costs and regulations to be uniform, for two reasons.

Multiple models for reporting CO2 emissions 

The shipping companies must report their CO2 emissions for 2024 at the beginning of 2025. After that, in September 2025, they are required to purchase carbon certificates through an auction where they compete with other EU industries. This means that shipping companies must pass on costs to cover the CO2 tax starting from January 2024, but they won't know the exact price until September 2025.

Another issue is that the tax applies to the entire ship, but the shipping company must allocate these costs across individual containers on the ship. Since a ship is not always full, questions arise about how emissions from empty spaces are distributed. This leads to many questions, such as what happens to shippers on the outbound journey (when the ship is full) compared to the return journey (when the ship is half-empty), and how emissions from empty containers between them are allocated. The questions themselves are not difficult, but the problem is that there are many ways to allocate this. If the total emissions of individual containers match the emissions of the entire ship, there are multiple allocation models possible. Shipping companies are already choosing different models, leading to variation in reported figures. Furthermore, freight forwarders and third parties are developing their own allocation models, but there is no scientifically correct model to allocate emissions at the container level since there are many choices, all of which are valid.

Shippers should not expect the new rates to be transparent or uniform. Instead, they should find an approach that suits their specific business. This may involve dealing with different types of fees or opting for a single model provider, such as a freight forwarder. However, it's important to note that comparing between freight forwarders can be challenging as they may also use different models.

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