Integrating emissions trading schemes in ship management agreements – BIMCO’s new ETS clause and mandate letter

The EU ETS is established pursuant to EU directive 2003/87 EC and (EU ETS Directive) designed to decrease the emission of greenhouse gases by establishing caps on the emissions permitted in specified sectors of the economy, assigning the emissions allowances to businesses and permitting businesses to trade the assigned allowances in a secondary market, thereby ­implementing the principle that the ­polluter pays.

Pursuant to a revision of the EU ETS Directive adopted as part of the Fit for 55 climate package in the spring of 2023, shipping activities across the European Economic Area (EEA), including EU ­member states and Iceland, Liechtenstein, and Norway, were included in EU ETS starting in 2024. Shipowners subject to EU ETS are consequently now required to monitor, report, and surrender allowances for each ton of CO2 equivalent they emit.

New BIMCO ETS clause for ship management agreements

BIMCO released an ETS clause for time charter parties in 2022. In response to the inclusion of the shipping industry in the ETS provisions starting in 2024, BIMCO released four new ETS clauses on 8 December 2023: three clauses tailored for voyage charter parties and one clause intended for use in ship management ­agreements. In anticipation of further developments in this area within the international arena, the BIMCO ETS clause for ship management agreements is drafted generally to cover not only EU ETS, but also analogous schemes that may be introduced in the future by the EU or other jurisdictions, e.g., the UK ETS scheme which is due to take effect from 2026.

The main purpose of the clause is to clearly allocate the costs and responsibilities related to acquiring, transferring, and surrendering required emissions allowances for vessels subject to an emission scheme such as the EU ETS. The clause uses a mechanism of direct transfer of allowances rather than cost reimbursement to integrate the allowances into the conventional cost allocation framework of a ship management agreement as an operating cost to be borne by the owners.

Owners’ and managers’ ­responsibilities

Structurally,  the clause is divided into a sub-clause (a) and a sub-clause (b). 

Sub-clause (a) applies when the ­owners are the responsible party towards the authorities under the relevant ETS scheme. Subclause (b) applies when the ­managers are the responsible party towards the ­authorities – either because the relevant ETS scheme designates the managers as the responsible party, or because the ­managers have assumed this ­responsibility on a contractual basis. As drafted, the clause presupposes that the managers’ assumption of responsibility under an ETS scheme will be documented under a ­separate undertaking issued to the ­relevant authorities. BIMCO published  the ETS Mandate, a standard format for such a document, on 8 May 2024.

As noted in our previous Shipping Offshore Update in December 2023, the adoption of ­implementing regulation (EU) 2023/2599 in November 2023 clarified that the ­responsible party towards the ­authorities under the EU ETS is the registered owner of the vessel. The ­responsibility may, ­however, be assumed by the ISM ­responsible company by written ­undertaking submitted to the relevant authorities. EU ETS will thus fall under sub-clause (a) unless the managers assume responsibility. Amendments to the standard clause should be considered in cases where the vessel’s registered ­owners – and thereby the responsible party towards the authorities under EU ETS – are a different entity from the contractual owners under the management agreement, including in case of vessels on bareboat charter.

Sub-clause (a)(i) obliges the ­owners to ensure compliance – at their own cost – with the relevant emissions ­trading scheme for the duration of the ship ­management agreement. To enable the owners to comply with this obligation, sub-clause (a)(ii) obliges the managers to furnish the owners with pertinent ship emission data in a timely manner or at agreed intervals. Pursuant to an optional sub-clause (a)(iii), the managers may, in addition, undertake to provide the owners with a set of emission scheme management services, including monitoring and reporting of emissions data to the authorities, calculating required allowances and arranging the surrender of the owners’ emissions allowances to the authorities on the owners’ behalf.

Sub-clause (b), applicable when the managers are the responsible party towards the authorities, necessarily goes a step further than sub-clause (a)(iii). Where sub-clause (a)(iii) obliges the ­managers to provide emissions data, monitor and ­report the emissions data to the ­authorities, calculate the emission allowances required and arrange surrender of the owners’ allowances, sub-clause (b) obliges the managers to provide monthly ­estimates of the allowances they will be required to ­surrender in the next month and obliges the owners to obtain the­ ­allowances and transfer them to the ­managers within an agreed time to enable the managers to surrender them to the authorities. Reconciliation between estimated and actual allowances is done monthly and at the end of the management period.

BIMCO ETS mandate letter

The BIMCO ETS clause for ship management agreements helps allocate the various responsibilities among the parties to the ship management contract. However, the responsibility towards the authorities will, as a starting point, rest with the registered owner of the vessel, no matter which party is designated as responsible in the ship management agreement and according to the ETS clause.

As outlined in several of our ­previous articles on the subject, the registered owner and the ISM-company may agree that the ISM-company should assume this responsibility instead of the registered owner. One of the key requirements set out in Implementing Regulation (EU) 2023/2599 for delegating this ­responsibility is that the registered owner and the ISM-company taking over the responsibility must sign a “mandate letter”. The EU has not published its own standard form mandate letter, and up until recently, we have seen several different versions of the mandate letter being used.

The lack of a standard template has led to increased discussions and efforts needed to formalise the change of the responsible entity towards the authorities. Therefore, it was a pleasant surprise to see BIMCO launching its own standard ETS template mandate letter on 8 May 2024. Instead of drafting bespoke mandate letters, as has been the case until now, industry players may now simplify the proceed by filling out the standard form and submitting it to the relevant administering authority.

Implementing ETS compliance in ship management agreements

The BIMCO ETS clause for ship management agreements affords the parties flexibility to allocate the tasks relating to compliance with EU ETS – and future ETS schemes – to suit the specifics of their trade and business. Together with appropriately-drafted ETS clauses up and down the contractual chain, the clause can be used to ensure that current and future ETS schemes applicable to the vessel are ­complied with and that the costs of compliance are ultimately allocated in line with the principle that the polluter pays.