EU Emissions Trading Scheme – Q & A Session

At the time of writing, there are already vessels en route to the European Union which will be subject to the EU Emissions Trading Scheme (EU ETS) coming into force from 1 January 2024 (the “Directive”).

We set out hereunder the typical queries we see on this topic, together with the answers, which we hope will be of assistance to all our Members who are trading to, within and out of the EU.

1.  RESPONSIBILITY FOR COMPLIANCE

Q. Is the ISM Doc Holder or the Registered Owner by default responsible for EU ETS?
The definition of “Shipping Company” in the Directive encompasses not only the registered owner, but also a bareboat charterer or ISM Doc Holder such as a manager. However, the recently published implementing legislation concerning the Administration of Shipping Companies has confirmed it will be the registered owner who is by default responsible for EU ETS compliance.

Q. What are the formalities for delegating responsibility for the EU ETS?
Notwithstanding the above default position, the registered owner can delegate responsibility for compliance with the EU ETS to the ISM DOC Holder, whether this is the manager or the bareboat charterer. However, the entity responsible for EU ETS must be the same entity that is responsible for compliance with MRV.

Delegation takes the form of a mandate and the formalities are set out in Article 1 of the implementing legislation. There is no set format, but a document containing the following details, signed by both the registered owner and the entity to whom responsibility for EU ETS has been mandated, is required:

1. Name and IMO unique company and registered owner ID number of the entity mandated by the registered
owner;
2. Country of registration of the entity mandated by the registered owner, as recorded under the IMO
Unique Company and Registered Owner Identification Number Scheme;
3. Name and IMO unique company and registered owner ID number of the shipowner;
4. Following information for the registered owners’ contact person:
    4.1. First name
    4.2. Last name
    4.3. Job title
    4.4. Business address
    4.5. Business telephone number
    4.6. Business email address
5. Date of application of the mandate from the registered owner to that entity;
6. The IMO ship ID number of each ship falling within the mandate

The document must be submitted to the mandated entity’s Administering Authority to perfect the delegation.  The mandate should also be reflected in the Monitoring Plan.

If there is any change in the identity of the party delegated, for example a change in management company, the  mandate and documentation (including the Monitoring Plan)  with the relevant authorities will need to be updated.

If the required documentation is not provided to the mandated entity’s Administering Authority, the registered owner remains responsible for EU ETS.

Q. What About the Situation Under a Bareboat Charter?
Per the implementing legislation, responsibility for EU ETS compliance can be delegated to a bareboat charterer (if they are the ISM Doc Holder), but the bareboat charterer cannot itself delegate a manager (as ISM Doc Holder) to take on responsibility for the EU ETS.

Traditionally, the registered owner of a vessel out on bareboat charter is completely hands off, however, that will no longer be the case. If the bareboat charterer wants the technical manager to take on EU ETS responsibility, only the registered owner will be able to complete the necessary formalities for that appointment towards the authorities. The standard printed form bareboat charterparties do not expressly cater for this and since the registered owner is not a party to the management contract (between the bareboat charterer and its manager), how to implement this in the contracts will need to be considered.

2.  ALLOWANCE OBLIGATIONS

Q. How many allowances need to be covered?
It is a phased scheme, so 40% of emissions reported for 2024 must be covered by emissions Allowances to be surrendered in September 2025.  This means that for the first year, 40% of emissions on a per voyage basis need to be accounted for by emissions Allowances.

Q. What is a “voyage”?
A “voyage” for emissions reporting purposes is as per the EU MRV regulation, and is defined on a berth to berth basis, i.e. from the berth at one port of call to berth at the next port of call.

This means that all emissions from departure from the berth to arrival at the next berth counts as a “voyage” as per the MRV, and are to be reported in addition to all in-port emissions.  The concept of voyage for MRV purposes is therefore more limited than the concept of voyage in a charterparty context, which in many instances will encompass multiple voyages (as per the MRV definition).

Q. What happens if the voyage began before 1 January 2024
The first reporting period for the shipping industry begins on 1 January 2024. For voyages beginning prior to 1 January 2024, only the emissions starting from 1 January 2024 will need to be reported and Allowances surrendered.

The same also follows for voyages that straddle two separate calendar years. A voyage that began in December 2024 and ends in January 2025, falls within two reporting periods. The emissions up to 31 December 2024 will be reported in the 2024 emissions report and the emissions from 1 January 2025 will be reported in the 2025 emissions report. The corresponding Allowances will also need to be surrendered across two submission dates.

Q. How are allowances transferred?
The Union Registry is the centralised registry for all participants in the EU ETS across all industries. Accounts within the Union Registry are managed by the individual Members States.  Every entity or person wishing to hold or trade Allowances must open an account at the Union Registry, by sending a request to its national administrator.  Any company (not just the “Shipping Company” as defined in the Directive) wishing to buy, transfer and trade Allowances will need to open a trading account.

The “Shipping Company” (whether the registered owner or delegated ISM company) will need a Maritime Operator Holding Account (“MOHA”) to hold allowances (i.e. receive and submit, rather than trade) which needs to be opened by the Member State corresponding to its Administering Authority.

As of now, it is not possible to open a MOHA. Current indications are that MOHAs will be available to open by 1 February 2024. This coincides with the date the European Commission is due to publish the list of Administering Authorities for known “Shipping Companies”. In the interim, Shipping Companies can open trading accounts. However, companies registered outside the EU may face bureaucratic challenges opening not only trading accounts but there may also be uncertainties as to whom their Administering Authority will be.

This time lag in the availability of MOHAs coupled with potential difficulties in being able to open a trading account, means that some companies may need to reach ad hoc arrangements with their counter parties to postpone the transfer of Allowances until all the necessary accounts are up and running.

3. CHARTERPARTIES – ETS CLAUSES

Q. Do I need an EU ETS Clause?
The standard printed form charterparties do not cater for allocation of the cost of compliance with the EU ETS, or indeed any ETS scheme. Specific clauses are therefore required across the board if the owner wants to recover either the actual Allowances or the cost of purchasing Allowances, from its charterer.

As introduced in the December 2022 Circular BIMCO has published an ETS Allowances Clause for Time Charterparties (2022), which caters for the EU ETS scheme and other similar schemes that remain to be seen.  The essence of the BIMCO clause obliges an owner to provide emissions data to allow their charterer to calculate, pay for and provide sufficient Allowances to cover the vessel’s emissions during the charter period.

We anticipate BIMCO will publish further clause(s) for voyage charters and Contracts of Affreightment, as well as the revised SHIPMAN contract which we expect will contain an ETS clause.

Q. What are the common points of negotiation in EU ETS clauses?
The main point of negotiation we see in the time charter context is the timing of  the charterers obligation to transfer Allowances to the owner.  The BIMCO clause referred to above contemplates a monthly transfer of Allowances to the owner, whereas charterers often want to delay that obligation to closer to the annual September submission date.

Another point for negotiation is whether charterers’ liability for Allowances is calculated using owners’ data or verified data. If charterers insist on the calculation of Allowances being based on verified data, owners need to consider whether they can comply (i.e. because they are using a data management provider authorised by the EU to verify data) and if so, then how frequently owners will receive verified data from their data management provider.

We have also seen some instances where the monthly calculation and transfer of Allowances in the BIMCO has been amended to a voyage by voyage calculation.  As long as the calculations cover the entire charter period, the end result should be the same, but there are practical aspects which owners should consider before agreeing this.

Finally, there will be commercial negotiations between the parties over the allocation of any Allowances (or the price thereof) arising at either end of the contractual period i.e. by reason of a ballast voyage delivering into a charterparty and / or after completion of final discharge.

Dates for the diary

31 December 2023
List of container transhipment ports per Art.3ga (expected)

1 February 2024
List of Administering Authorities for known Shipping Companies (expected) MOHAS become available for opening (expected)

1 April 2024
Submission deadline of updated Monitoring Plan

31 March 2025
Verified company emission report submission to administering authority

30 September 2025
Submission deadline for Allowances for 2024 calendar year

We are available to assist Members in drafting and advising on possible ETS clauses to manage and allocate the exposure to EU ETS Allowances.