From 1 January 2024, changes to the EU Emissions Trading System (EU ETS) will mean new responsibilities for the maritime sector. The EU ETS, set up in 2005 to reduce greenhouse gas emissions, is seen as the cornerstone of the European Union’s strategy to tackle climate change head on. It is a cap-and-trade system and said to be the world’s first and largest major carbon market.
Following Regulation (EU) 2023/957, enacted on 10 May 2023, the scope of the EU ETS was expanded to include maritime transport activities, making the EU the first jurisdiction to place an explicit carbon price on the maritime sector. These measures have been introduced to ensure that maritime activities contribute their share to the progressive emissions targets of the EU, in line with the Paris Agreement.
This latest development means that from the start of next year, the EU ETS will now apply to vessels of 5,000 gross tonnage and above. Regardless of the flag flown by the vessel, 100% of emissions from voyages between EU/EEA ports will be covered by the ETS and half of the emissions for voyages into or out of EU/EEA ports.
Responsibility for ensuring compliance rests with the ‘shipping company’, as defined in Article 31 of Directive 2023/959. The shipping company is the document of compliance holder, and is currently responsible for reporting emissions under the EU Monitoring, Reporting and Verification (EU MRV) Regulation. It is the shipping company that must surrender the European Union allowances (EUAs) to comply with the EU ETS, and thus bears the cost of these allowances.
From 2025, shipping companies must submit a verified company emissions report to the administering authority, and to the EU Commission, by 31 March each year. The company emission report will be based on the MRV ship emission reports from the previous year, in line with a revised MRV monitoring plan, which is required from 1 January 2024. This means that the ship emissions report will need to be verified and submitted a month earlier than under the current MRV system. The EUAs are then required to be surrendered to the administering authority by 30 September each year.
Failure to surrender allowances may lead to an excess emissions penalty of €100 per tonne of CO₂ and defaulters may still be liable to surrender the required allowances.
In case a ship has failed to comply with the monitoring and reporting obligations for two or more consecutive reporting periods, and where other enforcement measures have failed to ensure compliance, a member state of an EU port of entry can issue an expulsion order, meaning that all member states (except a member state whose flag the ship is flying) will refuse entry to the ship until the company fulfils its monitoring and reporting obligations.
Where such a ship flies the flag of a member state and enters or is found in one of its ports, the member state concerned can, after giving the shipping company the opportunity to submit its observations, detain the ship until the company fulfils its monitoring and reporting obligations.
It will be the shipping company’s responsibility to define in the monitoring plan which method is used to calculate the fuel consumption for each vessel under its responsibility. Actual fuel consumption data for each voyage must be used, and the following calculation methods are permitted:
The regulation requires the vessel’s monitoring plan to be verified by an independent and accredited verifier. The list of verification bodies is said to be a living document and includes all the IACS classification societies. The shipping company must submit the relevant monitoring plan to the verifier no later than two months after each ship’s first call in a port within the jurisdiction of an EU member state.
Costs relating to the EUAs as incurred by the shipping company are likely to be a subject of negotiation in future charter parties. BIMCO has proposed the ETS – Emission Trading Scheme Allowances Clause for Time Charter Parties 2022, which allocates to the charterer the costs of the EUAs to comply with the EU ETS during the charter period. The logic behind the clause is that the party paying for the bunkers under the charter is made contractually responsible for paying for the corresponding EUAs.
Under the clause, the shipowner must monitor and provide emissions data and calculations to the charterer, and the charterer must transfer appropriate allowances to the owner on a monthly basis. The owner has a right of suspension under the clause where the charterer fails to transfer allowances when due, with the vessel remaining on hire throughout. If there is an off-hire event, the clause stipulates that any allowances to cover emissions produced while off-hire should be paid for by the owners.
When the vessel is to be redelivered, and the period remaining is less than a month, owners must provide charterers with estimated emissions data and thereafter return any overpayment to charterers.
In conjunction with the IMO’s Carbon Intensity Indicator (CII) rating scheme, in full effect from 1 January 2024, the application of the EU ETS will introduce another layer of complexity to vessel performance and environmental compliance. In both cases, BIMCO’s model clauses render the vessel’s time charterer accountable for the cost of the vessel fulfilling the legislative burden. These regulatory regimes may be in operation for some time before they are subject to legislative review. In the interim, it remains to be seen whether a contractual allocation to charterers of all the liability arising from these commitments is the panacea the industry needs.
This article was co-written with Melwinder Gill, trainee solicitor in the marine, trade and energy team.