EU ETS

The EU ETS, or European Union Emissions Trading System (EU ETS), is a "cap and trade" scheme that permits the emission of greenhouse gases (GHGs1) in exchange for allowances. Over time, the quantity of allowances available to the industry will be reduced so that GHG emissions covered by the system gradually decrease. The EU has added the shipping industry to its scheme as part of the Fit for 55 package. The EU Directive (2003/87/EC) establishing a system of greenhouse gas emission allowance trading within the EU has now been amended by EU Directive (EU) 2023/959 incorporating maritime transport activities. This new directive takes effect gradually from 1 January 2024. It differentiates between voyages between EU Member States and voyages from and into EU ports. For ships performing voyages departing from a port outside the EU and arriving at a port within the EU, or departing from an EU port and arriving at a port outside the EU, the requirement for the shipping company is to surrender allowances equivalent to 50% of the emissions. For voyages performed wholly within the EU, the requirement is 100% of the emissions.

Under Article 3(d)(w) of the directive, the party responsible for surrendering the allowances is the “shipping company” which is defined as:

“The shipowner or any other organisation or person, such as the manager or the bareboat charterer, that has assumed the responsibility for the operation of the ship from the shipowner and that, on assuming such responsibility, has agreed to take over all the duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention.”

Where the ISM manager is the responsible entity for surrendering the EU allowances as per the mandate from the registered shipowner, the ISM manager will therefore be the target of any possible enforcement actions by Member States.

The EU ETS is a route-based system. This means it covers emissions from maritime transport as follows:

• 100% of emissions from ships performing voyages departing from a port under the jurisdiction of an EU Member State and arriving at a port under the jurisdiction of an EU Member State
• 100% of emissions from ships within a port under the jurisdiction of an EU Member State, ie emissions released at berth and during movements within such a port
• 50% of emissions from ships performing voyages departing from a port under the jurisdiction of an EU Member State and arriving at a port outside its jurisdiction
• 50% of emissions from ships performing voyages departing from a port outside the jurisdiction of an EU Member State and arriving at a port under the jurisdiction of an EU Member State.

For 2024, one only needs to surrender EU allowances in 2025 for 40 % of the emissions emitted in 2024. For the emissions emitted in 2025 the figure is 70%, and from 2026 the requirement is 100%.

Emissions will have to be split and accounted for separately under the two individual year emissions reports. The EU ETS requirements will apply to the emissions for the part of the voyage that occurs in 2024. According to the EU Directive (EU) 2023/959, shipping companies will need to surrender allowances equivalent to a percentage of the emissions for voyages that are within the scope of the directive. This includes voyages that started before but ended after the EU ETS came into force on 1 January 2024 - but only for that part of the voyage that took place in 2024.

This will similarly apply subsequent years.

The party responsible for surrendering allowances in accordance with the Article 3(d)(w) of the directive is the “shipping company” and for the purposes of this question, we will assume that this is the “owner” under the voyage charter party. It will depend on the terms of the contract as to whether the owners can claim costs of the EU allowances from the charterers. The reference to the “operation of the ship” under the directive (Article 3gc) means “determining the cargo carried and/or the route and the speed of the ship.” When a ship is trading on voyage charter, it may be difficult to establish that the charterers will automatically be responsible for the costs of the allowances. We therefore suggest that you include a clause which gives both parties certainty about the implications of the EU ETS on the voyage. BIMCO has three clauses available for the voyage charter party context, allowing parties to choose which clause best suits their needs and business model. The clauses can be found on BIMCO’s website along with accompanying explanatory notes:

• ETS – Emission Scheme Freight Clause for Voyage Charter Parties 2023
• ETS – Emission Scheme Surcharge Clause for Voyage Charter Parties 2023
• ETS – Emission Scheme Transfer of Allowances Clause for Voyage Charter Parties 2023

The situation is, generally, different under a time charter party than under a voyage charter party in respect of the rights and duties of the owners and charterers. As mentioned in Q7, the reference to the “operation of the ship” under the directive (Article 3gc) means “determining the cargo carried and/or the route and the speed of the ship”. However, while there may, perhaps, be a “back door” for the owners to recover the EU ETS cost following the “polluter pays” principle, this is by no means absolute and it is difficult to say how this may be dealt with in practice. It is also relevant to keep in mind that the outcome of potential national legislation may be very different depending on the domicile of the involved parties and the jurisdiction under which they have contracted. Therefore, BIMCO suggests that you include a clause which gives both parties certainty. BIMCO has the following ETS clause available for time charter parties on the BIMCO website along with explanatory notes:

ETS - Emission Trading Scheme Allowances Clause for Time Charter Parties 2022

If the parties have not agreed to include an ETS clause in an existing contract, then one party cannot force the other to do so.

Please also see the following question.

The reference to the “operation of the ship” under the directive (Article 3gc) includes “determining the cargo carried and/or the route and the speed of the ship.” The directive imposes an obligation on Member States to transpose the directive into national legislation by 31 December 2023 with the intention of ensuring that the shipping company is reimbursed by the entity responsible for the operation of the ship (for the costs arising from the surrender of EU ETS allowances). However, we are not at time of writing aware if such legislation is now in place in any of the Member States nor do we know how this may work in practice in each Member State. There are a number of challenges in this respect - not least considering that, after Brexit, such legislation will not be transposed into English law, which is commonly agreed to apply to shipping contracts. Another challenge is if one or both of the parties to a contract are domiciled outside the EU. To avoid any risk of uncertainty in this respect, it is strongly suggested to include a relevant clause clearly prescribing what the parties agree to in respect of EU ETS including recovery or reimbursement of costs of EU allowances.

Commission Implementing Regulation (EU) 2023/2599 of 22 November 2023 laying down rules for the application of Directive 2003/87/EC as regards the administration of shipping companies by administering authorities in respect of a shipping company prescribes the manner in which an organisation or person, such as the ‘shipping company’ assuming responsibility for the operation of the vessel from the ‘shipowner’ shall provide the administering authority with a document that it has been duly mandated by the ‘shipowner’ to comply with the EU ETS obligations. The ETS – SHIPMAN Emission Trading Scheme Allowances Clause 2023 caters for schemes such as the EU ETS by enabling the managers to assume responsibility for ETS obligations by agreement with the owners as prescribed by an emission scheme. 

BIMCO has developed the Standard ETS Mandate 2024 which can inter alia be used in conjunction with and to appoint managers as the responsible entity under subclause (b) (Managers as Responsible Entity) of the ETS – SHIPMAN Emission Trading Scheme Allowances Clause 2023. Before giving a mandate in accordance with Implementing Regulation (EU) 2023/2599, the parties should ensure that they are aware of the consequences of mandating ETS compliance to another organisation or person.   

Whereas Implementing Regulation (EU) 2023/2599 sets out how the shipowner can mandate ETS compliance to another organisation or person, the Implementing Regulation does not specifically address the termination of the mandate. The parties may, however, even before the ETS mandate is given, want to consider the termination process and the formality requirements relating to termination of the ETS mandate.  

Although there are no specific rules about termination of the ETS mandate, some guidance is to be found in the regulatory framework. 

According to article 22 of Commission Delegated Regulation (EU) 2019/1122 of 12 March 2019 on the functioning of the Union Registry, all account holders in the Union Registry for ETS allowances are required to notify the national administrator within 10 working days of changes to the account information. In circumstances where an organisation or person, such as the manager, has been mandated by the shipowner to ensure compliance with ETS obligations the manager will, in its capacity as an account holder in the Union Registry, have an obligation to inform the national administrator of the Union Registry about any changes to the account information. In case of termination of the mandate by either party, the manager will no longer be responsible for ETS compliance for the ships covered by the mandate and such changes will therefore presumably have to be notified to the administration.  

Conversely, once the mandate is terminated by either party and provided no other mandate for the ships concerned has been put in place concurrently, the obligation to ensure ETS compliance will, pursuant to Implementing Regulation (EU) 2023/2599, become the shipowners’ responsibility. In accordance with article 2 of the Implementing Regulation, the shipowner has an obligation to provide the administering authority with a list of ships in respect of which it has assumed responsibility for ETS obligations. In case of termination of the mandate by either party, the shipowner will therefore have to notify the administering authority of the ships for which the shipowner becomes responsible to ensure ETS compliance as a result of the manager ceasing to be responsible. This could for example be the registered owner who originally mandated the manager to become responsible for ETS compliance and now, as a consequence of the termination of the ship management agreement, reassumes this responsibility. It could also be as a result of a sale of the ship in circumstances where the ship management agreement is equally terminated. In such cases, the shipowner will have to inform the administering authority.  

From a contractual perspective, the parties may wish to address termination of the ETS mandate in their ship management agreement, e.g. by including a provision stating the consequences of termination with an obligation on the managers and shipowners, respectively, to notify the relevant authorities that the mandate has come to an end. To be noted that the reference to the relevant authorities differs in Implementing Regulation (EU) 2023/2599 (which refers to the “administering authority”) and Delegated Regulation (EU) 2019/1122 (which refers to the “national administrator”) but that both are supposedly to be understood as referring to the national authorities responsible for administering the EU ETS. 

The parties are encouraged to contact the relevant national authorities to seek clarification on any particular requirements they might have in relation to giving and terminating the mandate, including information to be provided in this regard.