Recently, it has been widely discussed that the emissions trading increases the prices of sea transport.
However, economic theories tell us that the price of a product is not based on costs, but it is formed by supply and demand. The price is an agreement between the seller and the buyer. In principle, the seller can raise the price as high as he wants, if someone is willing to pay such a high price. In practice, however, when prices rise, customers turn to competitors and buy their products cheaper elsewhere. In a free market economy, competition therefore keeps prices under control.
An example of a huge increase in sea transport prices was seen during the pandemic, when container ships were unable to unload their ships in ports affected by the pandemic. Trade and industry could not get their containers to move. Prices went up because there was always someone willing to pay even more for the transportation. Containerized goods moved even to air transport, when its prices – and above all the reliability of the transport – became more attractive than sea transport’s.
The current Suez and Panama Canal problems are not comparable to the crisis during the pandemic, because the ships have an alternative route to take. The prices will rise somewhat as the free ship capacity, i.e. the supply, decreases, but the ships will still run.
Going back to emissions trading, based on economics, the cost increase caused by emissions trading does not necessarily – in a tight competitive situation – increase transport prices, but rather reduces the profit margin of the shipping companies. Of course, it is always possible that the price of fuel or emissions trading can raise the shipping companies’ costs so high that it is no longer profitable to continue shipping with the current operating model, and some of the shipping companies would withdraw from their current operations.
This is the idea behind emissions trading. Competition keeps prices under control, so they cannot be raised very much – and the competition law makes sure that shipping companies cannot agree with each other on how much the price will be raised. Shipping companies should therefore invest in more efficient operations to reduce the costs or directly in technology that reduces emissions, so that their operations remain profitable.
The passenger-car ferry companies, where thousands of passengers make a decision about their trip every day based on price, schedule and other factors, have recently raised ticket prices due to emissions trading, and shows the price increase on the ticket. On the other hand, we know from studies that passengers spend much more money on food, drink and shopping on board than what they pay for their tickets. It is interesting that they want to show the fuel and emissions surcharge in the ticket price, and not, for example, by raising the prices of sales on board.
The biggest question is, however, at what point does the price of travel tickets start to affect the number of passengers. This is called price elasticity. Is it more profitable to keep higher prices and attract fewer customers or lower prices and attract more passengers?
The Finnish government has tried to reduce the upward pressure on prices due to emissions trading with various reliefs, for example by lowering fairway dues and by giving relief to ice-strengthened tonnage and traffic between islands and the mainland. After reading this, everyone will of course understand that in a competitive situation, all business subsidies that are given to companies without direct earmarking for, for example, development activities, will only be transferred to a part of the company’s profit – or to cover losses. Subsidies therefore reduce the attractiveness of development measures that would reduce fuel consumption or emissions. In other words, subsidies work against the whole idea of emissions trading.
The article was previously published in Navigator Magazine in Finnish, an online magazine for maritime professionals, on January 23, 2023.
Tales of Talsinki 