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Expert Column Emissions Trading System (ETS) and Its Impact on Logistics Industry

Registration dateMAY 31, 2024

Emissions Trading System (ETS) and Its Impact on Logistics Industry
Toward Sustainable Transportation As international efforts to combat climate change accelerate, emissions trading system (ETS) is emerging as a key policy instrument of governments around the globe. This system is also having a major impact on the logistics industry, which is why shippers need to develop strategies to respond accordingly.

The logistics industry, which provides services related to international trade and transportation, plays a pivotal role in the smooth flow of goods between countries and domestic and international trade. As a key component of the global economy, the industry is a complex network of interconnected stakeholders. However, the logistics industry inevitably generates carbon emissions during the process of transportation, storage, loading, unloading, and packaging of goods. As the industry is closely tied to various industries, it may be difficult to collaborate with manufacturing and distribution companies when environmental issues arise. Therefore, logistics companies need to act as collaborative partners in the supply chain while working to reduce carbon emissions.

The ETS is a market-based mechanism designed to regulate and curb carbon emissions by trading carbon credits. The logistics industry has a direct and indirect impact on the environment, including carbon emissions, and is thus making efforts to counteract these environmental impacts. We need to build a sustainable logistics system, innovate technologies that can reduce carbon emissions, and actively communicate with stakeholders to build a sustainable logistics industry. The logistics industry plays a pivotal role in our economic activities, but at the same time, it is one of the main origins of environmental problems.
Illustration of Emissions Trading System (Source: Baidu)
What is Emissions Trading System (ETS)? An emissions trading system (ETS) is a market-based policy instrument that sets a cap on total greenhouse gas emissions and allows companies to trade their allocated allowances. In this system, the government only allows a certain amount of GHG emissions, and companies that exceed the cap must purchase additional credits from the market, while companies that emit less than their cap can sell their remaining credits to the market, resulting in an overall reduction in GHG emissions. The idea behind a cap-and-trade system is to achieve greenhouse gas reduction goals through this process.

Carbon credits are composed of allowances and credits. An allowance is a greenhouse gas emission license granted to major emission sources such as power plants and manufacturing facilities within the total greenhouse gas emission cap set by the government for each industry sector. Cap-and-trade system operates on a cap-and-trade basis. Companies can either buy allowances in the market to cover their shortfall or sell surpluses to secure credits to submit to the government. This process creates a price based on the supply and demand for credits, and companies choose to invest in abatement when it is more cost-effective to abate emissions than to buy credits. The result is a system that controls overall GHG emissions while minimizing costs because reductions are driven by market forces.
Illustration of Emissions Trading System (Source: Ministry of Environment)
Credits, on the other hand, are emission permits issued for reductions from business as usual (BAU) through GHG reduction projects such as the Clean Development Mechanism (CDM). Companies can purchase credits to make up for any shortfall in their quota.

According to the International Carbon Trading Partnership, there are 28 emissions markets in operation globally as of 2023. Another eight are under development and 12 are under consideration. The largest market is the European Union (EU) ETS, with national programs in China, the United Kingdom, and Germany. South Korea has been implementing a cap-and-trade program since 2015. What Major Logistics Companies Are Doing Carbon taxes and carbon credits are expected to have a significant impact on the logistics industry, as these regulations are directly related to logistics costs.

Green transportation is one of the major issues for logistics companies, who are minimizing environmental impact by switching to low-carbon and eco-friendly transportation and optimizing resource utilization. This is how the logistics companies realize environmental protection and sustainable transportation. They are striving to save energy and reduce carbon emissions by converting road and maritime transportation to eco-friendly means and increasing the loading rate of transportation vehicles through logistics pooling.

Major logistics companies in Korea are responding to climate change through ESG management strategies and implementing a roadmap to become carbon neutral by 2050. To achieve this, they are implementing carbon reduction activities through transportation efficiency, using eco-friendly transportation, building energy efficiency, introducing renewable energy, concentrating logistics bases, switching to rail transportation, improving vehicle loading rates, building green logistics information system, real-time vehicle monitoring, and optimizing transportation.

Specifically, logistics companies are trying to reduce carbon dioxide emissions by introducing eco-friendly vehicles such as electric cargo vehicles and hydrogen vehicles. They are also minimizing environmental burdens by introducing eco-friendly packaging and distribution processing, and promoting the reuse and recycling of products through reverse logistics to reduce carbon dioxide emissions and solve the waste problem. Some warehouses and facilities have installed solar power systems to utilize renewable energy to generate their own power, reduce carbon emissions, and realize environmentally friendly operations. As climate change and carbon emissions are becoming increasingly important issues around the world, logistics companies are setting goals and making efforts to realize them, including reducing emissions and becoming carbon neutral.

Shipping companies are facing increasingly stringent environmental regulations and pressure from market stakeholders to decarbonize. Public sector environmental regulations such as the International Maritime Organization's (IMO) Energy Efficiency Existing Ship Index (EEXI) and Carbon Intensity Indicator (CII) regulations, carbon emissions trading schemes, and FuelEU Maritime are gradually strengthening, and large shippers and financial institutions are actively demanding eco-friendly transportation. Shipping companies are under pressure to decarbonize not only from the public sector, such as the IMO and the UNFCCC COP, but also from private sector initiatives such as the Getting to Zero Coalition, the First Movers Coalition, the shipper-focused initiatives coZEV (cargo Owners for Zero Emission Vessels) and ZEMBA, and the Ship it Zero campaign founded by 17 environmental organizations.

Global shipping companies are taking a variety of strategic measures to address this challenge. Among them are improving fuel efficiency by installing energy-saving devices (ESDs) and using alternative fuels. However, since ESDs have limited mitigation potential, most carriers have opted to use alternative fuels, primarily LNG-fueled for newbuildings, and some container carriers have begun ordering methanol-powered vessels.

Maersk ordered the world's first methanol-powered vessel in 2021 and has partnered with several suppliers to establish a methanol supply chain. MSC is on track to introduce 51 LNG and ammonia-powered container ships by 2026. CMA-CGAM has ordered 18 methanol-powered vessels and seven biogas container vessels, and plans to expand its fleet to 44 LNG-powered vessels. COSCO has also ordered 12 methanol dual-fuel container vessels.

HMM has established short-term measures to achieve carbon neutrality by 2050 and a medium- to long-term GHG reduction roadmap. Short-term measures for the existing fleet include power limits and maximum speed reductions for non-EEXI compliant vessels in response to the Energy Efficiency Existing Ship Index (EEXI) regulation. In response to the CII regulation, the company is developing a CII real-time monitoring system, reducing ship speeds, adjusting routes, installing EDS (energy reduction devices), using biofuels, and retrofitting existing ships. In the mid- to long-term, the company is developing bio heavy fuel oil, hydrogen fuel cells, and onboard carbon capture technology, and plans to invest KRW 15 trillion in eco-friendly businesses by 2026. In the newbuilding sector, the company has ordered two LNG-DF (dual-fuel) ships of 7,700 TEU in 2022 and nine methanol-DF ships of 9,000 TEU, and plans to order alternative fuel ships such as LNG, methanol, ammonia, and hydrogen in the future.

As such, global shipping companies are making multifaceted efforts, including technological innovation, new investments, operational improvements, and strategic planning, to proactively respond to the EU ETS in an attempt to minimize regulatory risks and secure long-term competitiveness. Impact on Shippers First, increased logistics costs
The increased costs of logistics companies will be passed on to shippers under the emissions trading system. In addition, shippers that operate second-party logistics will have to purchase emission allowances directly, which will increase their logistics costs even more. This will lead to an increase in product costs, which may cause a decrease in corporate profitability. Furthermore, the increase in the price of emission allowances may also make shippers less competitive due to increased costs. Since January 1, 2024, CMA CGM has been collecting 25 euros/TEU (Dry) and 38 euros/TEU (Reefer) from shippers for the EU ETS surcharge on the Asia-Nordic route. This is based on the EUA price of 90 euros, and the surcharge is likely to increase if the EUA price rises in the future, further increasing the logistics cost burden on shippers. As Korea relies on maritime transportation for 99.7% of its import and export cargo, any increase in the cost burden on the shipping industry, such as the emissions trading system, could lead to a rise in Korea's import and export logistics costs and weaken trade competitiveness.

Second, the supply chain needs to be reorganized
Shippers also need to reorganize their supply chains to reduce emissions throughout the life cycle of their products. The entire process of purchasing, production, storage, transportation, and sales needs to be energy-efficient and environmentally friendly. As carbon emissions regulations become more stringent, the use of low-carbon transportation is inevitable. Modal shift, or the shift to greener modes of transportation, is important because it requires the restructuring of existing supply chains. This will increase the complexity and cost of supply chain operations.

Third, investing and staffing for compliance
Implementing an emissions trading system requires shippers to bear the costs of purchasing emissions credits, investing in emissions reduction technologies, and monitoring emissions. It also entails investments in systems, processes, and personnel. R&D investments in eco-friendly packaging, product design, and process improvements will also increase.

Fourth, responding to changing consumer demand
Increasing consumer awareness of climate change issues is driving demand for eco-friendly products. Shippers will need to improve their products and services to meet customer needs. This requires efforts such as using eco-friendly raw materials, promoting recycling, and managing product life cycles.

Fifth, advanced carbon emissions monitoring and management
To manage carbon emissions throughout the life cycle of a product, it is essential to have the ability to measure, collect, and analyze data. It is necessary to have an integrated system to manage emissions from domestic and overseas business sites, suppliers, and logistics. Based on this, emission reduction activities should be carried out and relevant information should be transparently disclosed to customers and investors. Proposal for Development of ETS and Logistics Industry The implementation of the Emissions Trading System (ETS) will inevitably lead to cost pressures and operational changes in the logistics industry in the short term. However, this will ultimately be a transition period to realize green logistics and improve cost efficiency. If governments and companies respond proactively, they will be able to secure the green transformation and sustainability of logistics as a whole.

In the short term, both logistics companies and shippers will face high costs and operational burdens to implement the ETS. In the case of logistics companies, transportation costs will likely increase due to the cost of purchasing emission credits, huge investment costs to build eco-friendly transportation and logistics center infrastructure, and difficulties in reorganizing existing transportation networks.

Shippers are also concerned that rising logistics costs will be passed on to the cost of products, resulting in a deterioration in profitability. In addition, to reduce greenhouse gas emissions throughout the supply chain, including production, storage, and transportation of products, they will need to rebuild transportation networks and develop eco-friendly products and services. Investment and specialized human resources are also essential. The industry will also face new challenges, such as meeting growing consumer demand for eco-friendly products and measuring, managing, and disclosing life-cycle carbon emissions data.

In the long run, however, ETS will provide the logistics industry with new opportunities for growth and a shift to greener business models. For starters, it will reduce transportation costs by optimizing the weight and volume of products. By developing eco-friendly products and services, companies can meet the environmental demands of customers and enhance their corporate image and competitiveness. There are also opportunities for long-term cost savings by increasing energy efficiency and switching transportation modes. Most importantly, companies can proactively secure their future competitiveness by investing in green technologies and processes and expanding R&D in preparation for increased environmental regulations.

Most importantly, companies should actively recognize and utilize the ETS as a new business opportunity, not just a regulation. They should bear the short-term burden and effort, and take the long-term perspective as a breakthrough to realize green logistics and improve cost efficiency. This will accelerate the logistics industry's transition to carbon neutrality and a circular economy and lay the foundation for sustainable growth.

YoungSoo Kim Professor YoungSoo Kim Professor

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