BACKGROUND

Emission trading systems (ETS) are “cap and trade” schemes that permit the emission of greenhouse gases in exchange for allowances. Over time the quantity of allowances available to industry are reduced as an incentive to reduce emissions through increased efficiency and the use of alternative fuels.

The world’s largest ETS is operated by the European Union who have recently added the shipping industry to their scheme as part of the “Fit for 55” package. In the absence of a “global” scheme, other countries may also develop their own ETS soon.

The ETSA Clause follows the “polluter-pays” principle by ensuring the pass-through of ETS costs to the commercial operators of vessels – in this case, the time charterers.

The fundamental principle behind the clause is that it requires both parties to the charter party to cooperate and collaborate.

Drafting team

The BIMCO ETSA Clause for Time Charter Parties 2022 is the result of a collaborative and consensual process between owners, charterers, P&I clubs and legal experts. BIMCO is grateful to the following individuals:

Peter Eckhardt, F. Laeisz (Chairman)

Panos Zachariadis, Atlantic Bulk Carriers Management, Ltd.

Takaaki Hashimoto, NYK

Lars Bagge Christensen, Navigare Capital

Harry Fafalios, Union of Greek Shipowners

Kyriakos Kourieas, Interorient Marine Services Limited

Ann Shazell, Cargill Ocean Transportation

David Sale, BP Shipping

Kelly Vouvoussiras and Divek Chinnadurai, Rio Tinto

Alessio Sbraga, HFW

Helen Barden, North P&I Club

Lasse Brautaset, Nordisk

BIMCO was represented by:

Lars Robert Pedersen, Deputy Secretary General (Technical)

Søren Larsen, Deputy Secretary General (Contractual)

Stinne Taiger Ivø, Director, Contracts & Support

BIMCO secretariat support was provided by the Standards, Innovation and Research team - Grant Hunter and Mads Wacher Kjærgaard.

Guidance Notes

These guidance notes are intended to provide an insight into the thinking behind the BIMCO Emissions Trading System Allowances (ETSA) Clause for Time Charter Parties 2022. They also explain how the clause is intended to operate and the allocation of responsibilities and costs between the parties. If you have any questions about the clause, please contact us at contracts@bimco.org and we will be happy to assist.

Definitions

For ease of reading the clause sets out two definitions – “Emission Allowances” and “Emission Scheme”.

“Emission Allowances” are the allowances issued by an authority under a “cap and trade” regulatory scheme that give the holder the right to emit an agreed volume of greenhouse gases. Under the EU ETS, each allowance entitles the holder to emit one tonne of CO₂.

“Emission Scheme” refers to the applicable emissions trading scheme for greenhouse gases. This clause is designed to apply to future emissions schemes that may be implemented around the world, not just the EU ETS.

Subclause (a)

An essential part of meeting the requirements of an emissions trading scheme under a time charter party is cooperation between owners and charterers. At the heart of this cooperation is the timely sharing of data and information. Charterers must receive from the owners the data they need to calculate the allowances required to cover their emissions.

Subclause (b)

Owners are obliged to follow mandatory reporting obligations such as the EU MRV to establish the ship’s emissions. The report of the amount of greenhouse gases emitted by the ship must be independently verified.

Subclause (c)

This is the main operative part of the ETSA Clause. It establishes the time charterers’ responsibility to “provide and pay for” allowances corresponding to the ship’s emissions during the time charter period. It follows the principle that the party providing and paying for the fuel should also provide the emissions allowances to cover the greenhouse gases emitted by that fuel. The clause works on the principle of transferring actual allowances as opposed to reimbursing the owners for the cost of allowances to avoid complications with price fluctuations.

The charterers are obliged to transfer allowances to the owners’ emission scheme account monthly following receipt of the owners’ data and calculations showing the quantity of allowances due for that period. 

When the ship is due to be redelivered and the remaining period is less than a month, the owners must provide the charterers with an estimated quantity of allowances. In the event of a discrepancy between the estimated and actual quantities, the owners are to return any excess to the charterers, or the charterers are to transfer the difference to the owners.

Under a conventional time charter party, the charterers provide and pay for the bunkers. The responsibility for the emissions produced by burning those bunkers is with the charterers. The cost of any bunkers used by the owners during offhire periods when the charterers are unable to use the ship must be repaid by the owners to the charterers. Similarly, the allowances to cover the emissions from the bunkers used by the owners during offhire must be returned to the charterers. This can be done either by deducting the amount of allowances from the subsequent months’ transfer of allowances or by the owners transferring the amount of allowances for the emissions they made back to the charterers.

Furthermore, the consideration of vessel delivery and redelivery is crucial. In instances where the vessel's delivery is agreed to take place, as an example, upon Dropping Last Outward Sea Pilot (DLOSP) of an EU port, the charterers are to pay for and provide the emission allowances from the DLOSP at the EU port until the vessel is berthed at the next port to which they have ordered the vessel whether this is an EU port or a non-EU port, unless an alternative agreement has been reached. The next port will determine whether it is 100% or 50% of emissions which must be covered.

This principle also applies if the redelivery is agreed to take place upon DLOSP of an EU port. Here, the responsibility to cover the costs and provide the emission allowances from the DLOSP at the EU port up until the next EU port (100%) or a non-EU port (50%) falls on the owners.

Further, one may also encounter situations where the vessel is delivered and / or redelivered eg upon “passing” a certain place. The vessel may (or may not be) on a voyage to or from an EU port at this point in time, but the effect also here is that the charterers will be responsible for the full period when the vessel is on hire as long as the owners become responsible for surrendering emission allowances corresponding to the emissions under the scope of the ETS. By including this clause in the time charter, the charterers’ responsibility kicks in from the moment of delivery until redelivery whether they are calling an EU port or not under the charter party in question. It is the party operating the vessel and paying for the fuel who must pay for the emission allowances.

Therefore, it is of utmost importance for all parties to take into account the vessel's port of call prior to its delivery to the charterers and redelivery to the owners. This consideration is critical in determining the quantity of emission allowances the charterers will need to cover and provide under the time charter period and if the parties want to regulate this differently it must be addressed during negotiations.

Subclause (d)

If the charterers fail to transfer the required allowances, then the owners can exercise commercial leverage against the charterers by suspending performance. The ship will remain on hire during any periods of suspension and owners will not be responsible for any resulting consequences. This is an important safeguard for owners given the expected high value of allowances accumulated during a calendar year.