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The EU ETS is an emissions cap-and-trade system that aims to reduce greenhouse gas (GHG) emissions by setting a limit, or cap, on GHG emissions for certain sectors of the economy. The EU Emissions Trading System (EU ETS), established in 2005, was expanded to include maritime transport in 2023 with the new rules taking effect from 1 January 2024. For every ton of reported CO2 emissions, shipping companies operating in the EU must purchase and submit one European Union Allowance (EUA) annually. Operating in the EU is taken to include not only voyages between two EU ports and time spent in an EU port, but also voyages starting or ending at an EU port. Shipping companies must purchase EUAs to cover: • 100% of emissions from voyages starting and ending in EU ports. • 100% of emissions from vessels at berth in EU ports. • 50% of emissions from voyages which start or end in EU ports. EUAs can be bought and sold on exchanges like ICE, EEX, and Nasdaq, or through over-the-counter markets. The required number of EUAs must be bought before a vessel starts a qualifying voyage. Purchased EUAs are recorded for each owner on the EU registry account (a special account for EU ETS participants). At the end of each year shipping companies must surrender the appropriate number of EUAs (based on qualifying emissions in the year) to the appropriate authorities i.e. these are deducted from their registry account. Which vessels are covered under the EU ETS? 1. Commercial Ships of 5,000 gross tonnes or more, transporting cargo or passengers, that call at EU ports, regardless of flag or of the owner’s jurisdiction of incorporation. Offshore ships will be included from 1 January 2027. 2. Ice-Class Ships with ice-class IA, IA Super or equivalent, are granted a dispensation until 31 December 2030 that requires their owners to only surrender a reduced quantity of allowances (5% fewer than their verified emissions). How to account for EUA? •Acquired rights to emit harmful substances (including EUAs) are considered intangible assets. •EUAs should be recorded in the accounting books on the date of acquisition at cost price. •The acquisition date is when emission rights are recorded on the owner’s EU registry account •Subsequentially a shipping company can use either the cost or fair value method to revalue EUA (assets) •In financial statements (balance sheet), EUAs are listed separately under intangible assets, regardless of whether they were acquired for internal use or resale. •Emissions obligations (liability) are recognised when the liability is incurred (i.e. at the time of the voyage/port call giving rise to the liability). •The liability should be revalued at each accounting reference date and/or at the date of settlement Other issues to consider •Exchange and verification of emissions data •Purchasing and recording EUAs for vessels on time charter and settlements in respect of this between the charterer and the owner

The global shipping industry is on course to see its greenhouse gas emissions rise by around a fifth by 2050 if action, including introducing a carbon levy on fuel, is not taken, research by the independent Maersk Mc-Kinney Moller Center for Zero Carbon Shipping shows. With about 90 per cent of world trade transported by sea, global shipping accounts for nearly 3 per cent of the world’s CO2 emissions and the sector is under growing scrutiny to become cleaner. However, the study argues that decarbonisation over the next three decades would in fact be possible if action is taken to ensure that zero and low carbon fuels become economically viable and competitive to fossil fuels, and that this should be done sooner, rather than later. Fuel cost is a major part of total cost of ownership of the shipping operation. Fossil fuels are and will likely remain cheaper than alternative fuels without a carbon levy. Energy efficiency has significant potential to reduce energy consumption Some of the major shipping associations in September proposed creating a global levy on carbon emissions from ships to help speed up the industry’s efforts to go greener and submitted a proposal to the IMO. The Maersk Mc-Kinney Moller Center for Zero Carbon Shipping said such a levy could be introduced initially at as low as USD 50 per T of CO2, with the revenue raised being earmarked for first-movers in the industry to incentivise research and development of alternative fuels. The levy could then be gradually increased to USD 150 towards 2050. This comes as key climate talks are set to begin at the end of this month in Glasgow to tackle global warming under the 2015 Paris Agreement, with fossil fuel in policy-makers' crosshairs. Still, energy transition and peak demand predictions have spooked investors in oil, putting the prospect of peak production sooner than anticipated accompanied by wild price spikes. In the base case scenarios, oil demand is to peak just below 115 Mn bpd in 2030, then it plateaus for less than a decade before starting to decline. Similarly, the IEA expects oil supply to peak slightly above 100 Mn bpd in the 2030s in its most bullish scenario, while in its Announced Pledges Scenario, supply peaks in the 90 Mn bpd levels between 2020 and 2030, well below the 98 Mn bpd peak seen before the Covid-19 pandemic in 2030. Meanwhile, OPEC's annual outlook last month saw global supply nearing a plateau in 2045 but no clear peak. The medium-term erosion of oil demand supposes that renewable energies like electric cars and wind power gain pace, which the International Energy Agency says it needs to pick up fast in order to head off shortages and sky-high energy prices even more severe than the ones currently occurring. This comes as Saudi Arabia's crown prince said on Saturday that the world's top oil exporter aims to reach "net zero" emissions of greenhouse gases, mostly produced by burning fossil fuels, by 2060. However, Crown Prince Mohammed bin Salman also stressed the continued importance of hydrocarbons and said it would continue to ensure oil market stability. While such a statement might appear puzzling and counterintuitive, it is also true that today’s shortages of everything, be it energy, basic commodities and agriculture have, little to do with disruptions driven largely by the Covid-19 pandemic as many seem to imply. Instead, as Jeff Currie, Global Head of Commodities Research at Goldman Sachs said, the roots of today’s commodity crunch can be traced back to the aftermath of the financial crisis and the following decade of falling returns and chronic under-investment in the “old economy” – the economic model prevalent before the “new economy” characterised by central bank quantitative easing programmes to support markets. As infrastructure aged and investment waned, so did the old economy’s ability to supply and deliver the commodities underpinning many finished goods. The severity of these supply constraints has been underlined as countries have moved into recovery mode from the pandemic, exposing just how stretched the old economy has become. The pandemic also had a further effect, placing social needs more at the centre of policymakers’ agendas. Such inclusive growth has only accentuated the demand for physical commodities. And this is where the revenge of the old economy will leave its mark. Periods of commodity price pressure will reoccur as broad-based demand meets inadequate infrastructure. On the current path, if policymakers’ goals of broad-based prosperity and a massive buildout in green infrastructure are to be met, commodity prices can be expected to significantly overshoot to the upside in order to provide the incentive for investment. This is needed to compensate for the growing risks involved in long-cycle capex projects and the inherent complexities surrounding the green energy transition.