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The EU ETS for shipping and the BIMCO ETSA Clause for Time Charter Parties 2022

Launched in 2005 after the adoption of the EU ETS Directive [1],  the EU Emission Trading Scheme (ETS) is based on the “cap and trade” principle.

In other words, under the scheme, and given an absolute limit (cap) on the total amount of emissions that can be produced by entities operating in regulated sectors[2], such entities can receive or buy allowances that they can trade with one another (trade). At the end of each year, they must surrender enough allowances to cover the GHG emissions produced in the previous year.

If the company in question has remained under the “cap”, it can decide whether to keep the “saved “allowances or sell them on the ETS market.

The cap, and thus the quantity of allowances available to industry and to a single company, is reduced over time.[3]

On the 14th of July 2021, the European Commission adopted the “Fit For 55” package, a series of proposals fit for reducing net greenhouse gas emissions of at least 55% by 2030, compared to 1990 levels, in line with the target set in the European Climate Law [4].

In particular, the package includes a revision of the EU ETS [5] and an extension of such scheme to the shipping sector. In June 2022 the Eu Parliament proposed a revision of such draft.

Specifically, as per the amendments brought forward by the EU Parliament [6], the implementation of EU ETS to the shipping sector could start from January 1, 2024[7], applying to all vessels over 5.000 GT[8], calling at EU ports, regardless of the flag they fly. The scheme involves, among other features:

  • The elimination of the phase-in period (The proposal of the Commission includes a gradual introduction of the scheme for intra-EU shipment, starting from 2023 and getting to the 100% of the emission covered in 2026);
  • The 100% of emissions from voyages between EU ports and from ships at berth in EU ports covered;
  • The 50% of the emissions from voyages from a non-EU port to a UE Port and vice-versa covered until 2026 (but the 100% if the distance is less than 300 nautical miles), increasing to 100% starting from 2027 [9];
  • The coverage of the following greenhouse gases: carbon dioxide (CO2), methane (CH4), and nitrous oxides (N20);
  • April 30th as the yearly deadline for Member States to surrender a number of allowances equal to the total emissions (corresponding to the quantity of fuel released) referring to the previous calendar year;
  • the explicit recognition of the “polluter pays” principle, mentioning the possibility to include a specific binding clause in contractual arrangements.

On the 29th of June, 2022, The Council adopted its negotiating positions [10] on relevant legislative proposals in the ‘Fit for 55’ package, including the EU ETS scheme, as described above.

In such respect, the Council endorsed the extension of the scheme to the shipping industry and proposes to redistribute 3,5% of the ceiling of the auctioned allowances to member states who heavily depend on maritime transport, and who will naturally be the most affected.

Moreover, the Council suggests the introduction of transitional measures that would apply to small islands, winter navigation, and public service-related navigation. [11]

However, the Council, in line with the Commission’s position, still maintains the need for the system to be gradually introduced to the shipping sector between 2023 and 2025, with all emissions linked to intra-EU shipments covered from 2026 (see above).

At this point, negotiations between the European Parliament, the Council, and the Commission will continue in order to reach a final agreement on legislation.

Pending the legislative process, and ever since the first drafts of proposals, operators have drawn concerns regarding the effective application of the scheme to the shipping sector. In this sense, several Italian and international associations have raised, among others, the risk of distortion of competition in favor of non-EU ports, which could be chosen for stops in between voyages departing from/arriving to Eu ports, in order to avoid allowances.

Another important concern relates to the application of the Emission Trading Scheme in case a charterparty, namely a time charterparty, is in place, and thus the allocation of the costs for ETS compliance is to be determined.

Indeed, one of the amendments brought forward by the EU Parliament partly addresses the issue by stating that “[…] the shipping company is not always responsible for purchasing the fuel or taking operational decisions that affect the greenhouse gas emissions of the ship. Those responsibilities can be assumed by an entity other than the shipping company under a contractual arrangement. In that case […] a binding clause should be included in such arrangements for the purpose of passing on the costs so that the entity that is ultimately responsible for the decisions affecting the greenhouse gas emissions of the ship is held accountable for covering the compliance costs paid by the shipping company under this Directive [12]”

However, while, as anticipated, the above-mentioned amendment clearly gives relevance to the “polluter pays” principle, suggesting that the party who is responsible for the cost of fuel should also cover the ETS costs, the proposal still does not clarify how a similar clause could be imposed in contracts concluded between extra-UE parties once the EU Scheme is in force.

In order to provide for a practical solution to allow the allocation of cost and responsibilities for obtaining, transferring, and surrendering GHG emissions allowances for parties entering a time charterparty, BIMCO has recently published the Emission Trading Scheme Allowances (ETSA) Clause for Time Charter Parties2022 [13].

The scope of application of the clause includes any scheme, not only that of the EU, and addresses potentially all GHG emissions [14].

As stated in the preamble to the clause, given the responsibility of the charterer for providing and paying for emissions trading allowances, in line with the Parliament position, the general principle is that the shipowner must monitor the ship’s emission and provide the relevant emission data and calculations to the charterer, whom, in turn, has to transfer the appropriate allowances to the shipowner on a monthly basis.

Thus, cooperation between owner and charterers emerges as crucial in order to meet the requirements of an ET scheme under a time charterparty.

Particularly, under a contract where a BIMCO ETSA clause is included, within the first seven days of the month, the owner has to notify the charterer the quantity of allowances for the previous month and, in turn, within 7 days of such notification, the charterer has to transfer the same quantity of allowances into the owner’s nominated account.

Moreover, within 14 days before the expected date of redelivery, the owner has to notify the estimated quantity of allowances for the final month or part thereof. In case the estimated quantity is different from the actual one, the difference in emission has to be returned by the owner into the account of the receiving party, within 7 days of notification from such party, or, transferred by the charterer to the owner, in case the actual quantity of emission in higher.

According to the clause, during off-hire, the ETS compliance becomes the responsibility of the owner, as the charterer can choose whether to offset against allowances due or require owners to return a quantity of allowances equivalent to what charterers would otherwise have been responsible for if the ship had remained on hire.

Finally, the clause addresses the case where the charterer fails to transfer allowances when due, providing the owner with the right to suspend the performance of their obligations under the charter party whilst the ship will remain on hire, for as long as the delay takes place.

Chiara Palandri

chiara.palandri@mordiglia.it

[1] DIRECTIVE 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC. LINK , revised in 2018 by the  EU ETS Directive (Directive (EU) 2018/410. LINK

[2] Currently, the sectors covered by the existing EU ETS include are: power and heat generation, energy-intensive industrial sectors, and aviation within Europe

[3] The system’s discipline has undergone several changes since its introduction in 2005, and its implementation process has been divided into 4 phases (phase 4 is now in progress). For more details on the different phases, see the following LINK

[4] REGULATION (EU) 2021/1119 establishing the framework for achieving climate neutrality and amending Regulations (EC) No 401/2009 and (EU) 2018/1999 (‘European Climate Law’). LINK

[5] Proposal for a Directive amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and Regulation (EU) 2015/757. LINK

[6] Amendments proposed by the European Parliament on 22 June 2022 on the proposal for a directive of the European Parliament and of the Council amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and Regulation (EU) 2015/757. LINK

[7] The date has been pushed back from 1 January 2023

[8] According to Amendment (EU Parliament proposal, June 2022) starting form 1 January 2027, the scheme would apply to vessels of 400 Gt or over

[9] The proposal includes some exceptions (i.e. the voyage is from or to a non- EU port which is subject to an equivalent emissions trading scheme)

[10] Eu Council press release, 29 June 2022. LINK

[11] For more details see the Council General Approach on EU ETS, see the following  LINK

[12] Amendment 440 (European Parliament, 22 June 2022)

[13] For the complete BIMCO clause and the guidance notes, see the following LINK

[14] The BIMCO clause, defines “emission allowances “ an “allowance, credit, quota, permit or equivalent, representing a right of a vessel to emit a specified quantity of GHG emissions recognized by the Emission Scheme”