In a nutshell: From 1 January 2024, the European Union Emission Trading System (EU ETS) will be extended to additionally cover greenhouse gas emissions from the shipping industry. Negotiations between ship owners, ship managers and charterers to include respective EU ETS clauses in their contracts started earlier this year, but one topic that has caused intense discussion was the question of who should be responsible for submitting allowances to the relevant authorities in the member states of the European Union (EU): the ship owner or the manager? On 1 September 2023, the European Commission published a first draft of an implementing regulation that made it clear that responsibility will likely fall on the registered ship owner. This means that the ship owner will be responsible for complying with all obligations under the EU ETS unless the ship owner has contracted out this responsibility to a third party. In this newsletter, we will provide an overview of the implications of this approach and the issues to keep in mind when negotiating contracts in this context. 

IMPLICATIONS OF NEW DRAFT IMPLEMENTING REGULATION

The long-expected draft implementing regulation “Commission Implementing Regulation (EU) laying down the rules for the application of Directive 2003/87/EC of the European Parliament and Council as regards the administration of shipping companies by administering authorities in respect of a shipping company” (the “Draft Implementing Regulation“) was published by the European Commission on 1 September 2023 and is scheduled to be adopted by the European Commission in the fourth quarter of 2023. Although there still may be changes to the draft, it provides important indications for all parties concerned on how to implement the EU ETS.

The Draft Implementing Regulation clarifies that in general, in the absence of contractual agreement, the registered ship owner will be the responsible entity to submit the required emission allowances to the relevant administering authority in the member states. This was not commonly expected, as generally in maritime law and also in the EU context the “shipping company” refers to the entity that is entrusted with all duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention (ISM Code), which is usually the manager of the ship as the “DOC holder”.

However, considering the consequences that come along with being the responsible entity to comply with the EU ETS obligations, the European Commission favours a different approach. This approach leads to three main options for the parties involved:

(1) the ship owner remains the responsible entity to comply with the EU ETS obligations, i.e., complying with national measures implementing Directive 2003/87/EC and the obligation to surrender allowances to the administering authority;

(2) the ship owner delegates the responsibility to comply not only with the ISM Code but also with the EU ETS obligations to another entity, e.g., the manager or bareboat charterer. There are formal requirements to perfect such delegation of the EU ETS obligations and it should be highlighted that if the requirements stipulated in the Draft Implementing Regulation are not fulfilled, the ship owner will remain the responsible entity for compliance with the EU ETS;

(3) the ship owner remains the responsible entity but subcontracts a service provider to assist with all EU ETS related requirements, e.g., collecting the necessary data or monitoring the process. The third party may also be granted powers to buy the necessary certificates on behalf of the ship owner and book these on the relevant ship owner’s certificates account. This would typically be “service business” such as technical or crew management.

What illustrates the implications of assuming responsibility under the EU ETS are the penalties provided for in the Directive 2003/87/EC in case of non-compliance. The penalty system that is currently applicable under the EU ETS will in general also apply to maritime transport. That means that any shipping company that does not surrender sufficient allowances by 30 September of each year to cover its emissions during the preceding year will be liable to payment of an excess emissions penalty, which is currently EUR 100 for each ton of carbon dioxide equivalent emitted for which the shipping company has not surrendered allowances. Payment of the penalty does not release the shipping company from the obligation to submit the required allowances. The penalty amount is intended to develop in accordance with the European index of consumer prices. If a shipping company fails to comply with the surrender obligations for two or more consecutive reporting periods, the member states will ultimately issue expulsion orders – detention orders if a ship fly’s the flag of a member state – for all ships under the responsibility of the shipping company concerned. Further implementing acts to cover these enforcement procedures in more detail is expected to be adopted by the European Commission. Such extensive consequences in case of non-compliance with the EU ETS illustrate the responsibility that the “shipping company” assumes as the responsible entity.

CONCLUSION

What needs to be done now by ship owners, managers, charterers and other parties involved is to negotiate commercially reasonable clauses that encompass all risks and responsibilities allocated to the respective parties. Such clauses should take into account the pros and cons and risks involved when choosing one of the three options decribed above and should be based on the information and legal documents that are currently available. The Baltic and International Maritime Council (BIMCO) published an ETS Emission Trading Scheme Allowances Clause for Time Charter Parties in 2022 and is expected to publish a clause for their ship management agreement SHIPMAN in the fourth quarter of 2023, which may be used as a basis for further considerations. Please do not hesitate to turn to us for advice when considering your options and for drafting the relevant clauses.

Please to contact your regular contact person at EHLERMANN RINDFLEISCH GADOW or Dr. Julia Glocke or Hendrik Brauns.