Background

Emission Schemes are “cap and trade” schemes that cap the total amount of greenhouse gases to be emitted by certain vessels covered by the system.  Over time, this cap is reduced as an incentive to reduce greenhouse gas emissions through increased efficiency and the use of alternative fuels.

In the context of the world’s largest Emission Scheme – the European Union Emissions Trading System (EU ETS) – the cap is expressed in emission allowances, where one emission allowance gives the right to emit one tonne of carbon dioxide (CO₂) equivalent.  For each year, shipping companies must surrender enough emission allowances to fully account for their emissions. In the absence of a uniform global Emission Scheme, other countries and/or groups of countries may develop their own unique Emission Scheme in the future and this clause is designed to be broad enough to cater for not only the EU ETS but for any other similar Emission Schemes that are imposed.

Drafting Team

The BIMCO ETS – Emission Scheme Surcharge Clause for Voyage Charter Parties is the result of a collaborative and consensual process between owners, charterers, a P&I Club and legal experts. BIMCO is grateful to the drafting team for their considerable time, effort and commitment in producing the ETS - Emission Scheme Surcharge or Transfer of Allowances Clause for COAs:

• Nicola Ioannou, Oceanfleet (Chairperson)
•  Daniel Carr, Stolt-Nielsen
• Henning Babiel, ADM
•  Kelly Vouvoussiras, Rio Tinto
• Claire Weustenraed, Pacific Basin
• Lisa-Marie Perrella, Fednav
• Annie Choquette, CSL Group
• Rachel Hoyland, Stephenson Harwood
• Helen Barden, North Standard

BIMCO Secretariat:

• Stinne Taiger Ivø
•  Natalie Wong
• Carl Lindahl

As part of the development work, the subcommittee consulted a group of stakeholders engaged in COAs. BIMCO would like to thank them all for their support and valuable input to the process.

Explanatory Notes

These explanatory notes are intended to provide an insight into the thinking behind the ETS - Emission Scheme Surcharge or Transfer of Allowances Clause for COAs. 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.

Key Features of the Clause

Definitions

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

“Emission Allowances” are the emission 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 equivalent.

“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.

These two definitions are identical to those that appear in the ETS - EMISSION TRADING SCHEME ALLOWANCES CLAUSE FOR TIME CHARTER PARTIES 2022 as well as the ETS – EMISSION SCHEME TRANSFER OF ALLOWANCES CLAUSE FOR VOYAGE CHARTER PARTIES 2023.

“Emission Scheme Surcharge” means the pre-agreed costs covering the Vessel's emissions under the scope of the applicable Emission Scheme as set out in subclause (a).

Subclause (a)

This subclause stipulates that the charterers shall either pay the  pre-agreed Emission Scheme Surcharge or transfer the pre-agreed quantity of Emission Allowances as specified in the Emission Trading Scheme Allowances Annex.

If the parties decide to pre-agree an Emission Scheme Surcharge, they should insert a mutually agreed Emission Scheme Surcharge which is expressed as a cash amount (in the currency of choice, for example, EUR 100 or USD 100) in the Emission Trading Scheme Allowances Annex under the column named “Emission Scheme Surcharge OR Quantity of Emission Allowances”. 

If the parties instead choose to pre-agree a fixed quantity of Emission Allowances, then that quantity mutually agreed between the parties should be inserted under the “Emission Scheme Surcharge OR Quantity of Emission Allowances” column.

The cash amount or number of Emission Allowances to be inserted would simply reflect the outcome of a commercial agreement between the parties which is designed to compensate the owners for the Emission Scheme-related costs associated with surrendering the required Emission Allowances in respect of the voyage(s) performed under the COA.

For this clause to operate, it is important for parties to insert either the currency and amount or number of Emission Allowances as there is no default if this column is left blank.

The subcommittee was of the view that the Emission Scheme Surcharge and any pre-agreed quantity of Emission Allowances, shall generally not be subject to any address or brokerage commission.

Subclause (b)

This subclause deals with the timing of the payment of the pre-agreed Emission Scheme Surcharge or transfer of the pre-agreed quantity of Emission Allowances to the owners.  The payment or transfer must be made on: (1) the date of the initial freight payment if freight is due in instalments; or (2) the date on which freight is due, if freight is not payable in instalments.

Subclause (c)

This subclause underlines the fact that once the owners receive the full payment of the Emission Scheme Surcharge or receive the pre-agreed quantity of Emission Allowances, this releases the charterers from any responsibility for costs arising from the surrender of Emission Allowances for the voyage(s) performed under the COA. However, this is always subject to subclause (d).

Subclause (d)

This subclause addresses a scenario where the vessel may release more emissions than anticipated due solely to the charterers’ breach of the COA. For example, the vessel may be detained solely due to the charterers violating the COA. In this case, this subclause allows the owners to recover any costs arising from the surrender of Emission Allowances for the emissions released during such period of detention.

Subclause (e)

This subclause makes it clear that if the charterers fail to pay the pre-agreed Emission Scheme Surcharge or to transfer the pre-agreed quantity of Emission Allowances as required under the clause, this will be treated in the same way as non-payment of freight, meaning that the owners are entitled to take the same actions against the charterers in circumstances where the charterers have failed to pay freight under the COA.

Subclause (f)

This subclause stipulates that the obligation for compliance with the applicable Emission Scheme rests solely with the owners. This is intended to clarify that charterers shall not be responsible for compliance with the relevant Emission Scheme.

Subclause (g)

This subclause stipulates that the owners have the right to suspend the performance of any or all of their obligations under the contract if the charterers fail to pay the Emission Scheme Surcharge or transfer the quantity of Emission Allowances.  The owners still to have the right to pursue any other rights or claims they might have against the charterers even if performance is suspended in accordance with this clause.

Optional Subclause (h) – price adjustment

This subclause is only applicable if the Emission Scheme Surcharge applies (as opposed to a transfer of allowances) and the Parties have stated “Yes” in the subclause.

This optional provision allows for a price adjustment where the spot price of an Emission Allowance has changed over time. It can assist parties in mitigating the risk of agreeing an Emission Scheme Surcharge that does not reflect the market position by the time it comes to be transferred in accordance with subclause (b). The rationale for including an optional adjustment for price fluctuations is to counter the potential volatility in the emission allowances market, mirroring how a bunker adjustment factor addresses the fluctuations in bunker markets, for example. Therefore, the wording of the price adjustment mechanism is very similar to that of a bunker adjustment clause and follows a well-recognised concept which is already accepted by the industry.

This price adjustment mechanism only caters for the increase or decrease in the spot price of Emission Allowances and is not designed to allow for an adjustment in the actual quantity of Emission Allowances which underlies the surcharge. If parties wish to deal with the actual quantity of Emission Allowances, they may wish to use the ETS - Emission Scheme Transfer of Actual Allowances Clause for COAs 2024 instead of this clause.

The reasoning behind this approach is that the primary factor impacting the duration of a voyage, and consequently the number of Emission Allowances, is extended port stays. Such unforeseen delays are considered to be compensated by demurrage in the COA, and the subcommittee was of the view that owners may in any event provide for any additional exposure relating to Emission Schemes through an adjusted laytime regime and demurrage rate in the COA. It should also be noted that if charterers were to issue alternative voyage orders leading to an extension of the voyage duration, this could be subject to agreement on a revised freight rate and a corresponding revised Emission Scheme Surcharge as per the Emission Trading Scheme Allowances Annex if the voyage matches any of the pre agreed routes. If this is not the case, the parties should agree a revised Emission Scheme Surcharge for the particular voyage under the COA, depending on the parties' relationship and the terms of the relevant COA.

It is the view of the subcommittee that this aligns with the prevailing principle of voyage chartering, whereby owners bear the risk for any delay resulting from, for example, adverse weather conditions on the sea passage, whilst compensation for delays in ports are provided for by demurrage.

Emission Trading Scheme Allowances Annex

The annex needs to be completed by the parties for the clause to be operational. The annex has been created to accommodate aspects relevant for a COA, which often involve multiple load and discharge ports that cannot be easily incorporated into the clause itself. The annex provides parties with an opportunity to list multiple routes/voyages they anticipate to be performed under the COA.

In addition to port details, the annex requires parties to insert the pre-agreed Emission Scheme Surcharge or the pre-agreed quantity of Emission Allowances. The choice gives the parties the flexibility to decide which method would be most appropriate in the circumstances. The pre-agreed figures are not expected to change during the period of the COA unless otherwise amended by the parties. For instance, if the owners nominate a vessel that results in a higher quantity of emissions, these additional costs for procurement of extra Emission Allowances will be borne by the owners. Conversely, if a vessel is nominated that produces fewer emissions, the owners can benefit from the savings. It is very important to note that the parties must make a decision as to whether they wish to pay a surcharge or to transfer a fixed number of allowances in order to complete the annex.

Finally, there is a column in the annex named “If subclause (h) applies, number of agreed Emission Allowances for Price Adjustment”. This should only be completed if the parties have agreed that subclause (h) applies. This column allows for the agreed number of Emission Allowances for the COA's voyage(s) to be included for calculation purposes. Like the Emission Scheme Surcharge and Quantity of Emission Allowances column, the figure in this column will remain fixed regardless of the vessel used (unless otherwise amended by the parties).

Additional element(s) to consider:

Laytime/Demurrage

The clause does not operate to allow for a price adjustment if the actual emissions resulting from extended port stays is more or less than that which the parties had anticipated.  The primary factor impacting the duration of a voyage, and consequently the number of Emission Allowances, is extended port stays. Such extended port stays are considered to be compensated by demurrage in the charter party, and the subcommittee was of the view that owners may in time, provide for the additional exposure relating to Emission Schemes through an adjusted laytime regime and demurrage rate in the COA. At present, however, the Owner’s demurrage rate does not account for such added exposure under any applicable Emission Scheme. The subcommittee is of the view that this is best addressed by adjusting the demurrage rate, rather than in a surcharge clause.

This aligns with the prevailing principle of voyage chartering, whereby owners bear the risk for any delay resulting from, for example, adverse weather conditions on the sea passage, whilst compensation for delays in ports are provided for by demurrage.

Copyright and Availability

Copyright in the ETS - Emission Scheme Surcharge or Transfer of Allowances Clause for COAs 2024 is held by BIMCO.