The introduction of a new EU environmental tax on shipping next year is expected to lead to more costly imports and higher export costs, the Malta Freeport has warned.

With all large cargo ships forced to fork out for their emissions when docking at EU ports from January, it is likely that carriers will simply avoid Malta altogether, Malta Freeport Terminals CEO Alex Montebello said.

This would “undoubtedly have a negative impact on local importers and exporters both in terms of connectivity and cost,” he warned, adding the country was especially vulnerable due to its small size.

His concerns have been echoed by the Malta Chamber of Commerce and the Malta Employers Association at a time when the country is grappling with unprecedented inflation.

With only a small domestic market, Malta was not able to levy economies of scale to attract stand-alone shipping, Montebello said.

As a vital Mediterranean trading hub, the large number of ships regularly calling in at the freeport had historically given Malta access to a vast network of other ports and led to lower shipping costs, he explained. 

But this competitive edge is now at risk of being lost due to the upcoming Emissions Trading System (ETS) that will kick off for shipping from January.

The system already applies to aviation and is part of a wider package called ‘Fit for 55’ which aims to reduce greenhouse emissions in the EU by at least 55% by 2030.

Under the new rules, all vessels above a certain cargo capacity will have to buy emissions ‘allowances’ on 40% of their carbon emissions. By 2027, this will rise to 100%.

Under the new rules, all vessels above a certain cargo capacity will have to buy emissions ‘allowances’ on 40% of their carbon emissions. By 2027, this will rise to 100%

Montebello said there was a “clear and evident risk” that carriers could avoid Malta to avoid being hit by the prohibitive costs, instead diverting to North African ports such as East Port Said, Tangier Med or Damietta.

“The inevitable consequences of this would be a significant loss of business for EU transhipment hubs,” he said, stressing Malta would be at a “grave competitive disadvantage” when compared to its North African neighbours.

The services currently operated by shipping companies CMA CGM and MSC not only provide Malta with direct connections to more than 115 ports worldwide, but also ensure the island benefits from lower transportation rates due to high volumes of transhipment traffic handled by the freeport.

Montebello stressed the loss of connectivity would have “serious consequences” for Malta, which depends heavily on manufacturing exports for its survival. 

Under the new rules, manufacturing exports are expected to incur higher freight rates, longer transit times and irregular services, he said.

Montebello also noted it would also be “relatively easy” for operators to avoid having to buy allowances by simply unloading goods from large vessels at a non-EU port and then ferrying them into the EU in smaller ones not liable for the tax.

Meanwhile, by sailing through European waters while on route to non-EU ports, large vessels will continue to pump out pollution in Europe while avoiding paying the very tax brought in to address the problem.

“The extension of the EU Emissions Trading System... will place ports within the EU at a clear competitive disadvantage... while failing to bring about any environmental benefits,” he said.

Montebello stressed that while the freeport supported finding climate-friendly solutions, these should not “distort” fair competition, and called on the European Commission to act swiftly to find a solution.

‘Consumers will be directly affected’

The new directive is a “heavy blow” to the Freeport, said Joe Farrugia, the director general of the Malta Employers’ Association.

“We are certainly worried; in fact, we called an urgent meeting about the issue,” he told Times of Malta.

“There is reason to worry. There might still be time to reverse it but, as things stand today, it doesn’t look good,” he said.

Echoing Montebello’s concerns about the potential impact to manufacturing, Farrugia warned the ETS directive could have wider implications.

He said inflation could occur because of possible reduced economic activity stemming from ETS, a concern shared by the Malta Chamber of Commerce.

There is reason to worry. There might still be time to reverse it but, as things stand today, it doesn’t look good- Joe Farrugia, director general of the Malta Employers’ Association

The chamber said the new regime would erode the country’s ability to compete internationally and would make supply disruptions likely.

“Ultimately, consumers will be directly affected,” a spokesperson said.

“Supply chain disruptions are likely to happen, translating in late delivery of consignments, including ‘just-in-time’ products, and an increase in prices,” he said.

The spokesperson added that while the chamber was “deeply concerned” by ETS, it believed Malta “could have possibly done more” while the issue was being decided. 

“We believe that, as a country, we often find ourselves lost in trivial political discussions while EU dossiers of vital importance and which profoundly affect us end up being overlooked,” he said.

Costs to operators

Recently, the European Commission moved to include Morocco’s Tangier Med port and Egypt’s East Port Said in the ETS directive. 

Their inclusion as ‘neighbouring container transhipment ports’ means voyages calling at the North African ports will still be subject to ETS charges, despite being outside the EU.

Transhipment refers to the unloading of cargo from one ship to another to complete a journey to a different destination.

Neighbouring container transhipment ports are defined as having at least 65% of their traffic dedicated to transhipment and being located less than 300 nautical miles from an EU member state’s jurisdiction.

According to the European Commission website, voyages from such ports to those in the EU will have 50% of their emissions fall under ETS. Journeys between EU ports will see 100% of their emissions fall under the regime. 

While Montebello said the Freeport welcomed the addition of East Port Said and Tangier Med, he called for more to be added to the list, stressing EU ports would lose out on long-haul voyages. 

According to estimates provided by the freeport, voyages from Singapore to Rotterdam via Malta could incur a staggering €23 million in ETS charges annually.

Meanwhile, carriers travelling via East Port Said instead could see their costs lowered to €18 million.

We need to anticipate and intervene on potentially damaging EU developments at negotiation stage, not after adoption- PN MEP candidate Peter Agius

The difference is starker for cargo runs between two non-EU ports, however.

While voyages from New York to the Indian port of Mundra could incur €13 million in annual charges if calling in at Malta, should a carrier decide to travel via East Port Said instead it will avoid ETS charges altogether.

“It is crucial that other measures and applications... are explored to ensure fair and similar treatment for all transhipment ports regardless of whether they are in or outside the EU,” Montebello said.

Responding to questions from Times of Malta, a spokesperson for the Transport Ministry said the government had successfully negotiated a number of “positive points” when ETS was being decided, including funding for Malta’s maritime sector.

“It is pertinent to note that industry still has concerns about this and there are submissions being made by several governments, including the Maltese government,” the spokesperson said.

Malta voted in favour of introducing the measure back in April at a meeting of the EU Agriculture and Fisheries Council, where it was represented by Agriculture Minister Anton Refalo. 

According to PN MEP candidate Peter Agius, who has been a vocal critic of the government’s negotiations with the EU on the matter, the case highlighted the need to bolster Malta’s representation in the bloc.

“We need to anticipate and intervene on potentially damaging EU developments at negotiation stage, not after adoption,” he said.