The Malta Maritime Forum expressed concern about the “imminent risk” that major shipping companies pull out of Malta as a result of an environment tax that will be introduced in European Union countries as from next year.

There is a “likely scenario” in which Malta will lose its role as a transhipment hub, as shipping countries choose ports of call outside the EU where no such tax is paid, MMF CEO Kevin J. Borg said in an interview with The Malta Independent on Sunday.

The MMF, he said, acknowledges the truly commendable Climate and Environment objectives behind the EU’s Emission Trading Scheme (ETS), but current flaws in the implementation mechanism may unintentionally render it incompatible with Europe’s core principles and goals in favour of carbon neutrality.

The EU ETS stands as a fundamental element in the European Union’s strategy to address climate change, serving as a pivotal instrument for efficiently diminishing greenhouse gas emissions. It holds the distinction of being the planet’s inaugural significant carbon market and continues to be the largest of its kind.

The EU ETS Directive on Shipping obliges ships to surrender so-called EUAs (Emission Unit Allowances) to compensate for the carbon they generate while under sail. “But in the absence of a globally enforceable measure, ships that sail into EU ports will pay higher monetary costs in terms of EUAs and those that manage to avoid EU ports may avoid the provisions (and costs) of the directive altogether,” Borg told this newsroom.

The system, which is already in place for the aviation sector, forming part of a wider package, is known as Fit for 55. This is a European initiative which targets EU greenhouse emissions reduction by 55% by end of 2030.

According to the new regulations, ships with cargo capacities exceeding a specific threshold will be required to “purchase” emission allowances for 40% of their carbon emissions as of January 2024. This percentage is set to increase to 100% by the year 2027.

“The cost differential between EU and non-EU ports could stand at €34m per year, per each route served. This has been confirmed by major carriers while also reaffirming that such is the tight competitive scenario that a decision by any single carrier to incur the extra EUA cost could have existential consequences on the company as against others which decide to by-pass the directive. Clearly, this variance is prohibitive enough to force major shipping lines to seek alternative solutions,” Borg said.

He explained that the ramping up of capital investments by major shipping lines in container terminals to create TEU capacity in ports located in neighbouring non-EU Mediterranean countries (such as in Egypt and Morocco) is leaving no doubt that shipping lines are preparing alternatives to bypass the EU ETS regime.

Borg said that such investments are unequivocal signals that major carriers are being led to take irreversible decisions to omit EU transhipment hubs located in the Mediterranean and instead divert to a non-EU port like East Port Said and Tanger Med in order to by-pass the prohibitive costs imposed by this directive and use feeder vessels instead to ship cargo into the EU.

Transhipment is the process of transferring cargo from one ship to another via a terminal in order for the container to continue its journey to its ultimate destination.

Neighbouring container transhipment ports are those that handle a minimum of 65% of their traffic through transhipment activities and are situated within 300 nautical miles of a jurisdiction belonging to an EU member state.

The European Commission recognised the possibility of similar evasive practices elaborated above and attempted to address the situation through a corrective measure referred to as the Transhipment Rule.

In explaining what the rule is, Borg said that it was formed by the European Commission after it recognised that the directive could lead to “risks of transfer of transhipment activities outside the EU” by shipping vessels that could easily divert to these so-called “neighbouring” ports outside the EU to circumvent the ETS regulations and the new costs involved.

He said that, in response, the Commission introduced an Annex in which it listed two “neighbouring non-EU ports”, located outside the EU, that shall not be considered as a “port of call” in the counting of the ETS charges.

He said that if this transhipment rule wasn’t in place, shipping vessels which left from a non-EU port and had their final destination in an EU port, would stop in a neighbouring non-EU port and would therefore have a shorter distance to cover for the new European emission tax.

However, he said that the Transhipment Rule is completely ineffective as a corrective measure when journeys start and finish outside EU Ports (such as from Asia to the US) and only stop over for transhipment in the Mediterranean in North Africa.

Borg said that as things stand, the EU Commission will start reviewing the effects of business leakage every two years instead of five but even a review after two years will be too late because shipping companies’ investments and decisions to divert away from EU transhipment hubs will be devastating and irreversible.

The Italian Port Authority is referring to the effect of EU ETS Shipping as “the desertification of the transhipment terminals”.

“This rule is not sufficient to address the risks involved and the MMF submitted strong objections as part of the public consultation process undertaken by the EC last September. Furthermore, the MMF coordinated similar responses from other Maltese interest groups,” Borg said.

“The MMF, therefore, is gravely concerned about the imminent risk of major shipping carriers pulling out of Malta as a result of the provisions of the directive. In seeking to avoid the ensuing discriminatory conditions and prohibitive costs, shipping lines can still tranship containers in the Mediterranean by avoiding EU ports and shifting to competing ports in North Africa which lie in proximity where the same regulations apply differently or do not apply at all.”

“In this worst-case, but most likely scenario, Malta will lose its role as a transhipment hub with the catastrophic repercussions affecting not only Malta Freeport Terminals (MFT) but also European transhipment hubs such as Gioia Tauro, Valencia, Barcelona and Algeciras,” he said, adding that for Malta, the diversion of traffic to non-EU ports will mean a dramatic loss of connectivity because the domestic market for containerised cargo is not sufficient in terms of volume to attract stand-alone shipping services.

Suffice to mention that thanks to the attraction of the world’s five major shipping carriers to the Freeport, Malta today is connected to 165 other ports worldwide. The critical mass generated by the level of transhipment traffic at MFT and which translates into competitive freight rates for Maltese importers and exporters will be lost because the volume of domestic cargo does not economically justify a stop-over at MFT using mega carriers.

He said that the implications of the above on the wider Maltese economy are of grave concern given its dependence on export-led activity generated by the manufacturing industry. Malta-based factories have a two-fold dependence on maritime logistics in terms of shipping in the inputs and shipping out the finished/processed product. As a result of the current provisions of the directive, it is expected that they will incur higher freight costs (20-25% due to additional feeder leg), longer transit times (by as much as 8-10 days), irregular and unpredictable service (dependent on efficiency of North African transhipment hubs).

The forum continued to make strong representations with the ministers concerned, providing technical support to the government to take the necessary positions with the EU and other similarly-affected countries. Suffice to mention that through the forum’s backing, Malta’s government sent a joint letter to the Commission with the governments of Croatia, Cyprus, Greece, Italy, Spain and Portugal making clear, strong and urgent requests while offering workable recommendations.

At its level of national maritime clusters and industry associations, Borg said that the MMF is persisting with its demands to ensure that before the directive is implemented, all risks concerning both business and carbon leakage are addressed.

He said that as things stand, Europe is running strong risks of losing connectivity and business for its southern Mediterranean states and ports for the sake of protecting the environment from carbon emissions.

Referring to the directive, Borg said that: “We are going to serve other continents (outside EU) all the transhipment business which today is undertaken in southern Mediterranean EU member states (including Malta) on a plate to no environmental benefit whatsoever.

“Yes, it is ironic that through these measures, the emissions from ships in EU waters will increase because, notwithstanding the fact that mega carriers will affect their transhipment operations in non-EU ports, they will continue to transit the Mediterranean (hence EU waters) but:

  1. a) The mega carriers will need to deviate from the most efficient navigation course to call at North African ports instead of central Med terminals located in the EU (Malta and Gioia Tauro);
  2. b) Ships may need to increase power during the voyages to compensate for deviation delays; and
  3. c) Extra voyages required by feeder ships to transport EU-destined cargo from North African transhipment hubs to southern EU ports.”

Described as catastrophic repercussions on EU Mediterranean ports, Borg said that the MMF is calling for:

  1. a) The EU Commission to immediately and temporarily suspend the application of the directive on certain EU ports for container transhipment destined to third countries and originating from Non-EU ports pending proper ex ante risk assessment of business and carbon leakages and appropriate solutions found;
  2. b) In consultation with the main affected stakeholders, propose an alternative percentage computation method that ensures a successful implementation of the ETS Directive in a manner that ensures:
  3. Successful achievement of its desired and commendable climate-change objectives and,
  4. Continued and complete solidarity among all EU operators and member states while seeking to avoid any distortions in fair competition, business leakage and the very carbon leakages which the directive sets out to avoid.

Malta voted in favour of this directive back in April.

This article appeared in the Malta Independent on Sunday, 12 November 2023


Karin Grech
Author: Karin Grech