The EU emissions trading scheme (the EU ETS) is expanding to include the shipping industry. With 2024, the first year in which vessel emissions will be included within the scope of the EU ETS, just around the corner, shipowners and operators need to assess how the scheme will impact their business, sources Norton Rose Fulbright.
Administering EU ETS
The current EU ETS legislation prescribes that the ‘shipping company’ for a vessel will be responsible for administering the EU ETS for that vessel. A ‘shipping company’ is defined as the shipowner or, if a different entity holds the document of compliance (the DOC) for a ship, the DOC holder. This follows the EU approach generally where for the purposes of EU regulations on monitoring and verification and FuelEU Maritime, a ‘shipping company’ is the DOC holder. DOC holders are usually the technical manager of a vessel and whilst it is appropriate that a manager should be responsible for compliance with international conventions, there are a number of concerns that the imposition of responsibility for compliance with the EU ETS would place a large administrative and financial burden on managers, particularly for those managers who would be responsible for a large number of vessels subject to the scheme.
The EU have acknowledged that there is a mismatch between how responsibility for the administration of the EU ETS should be allocated and general maritime law and have produced a draft implementing regulation (the Draft Implementing Regulation) to try and address this. The Draft Implementing Regulation provides that, if the DOC holder is to be the ‘shipping company’ for a vessel and so responsible for administering obligations under the EU ETS, it has to formally document (by way of a formal declaration) its acceptance of the role and that evidence of the acceptance of this mandate has to be provided to the administering authority in the relevant Member State. There will be a number of factors to consider in reaching this decision including:
- What implications will the choice of ‘shipping company’ for the purposes of the EU ETS have on the administering authority for a ship? The jurisdiction of incorporation of the ‘shipping company’ will determine which Member State is the administering authority for the scheme.
- If the DOC holder is to be mandated as the ‘shipping company’ under the scheme, both the owner and the DOC holder will need to consider how the costs and risks associated with compliance, in particular the purchase and surrender of allowances, will be dealt with.
Impact On Chartering Arrangements
Decisions made by charterers around the employment of the vessel impacts vessel emissions and the level of vessel emissions directly correlates to the cost of complying with EU ETS obligations. As a result there will be a need for effective collection and exchange of data between shipowners and charterers to enable the compliance with the obligations imposed by the EU ETS, such that the charterer knows the cost of sending the vessel to an EU port in terms of allowances that will be required. Commercial decisions will also need to be made on how responsibility for bearing the costs of compliance with the EU ETS, particularly in relation to the purchase of allowances under the scheme, will be allocated. The EU ETS directive provides that Member States should enact national legislation to ensure that if someone other than the shipowner or DOC holder is contractually responsible for making decisions about the use of the vessel that impacts emissions, which is common in chartering arrangements, that third party (the economic user) will be obliged to reimburse the shipping company for the costs arising from the surrender of allowances under the scheme: the so called ‘polluter pays principle’. In turn, the charterer is able to pass the costs on to the party that requires the goods to be moved by sea. There is no visibility at present as to how this legislation would work and it is possible that different Member States will take different approaches to implementing this in national law.
Given this uncertainty, charterers and owners should deal with this allocation of responsibility contractually. BIMCO has already produced an ‘ETS – Emissions Trading Scheme Allowances Clause for Time Charter Parties’ which highlights the need to carefully consider the issues involved. One particularly complicated area is how allowances will be passed from charterers to shipping company: should there be a requirement for charterers to merely account for, or supply to the shipping company, emissions allowances on a monthly or other periodic basis, or would the charterer rather supply the allowances as a lump sum at the time that they are due for surrender? Supplying the allowances (or the cost of these) monthly is clearly preferable from a risk perspective to a shipowner as the value of such allowances, and the liability to surrender them will amount to a substantial sum over the course of a year. The shipowner will be concerned about counterparty risk (what if the charterer becomes insolvent before the allowances are transferred?), levels of liability and reporting requirements. However, that approach might interfere with a charterer’s trading or hedging strategy, which will become an important part of efficiently dealing with this liability.
Mid Period Changes In Ownership
The EU ETS legislation envisages that emissions, and so a vessel’s liability under the scheme, will be calculated annually. This raises the question of how the sale of a vessel or start/end of a charter at some point part way through this period will be accounted for. In relation to a vessel sale, the buyer and seller will need to be able to calculate the emissions of the vessel up until the point of sale and decide how the seller will account for these: will allowances be transferred or will the cost of these allowances be added to the purchase price? If the vessel’s administering authority will change as a result of the sale, how will the transfer of allowances between accounts with different administering authorities be carried out? Similar issues arise with a mid-period change in the chartering arrangements for the vessel. It will be interesting to see if EU ETS liabilities impact maritime law more generally: for example, could we see a need for these liabilities to be treated as maritime liens which rank ahead of vessel mortgages in certain jurisdictions?
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Source: Nortonrosefulbright
