Clarification on responsible entity under EU ETS (the "shipping company")
The inclusion of the shipping industry in the EU Emission Trading System as per Directive 2003/87/EC ("the EU ETS") from 1 January 2024 is now fast approaching. According to Article 3 in the said directive, it is the "shipping company" that is responsible for compliance with the EU ETS-obligations, hereunder to surrender emission allowances.
Up until recently, the general understanding in the industry has been that the "shipping company" referred to the holder of the Document of Compliance (the "DOC holder") – typically the bareboat charterer or technical manager. The Commission has now, through a new implementing regulation, changed this understanding and clarified that it is the shipowner who – as the general rule – will be considered to be the "shipping company" and therefore also is responsible for compliance with the EU ETS-obligations.
On 22 November 2023 the Commission adopted Implementing Regulation (EU) 2023/2599 laying down rules for the administration of "shipping companies" by national administering authorities under the EU Emissions Trading System (the "Implementing Regulation"). The Implementing Regulation entered into force 26 November 2023, following its publication in EU's official journal.
The Implementing Regulation explicitly designates the "shipowner" as the default party responsible for compliance with the EU ETS-obligations, hereunder the obligation to surrender allowances. However, another entity may take over this responsibility if the conditions set out in the Implementing Regulation are fulfilled.
To formally qualify as an entity which may take over the responsibility, the entity must have assumed the responsibility for the operation of the ship from the shipowner. On assuming such responsibility, it must also have agreed to take over all duties and obligations imposed by the ISM Code. In practice, this means that the relevant entity – as a minimum requirement – must be the DOC holder. Responsibility for compliance with the EU ETS-obligations may not be transferred to other entities.
The Implementing Regulation clarifies that being the DOC holder is not sufficient in itself. In order for responsibility to be transferred, the entity must also have assumed responsibility for the EU ETS-obligations, hereunder the obligation to surrender allowances. In addition, documentation clearly indicating that the other entity has been mandated by the shipowner to comply with the EU ETS-obligations must be submitted to the relevant authorities. This documentation must be signed by the shipowner and the entity which is taking over responsibility for the EU ETS-obligations.
The Implementing Regulation includes further details on the documentation that needs to be submitted to the authorities. It is also specified in the Implementing Regulation that until such documentation has been submitted, the authorities will consider the shipowner as the responsible entity. An agreement between a shipowner and a technical manager or bareboat charterer, is therefore not sufficient in itself.
It is worth mentioning that the EU ETS recognise the "polluter pays"-principle by providing that the EU member states shall take the necessary measures in their background law to ensure that when the ultimate responsibility for the purchase of the fuel, the operation of the ship or both, is assumed by an entity other than the "shipping company" pursuant to a contractual arrangement, the shipping company is entitled to reimbursement from that entity for the costs arising from the surrender of allowances. This could typically entail a financial recourse towards the charterer under a time charter. However, the scope and practical implementation of such arrangements in background law of member states remains unclear. In addition, owners must also take into account that many agreements within shipping are governed by English law, which is a non-EU country and which does not have rules on EU ETS.
While the Implementing Regulation clarifies the public law position under the EU ETS, industry players are still well advised to consider how the EU ETS rules should be taken into account in their contractual regulations.
For bareboat charters the general structure and provisions should imply that the bareboat charterers should cover the costs related to acquisition of allowances under EU ETS as this would be typical operational expenses. However, the registered owner should make sure that the bareboat charterer undertakes a contractual obligation to comply with EU ETS and to also take on the public law responsibility as the "shipping company" under EU ETS by delivering the necessary documentation to the administrating authorities. Having the bareboat charterer take on the public law responsibility for compliance with EU ETS will be beneficial for the registered owner as it will not need to get involved with monitoring of emissions or submission of allowances during the period of the bareboat charter.
In existing bareboat charter parties, owners could seek to get the bareboat charterers to take on responsibility for compliance with EU ETS going forward with reference to the general cost and responsibility allocation. Although the owners might get their costs related to submission of allowances under EU ETS covered under either existing contractual provisions or by reimbursement mechanisms under background law, the procedure and timing for such claims remains unclear. It would therefore be beneficial for the owners to shred the public law responsibility as the "shipping company" altogether.
For management agreements, the firm starting point now is that the registered owner will be responsible for compliance with EU ETS. However, the technical managers may agree to take on this responsibility. If this is agreed, documentation must also be submitted to the relevant authorities in order for the transfer to be effective. Irrespective of whether the responsibility as "shipping company" is assumed by the technical manager, the technical manager may also take on responsibility for monitoring and reporting of emissions from the vessel to the owner. BIMCO is expected to release both a revised SHIPMAN contract – which will include an EU ETS-clause – and a stand-alone ETS-clause in December 2023. These clauses are expected to address both the responsibilities for monitoring and reporting as well as the submission of allowances.
While time charterers cannot take on responsibility as the "shipping company" under the public law regulations, they should be the ultimate financially responsible party – in line with the "polluter pays"-principle. For existing charter parties, owners should review the contractual provisions to clarify whether the charter parties offer protection through existing cost-covering clauses or potentially under reimbursement mechanisms to be incorporated in the background law in the EU countries. However, it is advisable to amend long term time charters to clarify the financial responsibility for EU ETS. Specific contractual provisions should, amongst other things, address what should be delivered by the charterers in relation to the EU ETS (allowances, derivatives relating to allowances or cash compensation allowing the owners to acquire allowances themselves), when to deliver / frequency (one a year, once a month, or something else), and the price (in particular if cash compensation is chosen). BIMCO released an emission trading scheme allowances clause for time charter parties already in 2022, which states that the charterer should provide allowances on a monthly basis.
While numerous clarifications are still pending despite the imminent implementation of the EU ETS regulations in just a month, these latest insights from the EU are beginning to outline the practical aspects of how the regulations will be managed. In recent months, Wikborg Rein has conducted a series of workshops with clients on this topic and remains vigilant in tracking the latest developments. Please do not hesitate to get in touch should you wish to discuss.