The shipping sector is in the spotlight. Alone, emits about 3% of C02 emissions. There is no denying the ecological and environmental impacts. Transporting around 11 billion tons of raw materials and finished products each year, the sector has undergone a huge expansion in the last four decades and has strongly contributed to globalisation, including trade between different countries and cultures. However, the industry is also very polluting and harmful to the environment and is certainly a significant contributor to the global warming we are currently experiencing. It was obvious and necessary that the shipping sector had to be curbed and that stricter regulations on environmental conservation and targeted action to restrict global warming were needed.

The European Commission has taken matters into its own hands and has decided to integrate this industry into the European Trading System (ETS) from 2023. The main aim of this project is to align the different sectors with the target set by the European Union, i.e., a 55% reduction in greenhouse gas emissions by 2030. It will be necessary in the coming years to introduce new restrictions, some of which may be introduced by the International Maritime Organisation, to try to reduce our emissions as much as possible and protect our planet as best we can.

These new regulations have prompted some questions from experts such as who will have to pay the price of carbon, ship owners, charterers, or consumers? All these questions trigger challenges for the European Commission who are the key players to address these issues to allow a smooth and efficient implementation.

The purpose of this thesis project is to analyse the impact of the inclusion into the European Union Trading System on Capesize (5TC) and Panamax (4TC) freight rates by using time-varying risk models.