EUROPE’s emissions trading system should have a higher carbon price and cover more voyages if it is to work better, new research has found.

The ETS is a positive step to ensure part of the shipping industry is subject to a carbon price this decade, says the London-based University Maritime Advisory Services.

But it warned that in its current form the European Union carbon market’s low price “may lead to unintentionally harmful outcomes” such as shipowners buying carbon allowances out of the sector instead of investing in efficiency technologies, though it could lead to some slower steaming.

“Reforms to its design such as an expanded scope, a sectoral emissions cap, and reinvesting revenues in shipping decarbonisation would all help build a stronger system able to generate meaningful emissions reductions in this decade,” according to the report.

It said even the record high of €66 ($74) per tonne for carbon was nowhere near the $173-191 per tonne needed to drive investments in zero carbon fuels.

“Given there’s this low, low price, there are a few ways the design could be improved,” said Sophie Parker, a principal consultant at UMAS and lead author of the report.

She said this could include restricting the buying of carbon allowances outside shipping or coupling the proposal with supply-side policies such as subsidies to spur uptake of zero-carbon fuels.

UMAS called for a sectoral cap on emissions and to reinvest more revenues into decarbonising shipping.

“Without these design features, it will be left to national governments to create the zero-emissions fuel infrastructure needed to kickstart the international zero emissions fuel market,” the report said.

Shipping’s inclusion in the EU carbon market is one of the proposals in the Fit for 55 package before the European Parliament.

It would from 2023 cover all voyages within the European Economic Area and half of voyages to and from it.

The World Shipping Council, a club of container lines that includes Maersk, is lobbying to exclude non-EEA voyages from the scheme, though other shipping groups are less opposed.

But the UMAS report, carried out for the Environmental Defense Fund Europe, found that even if the scope was increased to all extra-EEA voyages, it would still cover a small share of emissions since the most polluting ships spent relatively little time in Europe.

Bulk carriers, for example, represented more than half of emissions in the EU monitoring, reporting and verification scheme. The report found the ETS in its current form would cover less than 20% of their emissions, and less than 30% of emissions if all voyages in and out of the EAA were covered.

UMAS said the effective carbon price for globally trading ships was small relative to historic changes in bunker prices. If carbon dioxide cost $103 per tonne in 2030, the average effective global price would be just $22 a tonne, or about 20% of the ETS price level.

“A high carbon price is really important because of the known market inefficiencies,” said Dr Parker.

The ETS could spur uptake of liquefied natural gas-fuelled ships because of the low carbon price and the fact it penalised CO2 but not methane.

“The ETS’ exemption of methane emissions exacerbates the preferential treatment of LNG-propelled ships, which emit methane but have lower carbon emissions relative to high-sulphur fuel oil ships, and therefore are only marginally better at best than HSFO ships,” the report said.

This risked locking in fossil fuels and creating stranded assets, she said.

UMAS did not look at other aspects of the Fit for 55 plan, such as the FuelEU Maritime proposal to limit the carbon content of fuels.

An EU source said an impact assessment on the ETS in July found the same limited effect on reducing emissions, and it was FuelEU that was meant to drive more emissions cuts.

“It was always understood that ETS as such and on its own would not do the trick,” the source said. “We are looking at something like 90% decarbonisation delivered with FuelEU. The rest will need to come from the increased energy efficiency. And the only way to get that, you need a price on carbon.”

The effects of the ETS would be “relatively limited” early on because it allowed shipowners to abate emissions outside of shipping where it was cheapest, in recognition that shipping would not decarbonise overnight.

The EU Council will consider a progress report on Fit for 55 on December 9.