Maritime transport, often seen as a model of efficiency, is also a major contributor to greenhouse gas emissions. With over 1,076 million tons of CO2 emitted annually globally, accounting for 2.9% of the world's annual emissions, its impact is comparable to that of France, Spain, and Italy combined.
Euro standards for emissions have changed, but what does that mean for farmers? Will they be the ones who pay the price? Let us find out.
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The EU's New CO2 Emission Policy: What it Means for Maritime Shipping and Agriculture
As of January 1st, 2024, significant changes have been made to CO2 emission policies in the European Economic Area (EEA). The European Union (EU) has expanded its scope by integrating maritime transport into its Emissions Trading System (ETS).
This measure affects all shipments including grains and oilseeds to and from EEA, requiring ETS CO2 credits to cover cargoes related emissions.
Grains and oilseeds, based on AXSMarine data, account for 25% of all CO2 emissions from Dry Bulk goods trades to and from EEA.
Impact on Shipping and Trade Costs
These new regulations are expected to increase operational costs for shipping companies, which will likely be passed down the supply chain. Sectors heavily reliant on maritime transport, including agriculture, energy, and manufacturing, may see higher shipping costs reflected in commodity prices.
For example, farmers exporting grains and oilseeds may face higher freight rates, potentially reducing profit margins and competitiveness in global markets. Additionally, the cost of imported agricultural inputs like fertilizers and equipment could rise due to increased transport expenses.
Calculating CO2 emissions for Grains and Oilseeds for EEA
Intra-EEA exchanges are assessed at 100% for maritime transport emissions calculation, while exchanges between the EEA and other countries, meaning imports and exports, are only considered at 50%. This approach aims to allow partner countries the freedom to legislate on the remaining 50% of voyages.
Intra-EEA trade for Grains and Oilseeds accounts for 17% of the total, so only for those 17% of emissions, the EU is considering 100% of the emissions.
For Trades from EEA (exports) and to EEA (imports), representing together 83% of the emissions, the EU will consider only half of the emissions on those segments. Notably, the ballast legs for picking the cargo in EEA are also taken in consideration.
The EU plans a gradual implementation of the scheme, considering 40% of emissions for the first year (2024), 70% for the second year (2025), and 100% for the third year (2026).
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From CO2 Emissions to Impact on Trading Houses and Cooperatives
In 2023, the average price of EU ETS credits was €85 per ton of CO2, while in February 2024, it was €53 per ton.
With an expected variation in 2024, shipping companies will need to prove the purchase of ETS to cover 2024 emissions by summer 2025, some companies have already begun sourcing at the current low rate, while others will source later in 2024 or even in the first half of 2025, meaning that the cost estimation remains a forecast at this stage.
Financial impact on grains and oilseeds, assuming an average ETS credit price of €85 per ton in 2024 (average price of 2023):
Below with an average ETS credit price of €53 per ton (price in February 2024):
The additional cost of exporting grains and oilseeds from EEA to partners countries in 2024, based on 2023 trades and voyages, would range between €37m and €59m, or an additional freight cost between €0.71 ($0.76) and €1.14 ($1.23) per ton.
For 2026, this would represent between €93m and €149 m in additional costs for exports from EEA, translating to an additional freight cost between €1.78 ($1.92) and €2.86 ($3.10) per ton.
In the wake of these changes, shipowners or organizations responsible for ship operation will need to purchase ETS credits to offset their CO2 emissions. This expense inevitably trickles down to the charterers or trading houses. As Mathieu Mervoyer, a shipbroker from Barry Rogliano Salles, explains, "While shipowners seek to cover CO2 emissions with credits, the costs are transferred to the charterers in all freight calculations."
On their side the charterers or traders will reallocate the extra costs depending on market trend, Sebastien Henry, a grain trader at The Andersons based in Lausanne (Switzerland) notes, "In a bullish market, buyers will absorb additional costs, but in a bearish market, farmers will end up supporting the cost to remain competitive."
This observation underscores the intricate dynamics at play, particularly in competitive markets like Romania, where farmers may bear the brunt of such costs to compete with non-ETS regulated counterparts like Russian exporters.
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How the EU's New CO2 Emission Policy Will Influence Farmers
- Higher Shipping Costs for Agricultural Exports
- Increased Costs for Imported Farm Inputs
- Competitive Disadvantages on the Global Stage
- Pressure on Food Prices
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- Need for Policy Support and Adaptation
1. Higher Shipping Costs for Agricultural Exports
With shipping companies now required to buy carbon credits for CO₂ emissions, freight rates are expected to rise.
Therefore, farmers exporting grains, oilseeds, and other bulk commodities could face higher transport costs.
Reduced profit margins may force farmers to either absorb the costs or increase prices. The latter may not be feasible in highly competitive global markets.
Smaller-scale farmers may struggle more than larger producers due to lower economies of scale.
2. Increased Costs for Imported Farm Inputs
Agricultural production often depends on imported inputs such as fertilizers, seeds, machinery, and animal feed.
Higher freight rates mean the cost of these essential inputs could rise, hence this could push production costs higher, potentially squeezing profit margins unless market prices for farm produce also rise.
3. Competitive Disadvantages on the Global Stage
Farmers in the EEA now operate under stricter, more expensive shipping conditions compared to regions without similar carbon pricing. Export competitiveness could decline if non-EEA producers can offer lower prices.
Meanwhile, imported agricultural goods might remain cheaper, potentially undercutting local farmers.
4. Pressure on Food Prices
As transport costs rise, food supply chains could become more expensive overall, and farmers producing for domestic markets may see higher costs for distribution.
Food processors and retailers may also attempt to offset these costs by squeezing farm-gate prices.
5. Need for Policy Support and Adaptation
Officials are under pressure to support sectors most affected by carbon pricing policies.
What’s more, farmers may need subsidies or tax incentives to offset rising logistics costs. Ultimately, investing in local sourcing or shorter supply chains could mitigate dependency on costly international shipping.
Additionally, exploring sustainable agricultural practices and renewable energy could lower production costs in the long run.
Impact on the future of EEA agriculture
On one hand, agricultural production costs may increase if inputs, such as fuels or fertilizers, are subject to emission quotas, potentially reducing farmers' profit margins.
On the other hand, transportation costs for agricultural products may also rise as maritime shipping companies must purchase emission credits to offset their CO2 emissions, resulting in higher freight rates.
Nevertheless, these policies also aim to stimulate innovation and the adoption of more sustainable agricultural practices, which could ultimately benefit farmers by reducing reliance on costly inputs and bolstering resilience to environmental challenges.
While ETS may initially pose economic hurdles for farmers, it could concurrently pave the way for a more sustainable and resilient agricultural future.
Most revenues generated by the EU ETS contribute to national budgets of the EEA states. Each state will allocate these funds, which will be received end of summer 2025 for the year 2024.
The funds will be given towards investments aimed at bolstering renewable energy, enhancing energy efficiency, and fostering the development of low-carbon technologies to further mitigate maritime transport emissions.
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In Conclusion
The surge in shipping emission costs driven by the EU’s updated CO₂ policies poses a significant challenge for farmers, potentially squeezing profit margins and increasing the price of essential imports.
Balancing environmental goals with economic viability will require policy support, supply chain adaptation, and innovative solutions to ensure that sustainability doesn’t come at the expense of agricultural livelihoods.
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