A Cat-and-Mouse Game at Sea: Evaluating the Effectiveness of the EU ETS on Maritime Shipping

• In Event: Double-Edged Swords? Trying to Decrease Carbon from Transportation

Abstract

As of January 1, 2024, the European Union Emissions Trading System (EU ETS) mandates that all commercial passenger and cargo vessels over 5,000 gross tons entering or departing ports in the EU and European Economic Area (EEA) must purchase European Union Allowances (EUAs) to account for their carbon emissions. While the policy is designed to reduce overall emissions, some shipping firms may adopt avoidance strategies—such as rerouting through non-EU ports or using smaller vessels below the tonnage threshold—to minimize their taxable emissions. Although these strategies reduce emissions within EU jurisdiction, they often result in longer voyages and higher fuel consumption, thereby increasing emissions globally. This raises critical questions about the true effectiveness of the policy and its implications for global equity.

 

Despite these concerns, empirical research on how the EU ETS influences avoidance behaviors in the shipping sector remains limited, especially regarding how these behaviors vary across economic cycles. Given the cyclical nature of the shipping industry, high freight rates and profits during boom periods reduce the relative burden of EUA costs, thereby weakening firms' incentives to avoid compliance. Conversely, during downturns—such as those triggered by trade slowdowns—firms face stronger pressures to adopt cost-saving avoidance strategies.

 

Building on this, we first conduct a cost-benefit analysis to evaluate the economic viability of three compliance strategies under different macroeconomic conditions: (1) continuing on the original route and purchasing EUAs; (2) upgrading onboard technologies to reduce emissions while maintaining original routes; and (3) adopting avoidance strategies such as rerouting through non-EU ports or transshipment. By comparing the relative cost-effectiveness of these options, we estimate the strength of firms’ incentives to engage in avoidance behavior across boom and downturn phases of the shipping cycle.

 

Subsequently, we integrate global Automatic Identification System (AIS) data on vessel movements from 2010 to 2024 with estimated carbon emissions, employing machine learning techniques to predict traffic volumes and route-level emissions under different economic scenarios. Based on these estimates, we simulate counterfactual scenarios in which 10%, 50%, or 80% of vessels adopt avoidance strategies—such as introducing non-EU stopovers to reduce their EUA-liable emissions. These simulations allow us to quantify how such behaviors may reduce emissions reported within EU borders while increasing emissions in global terms.

 

Preliminary results suggest that while the EU ETS reduces reported emissions within the EU, it simultaneously contributes to a rise in global emissions due to increased avoidance behaviors. Our findings also suggest that avoidance behaviors are more prevalent during downturns than booms.

 

These findings provide actionable insights for policymakers and supranational institutions designing regional climate instruments. Effective policy must anticipate strategic behavioral responses and guard against the emergence of unintended global externalities.

 

REF

European Union. Directive (EU) 2023/959 of the European Parliament and of the Council of 10 May 2023. Official Journal of the European Union, L 130, 16 May 2023, pp. 134–171. eur-lex.europa.eu/eli/dir/2023/959/oj.

Authors

• Hao HE, Fudan University
  Presenting Author

• Haoqi Qian, Fudan University
  Non-Presenting Co-Author