Emission surcharge in the European Union Emissions Trading System: A competitive analysis for shipping companies

In the European Union Emissions Trading System (EU ETS), shipping companies operating on EU-regulated routes (intra-EU and extra-EU voyages) are required to purchase EU allowances (EUAs) for greenhouse gas (GHG) emissions. This regulatory shift has catalyzed two effects: (1) the structural reconfiguration of operational cost frameworks, and (2) the introduction of an emission surcharge (EMS) as a pricing instrument independent of the base freight rate. The EMS is redefining competitive paradigms, shifting market rivalry from conventional freight rate competition to full price (EMS + freight rate) competition that incorporate environmental cost internalization. By employing a surcharge competition model involving two heterogeneous shipping companies (a large one characterized by greater capacity with superior service and high freight rate, and a small one characterized by relatively limited capacity with inferior service and low freight rate), this study explores the EMS pricing strategies, and examines the surcharge competition, the full price competition, and the effect of EMS on the performance outcomes. It further incorporates shipper sensitivity to EMS, as shippers, being key stakeholders in the shipping supply chain, can significantly influence surcharge strategies through their varying levels of EMS sensitivity. The analysis reveals several key findings. First, if a competitor exits the market due to high EMS, the remaining company can adopt a fixed surcharge. As the competitor’s EMS decreases, the remaining company should implement a regulatory surcharge to squeeze the competitor out of the market. When the competitor further reduces EMS, the market transitions to a coexistence scenario, where a responsive surcharge becomes the primary strategy. Second, shipping companies can strategically combine “EMS + full price” to enhance their competitive advantage. Third, a “win–win” situation is achievable under specific conditions: high shipper sensitivity to EMS coupled with low EUA price. Based on these research findings, this paper provides suggestions for policy formulation and improvement.