This presentation and the information disclosed in connection herewith is strictly

private, confidential, and personal to the recipients and should not be copied,
distributed or reproduced in whole or in part, nor disclosed to any third party.

CARBON MARKETS:
MANDATORY (EU ETS) AND VOLUNTARY (INSETTING)
Tobias Troye / Head of Carbon Solutions
CARBON MARKETS
PART 1: MANDATORY MARKETS (EU ETS)
CARBON MARKETS – THE BIG PICTURE
Carbon markets play a key role in combating climate change by providing a market-based mechanism and
financial incentive for organizations or countries to invest in projects that reduce emissions.

There are two different types of Carbon markets:

Compliance market: Companies purchase carbon credits to meet mandatory regulatory

requirements (e.g., EU ETS)

Voluntary market: Companies purchase carbon credits voluntarily to achieve their optional
sustainability goals (e.g., Net Zero), and are not subject to any mandatory regulations

3
THE EUROPEAN UNION EMISSIONS TRADING SYSTEM (EU ETS)
What is it
Launched in 2005, it is the world’s first/largest
multi-national regulatory program designed to limit
global warming by reducing greenhouse gas (GHG)
emissions, covering ~40% of EU’s total emissions.

How it works
By putting a price on carbon emissions, it incentivizes companies to adopt new fuels, technologies and
processes that reduce emissions.
Uses a “cap-and-trade” system: Each year, a limited amount of EU Allowances (EUAs) is made available
for trading in the market. Each EUA gives companies the right to emit the equivalent to one ton of CO2.
After each year, companies must buy and surrender enough EUAs to fully cover all their emissions, or
face significant fines.
4
EU ETS: REGIONAL SCOPE
The EU ETS covers 100% of emissions on voyages and port calls within the EU/EEA, and 50% of emissions on
voyages into or out of the EU/EEA, are subject to the EU ETS.

Port of call:
Source: DNV, EU
A port where a ship stops to
ETS – Emissions load/unload cargo or
Trading System
passengers.

To prevent evasive behaviour:

Neighbouring container
transshipment ports within
300nm from an EU port, where
transshipment operations >65%
of total traffic, will be included
(50% of voyages, e.g, East Port
Said and MedPort Tangier likely
to be included).

5
EU ETS: VESSEL SCOPE
EU ETS initially covers cargo and passenger vessels sized 5000GT+, and is phased in during the first 3 years.
Shipping companies are already required to report emissions annually under the EU MRV regulation. This
data is used to determine the allowances they need to surrender

COMPLIANCE
SCHEME 2023 2024 2025 2026 2027 2028 2029 and onwards

ETS N/A Cargo & Passengers Cargo, Passengers & Offshore Vessels
TYPE OF VESSEL
MRV Cargo & Passengers Cargo, Passengers & Offshore Vessels

ETS N/A >5000GT >400GT and Offshore 1)

SIZE OF VESSEL
MRV >5000GT >400GT (General Cargo and Offshore vessels)

ETS N/A 100% intra EU/EEA, 50% in&out EU/EEA

GEOGRFICAL
SCOPE MRV 100% intra EU/EEA, 50% in&out EU/EEA 100% intra / in&out EU/EEA 2)

ETS N/A 40% 70% 100%

PHASE-IN TIMELINE
MRV 100%

ETS N/A CO2 CO2, Methane(CH4) & Nitrous Oxide (N2O)

GHG SCOPE
MRV CO2 CO2, Methane (CH4) & Nitrous Oxide (N2O)

1) To be discussed in 2026 2) to be decided in EU review before 2028

6
 Who is responsible
EU MRV AND EU ETS COMPLIANCE CYCLE for surrendering EUAs
and comply with EU ETS:

1 Jan - 31 Dec 2024 • The company that has

assumed from the shipowner
operational duties and
MRV reporting period
responsibilities for the ship,
imposed by the ISM Code, an
IMO standard for the safe
operation of ships and for
1 April 2024
pollution prevention
Submit new verified
Monitoring Plan to • This company is referred to as
administering authority the Document of Compliance
(+N2O and CH4) (DoC) holder and is the same
To do every year
company that is currently
responsible for reporting
30 September 2025 31 March 2025 emission through EU MRV
Deadline for
Deadline for reporting • Often the DoC Holder will be
MRV ship reports and
surrendering EUAs the Technical Manager
company ETS report

HOWEVER, this is not yet set in

stone…
7
EU ETS: COST IMPLICATIONS FOR SHIPPING
EUA PRICE DEVELOPMENT EUA PRICE EXAMPLE WITH FUEL
ASSUMPTIONS
Oil price EUA price EUA’s per Phase in
in USD in USD ton per year
590 100 3.2
40-70-100%
$/MT $/EUA EUA/MT

Today 2024 2025 2026

Phase in 0% 40% 70% 100%

Oil price per ton $590 $718 $814 $910

New price
(when fully phased in & = $590 + (3.2 * $100)
EUA’s are traded in a The amount of EUA’s are EU can regulate prices by sailing intra EU)
closed system reduced by 4% / year remove or add EUA’s
8
Fuel price EUA’s per MT EUA price
 EU ETS: CONTRACTUAL IMPLICATIONS
DoC holders must report and surrender EUAs to EU authorities. But they’re often not responsible for fuel choice, vessel route
or speed: “Polluter pays principle” allows them to pass compliance costs on to entities directly responsible for emissions.
This needs to be addressed through contracts between value chain parties. BIMCO has a suggested clause for EUA
settlement between Ship Owners & Charterers (for TC) and will develop more clauses (for VC) to create more legal certainty,
but all parties need to familiarise themselves with the EU ETS and what this potentially means for them - before Jan 2024.
Source: DNV, EU
ETS – Emissions
Trading System

(DOC Holder /
Technical Mgr)
THE EUA MARKET AND UNION REGISTRY
THE EUA MARKET
EU ETS today includes 15,000 industrial/energy installations and 1500 aircraft operators in 31 EU/EEA states:
➢ 2021 Verified emissions were 1.3 bn tonnes CO2. Shipping will bring an additional 80 million EUAs to market in 2024
➢ EUAs are brought to market via auctions (57%), the rest via free allocation.* (Cap reduces by 4% p.a.)
➢ The EU regulates supply of EUAs via the “Market Stability Reserve” to ensure stable prices

THE UNION REGISTRY

➢ Companies must have a Union Registry account to hold, transfer and surrender EUAs.
➢ Complex and time consuming to set up, especially for non-EU based companies (1-2 months)

* Shipping will NOT receive any free allocations, due to “phase in” approach (40%/70%/100%).
 UNION REGISTRY ACCOUNTS
Companies must have a Union Registry account to hold/transfer EUAs. There are two types of accounts:

Operator Holding Account (DoC Holders only*) Trading Account

➢ Companies subject to the EU ETS (operators) must
open an Operator Holding Account
➢ Tracks all Installations (vessels) operators are
responsible for, including their emissions
➢ Can transfer EUAs to/from any other accounts
➢ Are used to surrender EUAs (end of compliance year)
➢ It is also possible for other companies (not subject to
EU ETS) to buy or sell EUAs
➢ BUT, EUAs are financial instruments under EU MiFID 2:
• Investment services/activities requires authorisation
• Companies buying for own requirements are exempt
➢ Can transfer EUAs to/from any other accounts
➢ Can not surrender EUAs

The European Commission will only publish a list of shipping companies (DOC Holders) and which EU country they
should register in by earliest 1 February 2024.
“Maritime Operator Holding Accounts” will only become available after that, so if any shipping companies want to
trade EUAs before then, they need to open a Trading Account (complicated for non-EU registered companies).
 ACQUIRING EUAS
Union Registry only registers transfers of units, so buyers/sellers must be found elsewhere.
Primary Market:
The European Commission auctions EUAs via the European Energy Exchange (EEX). 1-3m EUAs per auctioned
(min. lot size 500 EUAs).
• Top10 participants account for 90% of volumes auctioned in 2021* (significant costs/admin, limited value)
Secondary Market
EEX and ICE also offers spot, futures and options (min. lot size 1000 EUAs), but complexity (e.g., registration
requirements, regulation, risks, margin mgmt., clearing, etc), costs and admin are significant.
• As a result, most compliance buying happens bilaterally via financial institutions (spot, forwards and
options), who in the EU are subject to prior authorisation under MiFID 2, and EMIR requirements.

MiFID 2 (Markets in Financial Instruments Directive): regulates financial markets to protect investors. Requires transparency of costs and transactions recording.
EMIR (European Market Infrastructure Regulation): EU law to reduce risks to financial system by derivatives transactions. Requires reporting and risk management obligations.
WHAT OUR CLIENTS ARE ASKING US

1. How will the EU ETS impact us

2. Operational requirements: responsibilities and contractual agreements across the value chain
3. Registry Accounts: how do we get set up / how do they work (Registry Guidance)
4. EUAs:
1. How do we calculate volume requirements
2. How do we purchase/trade them
3. Purchase strategy (timing, spot, forward, etc)
4. How do biofuels reduce EUA requirements / impact overall economics. And what about FuelEU
Maritime (from 2025)?
5. What should we do now / how do we get set up and buy EUAs from you
EU ETS Q&A
CARBON MARKETS
PART 2: VOLUNTARY MARKETS (INSETTING)
CARBON MARKETS
There are two different types of Carbon markets:

Compliance market: Companies purchase carbon credits to meet mandatory regulatory

requirements (e.g., EU ETS)

Voluntary market: Companies purchase carbon credits voluntarily to achieve their optional
sustainability goals (e.g., Net Zero), and are not subject to any mandatory regulations

16
VOLUNTARY CARBON MARKETS | THE BIG PICTURE
Voluntary markets How are emissions measured?
A cargo owner who wants to reduce emissions from their Scope 3: Scope 2: Scope 1: Scope 3:
maritime transportation has 2 options: Indirect Indirect Direct Indirect
emissions emissions emissions emissions

Offsetting Insetting
Emissions Emissions Emissions
from from Emissions from use of
purchased electicity, from assets sold
Clean fuel
goods and heat and owned or product
services steam controlled
puchased by the
by the reporting
reporting company
Transportation company
Retrofit and Transportation
Business and distribution
distribution
travels
Compensation for climate Funding decarbonization
impact by funding a carbon measures within the sector
reduction project outside the where the emissions originated. Up-stream Down-stream
Company activities
sector of impact Also called a “book and claim” activities activities
system.

17 Source: Smart Freight Centre, white paper Nov. 2020

CARBON INSETTING | WHAT IS IT? (1/2)
What
Enables more shipping emissions reductions to occur by transferring CO2 savings between vessels.

Why
Supply constraints for new fuels (i.e., biofuels) means only select voyages can use it. Insetting enables
vessels to “de-couple” new fuels used on one voyage and allocate them to a fossil fuel voyage where
cargo owners want to reduce their maritime Scope 3 emissions. Thus, Insetting plays a key role in
accelerating usage of new fuels by connecting demand and supply of green freight demand.

Benefits:
The funds paid by Scope 3 buyers reduces the cost of new fuels, making them competitive to fossil fuels.
This means more carriers are able to use new fuels, significantly contributing to decarbonize the marine
transportation industry.

18
 CARBON INSETTING | WHAT IS IT? (2/2)
Illustration of insetting in shipping
Sustainability
Claim:
Scope 1
claims
No scope 3
claims
Benefits:

• Receives biofuels at a discount

Voyage 1:
• Receives verified Scope 1 emissions reductions
Using Biofuels
Biofuel Physical delivery Shipowner/ Cargo owner Shipowner/ that can be used for sustainability reporting
Storage and/or trader operator user/operator • From 2024*, Scope 1 reduction can be used to
(Voyage 1) - reduce EUETS EUA obligations
Register Insets - improve CII score
- claim compliance with FuelEU maritime
(from 2025) based on the biofuel delivery
• Freight Forwarders receive verified Scope 3
emissions reductions that can be used for
sustainability reporting
Sustainability No scope 1 Scope 3 * Regulatory changes may impact this
claim: claims claims

Voyage 2: • Pays premium to receive verified Scope 3

Using Fossil fuels emissions reductions that can be used for
sustainability reporting
Fossil fuel Physical delivery Shipowner/ Cargo owner Cargo owner
Storage and/or trader operator (Voyage 2)
19
KEY SUCCESS FACTORS
Inset Ownership
Who owns the environmental benefits of Insets claims must be agreed. Contracts need to be signed regarding
Critical who owns Scope 1 claims and who owns Scope 3 claims, and how these reductions can be communicated.
Inset Credibility
success It is critical to use globally accepted marine Inset methodologies (e.g., Smart Freight Centre) and thorough 3rd
factors party verification (e.g., Bureau Veritas) to ensure fuel-switch and Inset credibility and accountability.
Inset Transparency
Origin, allocation, registration, transparency and traceability of Inset claims is paramount.

Quality and Trust Framework Blockchain-based Platform Transparency

• Follow and ensure compliance
How we with globally recognised
frameworks
Smart Freight Centre, GLEC,
ensure it GHG Protocol, ISCC, RSB
• Assurance
All Insets verified by third parties
e.g., Bureau Veritas, to ensure
credibility
• Full chain of custody of insets
fuel supplier, carrier, forwarder,
cargo owner
• Secure platform
Based on Smart Freight Centre on
Book & Claim, Central registry
and administration
• Legal toolkits
Contracts for Inset ownership
• Guaranteed ownership
Insets are immutable, e.g., no
double counting
• Full transparency
Proof of Sustainability, proof of
fuel delivery, consumption,
verified CO2 saving data,
emissions calculation, data for
inset reporting

20
 GLOBALLY RECOGNISED METHODOLOGIES FOR MARINE INSETTING
In 2013, Smart Freight Centre (SFC) was founded as a global non-profit organization for climate action in the freight sector.
They provide the knowledge, leadership and latest methodologies to guide over 150 multinational organizations collaborating for a sustainable
freight sector. The initiatives of the Smart Freight Centre include:

21
INSETTING Q&A
THANK YOU