European Shipping Faces Cost Squeeze as Full Emissions Compliance Bites

The continent's shipping industry entered 2026 confronting a significantly more expensive operating environment, as the European Union's Emissions Trading System completed its phase-in, requiring carriers to purchase carbon allowances for the full scale of their emissions.

From 1 January, shipping companies calling at EU and European Economic Area ports must surrender allowances covering 100 per cent of verified carbon dioxide emissions, marking the culmination of a gradual implementation that began with 40 per cent coverage in 2024. The regulatory burden extends beyond carbon dioxide this year, with methane and nitrous oxide now falling within the scheme's ambit for the first time.

Industry analysts expect costs to rise sharply. Hapag-Lloyd has warned clients to anticipate surcharges increasing by approximately 45 per cent compared with last year's levels, whilst Fitch Ratings projects the expanded scheme will exert downward pressure on freight rates already weakened by oversupply in several segments.

The timing proves particularly challenging for container shipping, where capacity growth continues to outpace demand. Fitch maintains a deteriorating outlook for the sector in 2026, citing geopolitical instability and the prospect of renewed Red Sea transits, which paradoxically threaten to worsen overcapacity by reducing voyage distances and effectively increasing available vessel supply.

The inclusion of methane emissions presents acute difficulties for liquefied natural gas carriers, where engine "methane slip" creates compliance costs substantially higher than for vessels burning conventional marine fuels. Operators using heavy fuel oil must now account for nitrous oxide emissions, a greenhouse gas with warming potential 265 times that of carbon dioxide.

Concerns persist over transparency in how major carriers calculate and pass through ETS-related costs. A 2024 analysis by Transport & Environment suggested some operators generated windfall profits from surcharges, with Maersk estimated to have made €60,000 per voyage in excess charges on certain routes.

The regulatory tightening arrives as European ports compete with global rivals increasingly able to offer lower-cost alternatives outside the ETS framework.