Decarbonisation in the Shipping Industry
EU Emissions Trading System for Maritime Transport Explained – Part 1 of 6
UK & Europe
Decarbonisation in the Shipping Industry
The EU Emissions Trading System (EU ETS), the world’s largest carbon market introduced in 2005 by the EU to combat climate change through the reduction of greenhouse gas emissions, by way of a cap-and-trade system, was recently expanded in June 2023 to include the maritime transport sector.
In the second article of our six-part series reviewing the changes introduced by the new EU rules, set to apply from 1 January 2024, we look at who is responsible for compliance under the EU ETS and which monitoring, reporting and verification obligations will apply.
The EU ETS applies on a company-wide basis, rather than on an individual ship basis.
The “Shipping Company” is the entity responsible for compliance with the EU ETS. It is obliged to monitor, register and report verified emissions to the administering authority on a yearly basis.
The Shipping Company will also be responsible for surrendering the required EU Allowances to the competent authority.
Article 31 of Directive (EU) 2023/959 (extending the EU ETS to maritime transport) defines the “Shipping Company” as:
“the shipowner or any other organisation or person, such as the manager or the bareboat charterer, that has assumed responsibility for the operation of the ship from the ship owner 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 (1) (our emphasis)”.
While it may have been envisaged that shipowners would be responsible for a ship’s emissions (and they are specially named in the definition of Shipping Company), it is also recognised that those who are responsible for emissions should share responsibility for compliance and, in practice, this will be the company that takes the operational decisions about the route and speed of the ship. Later in the series, we will explore how the cost of EU Allowances might be shared between the parties.
It is also possible that the compliance obligation could fall on technical managers if they have assumed responsibility for the Document of Compliance.
Whilst the legislation seeks to make shipowners responsible for emissions from their ship(s), it should be noted that, because of the link to the Document of Compliance(2) under Regulation (EU) 2015/757 (on the MRV (3) of CO2 emissions from maritime transport) and the fact that most shipowners or bareboat charterers will delegate responsibility for compliance with various Codes to their technical managers - be that in-house technical managers or third-party technical managers - it could be read that the technical managers fit the definition of “Shipping Company”.
Technical managers may be well-placed to record and monitor emissions data, as they do so already for the MRV compliance, but they may not be able or willing to be involved in the process of purchasing, surrendering, and trading EU Allowances (EUAs).
However, the intention of the Directive (4) is to capture those that are actually responsible for their emissions, which is arguably not the technical managers, but rather the party that issues operational instructions to the ship, such as voyage route, speed, cargo carried.
In reality, this means the charterer, whether bareboat, time, spot, or voyage, depending on the charter chain and who will be issuing instructions relating to route and speed.
Instructions as to route and speed have a direct impact on emissions and so the person giving the instructions should share responsibility for compliance.
So, the big question is: who will pay?
The immediate impact of the application of the EU ETS to the maritime transport industry is to increase costs throughout the chain, which may ultimately lead to the end-consumer absorbing increased supply chain costs.
SHIPMAN 2009, the latest edition of the widely used standard ship management agreement template drafted by BIMCO, includes compliance with the ISM Code as one of the obligations of the technical manager.
As mentioned above, this means that the burden of ensuring compliance with the EU ETS provisions might fall on the technical manager of the ship depending on how the legislation places the obligation of compliance.
BIMCO’s Documentary Committee are working on a revision of the current edition of SHIPMAN, which amongst other revisions, will include an Emission Trading Scheme Allowances (ETSA) Clause.
The new edition will be called SHIPMAN 2023.
BIMCO’s Documentary Committee met in April 2023 to discuss the first draft of the revision and the target date to present the revised SHIPMAN for adoption is likely to be in the next few months.
As part of this process, industry consultations have taken place and feedback on the existing SHIPMAN obtained.
The drafting team consists of delegates from shipowners, ship managers, insurance companies, and legal experts, including Stephen Mackin, Partner at Clyde & Co.
BIMCO have confirmed that the ETSA Clause is intended to apply more broadly than the EU ETS.
In order to participate in the EU ETS, Shipping Companies will need to – as is already the case for aircraft operators (among others) – open accounts with the Union Registry (which is accomplished via the relevant national administrator responsible for the shipping company).
The Union Registry is the centralised online database that records allowances held by its account-holders, and through which various transactions relating to EUAs can be conducted. These include any allocation of allowances, their auctioning, trading, transfer, and surrender.
Verified emissions data is also stored in the Union Registry, so that the annual reconciliation of allowances and verified emissions can be conducted. This determines what quantity of EUAs a company is obliged to surrender.
These allowances can then be surrendered directly via the Union Registry.
Shipping Companies (as defined) are required to collect emissions data at individual ship level and then aggregate this information at Shipping Company level for verification and reporting through the existing EU Monitoring, Reporting and Verification (MRV) system.
Shipping Companies will need to be registered with an administering authority, and which specific one will depend on where the Shipping Company is registered.
The administering authority in respect of a Shipping Company shall ensure that a Shipping Company under its responsibility monitors and reports the relevant parameters during a reporting period and submits aggregated emissions data at company level to the administering authority.
For companies registered in the EU, this authority will be the member state where they are registered.
For companies registered outside the EU, this will be the member state with the largest number of port calls from voyages performed by the Shipping Company across the last two monitoring years, or, if it has not traded in the EU during that period, the member state of the first port call.
Starting in 2025, by 31 March each year, the Shipping Company must submit a verified company emissions report to the administering authority.
The administering authority responsible may require companies to submit their emissions reports by a date earlier than 31 March, but not earlier than 28 February.
The report will aggregate the emissions that fall within the scope of the EU ETS for each ship that is under the responsibility of the Shipping Company for the previous calendar year (the reporting period).
This report will then be submitted to the verifier, a competent, independent, and impartial accredited legal entity or certified natural person, who will assess in an unbiased way the emissions data provided, after performing an analysis on the Shipping Company’s commercial activities.
The verifier will then issue a verification report stating that the aggregated emissions data is satisfactory if it is of the opinion that the data is free from material misstatements.
Once a verifier has assessed the monitoring plans and emissions reports made at the end of a specific reporting period, and where the emissions reports fulfil the regulatory requirements, the verifier will issue a Document of Compliance for the ship concerned, based on the verification report.
The Document of Compliance is defined under Regulation (EU) 2015/757 on the monitoring, reporting and verification of CO2 emissions as:
“a document specific to a ship, issued to a company by a verifier, which confirms that that ship has complied with the requirements of this Regulation for a specific reporting period.”
The Document of Compliance will include information on the identity of the ship, details on the shipowner, the identity of the verifier, the period of validity of the Document as well as the reporting period it refers to.
Shipping Companies will be required to surrender their allowances for each reporting period by 30 September of the following calendar year, as mentioned earlier.
The forthcoming articles in the series will examine: