Making Shipping Greener… at what cost? And who pays?

How does it work?

The EU ETS aims to reduce GTG Emissions by “pricing” the emissions produced by polluting sectors, including the maritime sector. It is part of the Market Bases Measures ("MBM”) introduced by the EU Commission to meet their climate goals.

The EU sets a yearly cap which limits the total amount of GHG that can be emitted. The cap reduces every year, ensuring GHG emissions decrease gradually over time.

The emissions cap is expressed in terms of “allowances” (“EUAs”), with one allowance giving rise to the right to emit one tonne of CO2. Vessels must surrender enough allowances to fully account for their yearly emissions.

These allowances can be sold and traded. As the cap decreases year on year, so does the supply of allowances to the EU carbon market (hopefully reducing global emissions).

Who does it apply to?

The EU ETS applies to cargo and passenger ships of 5000GT and above. From 1 January 2027, offshore ships of 5000GT and above will also fall within the scope of the EU ETS.

Shipping companies registered with EU administering authorities are responsible for complying with the EU ETS regime. The regime applies to 100% of emissions on voyages within the EU and EEA and 50% of emissions on voyages into or out of the EU and EEA. It also applies to 100% of emissions from vessels at berth in a port under the jurisdiction of an EU Member State.

Moreover, to avoid circumvention, vessels stopping to tranship in ports outside the EU or EEA but less than 300 nm from an EU or EEA port will be required to include 50% of emissions for the voyage to that port.

Monitoring, Reporting, and Verification

Alongside the application of the EU ETS regime, the EU also implemented Regulation (EU) 2015/757: the EU MRV Regulation (“EU MRV”).

This regulation was introduced with the objective of reducing emissions from vessels by requiring them to monitor, report, and verify certain criteria including CO2 emissions, cargo carried, miles travelled and duration of travel. The regulation applies to vessels arriving at, within or departing from EU and/or EEA ports irrespective of the vessel’s flag.

This regulation applies to ships above 5000GT (with some exceptions such as warships and fishing vessels).

How do the ETS and MRV work together?

The EU ETS and EU MRV regulations work in a cycle. Under the EU MRV, operators must monitor their procedures and prepare an individual ship’s report which is then submitted to a verifier. In addition, the fleet’s emission data is submitted to the verifier which produces a company emission report. The entire data set is, subsequently, sent to the national administering authority by 31 March of each year.

Based on this report, by 30 September of the year following the data collection, operators must surrender emission allowances in the EU ETS registry.

In 2025 a phase-in period begins for the EU ETS. This requires shipping companies to only surrender the EU allowances for a portion of their emissions:

• 2025 - 40% of their emissions reported in 2024;
• 2026 - 70% of their emissions reported in 2025;
• 2027 onwards - 100% of their reported emissions.

Companies will receive some free allowances and others will be sold in auctions. Companies are also allowed to trade allowances among themselves in a pool as needed. If an operator reduces its emissions, the company can decide to sell the spare allowances or keep them to use in the future. All these operations will be recorded in the union registry.

Who pays?

According to the legislation, the “shipping company” is the entity responsible for compliance with the EU ETS. This will normally be the shipowner. However, it can also be the bareboat charterer or technical manager.

Moreover, to redistribute the risk between owners and charterers, under Article 3gc of Directive (EU) 2023/959 a “polluter pays” principle was introduced as follows:

“Member States shall take the necessary measures to ensure that when the ultimate responsibility for the purchase of the fuel, or the operation of the ship, or both, is assumed by an entity other than the shipping company under a contractual arrangement, the shipping company is entitled to reimbursement from that entity for the costs arising from the surrender of allowances”.

EU Member States are obligated to develop mechanisms to ensure that owners can be reimbursed by the charterer who is actually operating the ship.

On the contractual front, the BIMCO Emission Trading Scheme Allowances Clause for Time Charter Parties 2022 (“BIMCO ETS Clause”) was published on 31 May 2022 in anticipation of the extension of the EU ETS to the maritime sector in 2024. The clause reflects the “polluter pays” principle and obliges charterers to provide and pay for the vessel’s emissions allowances.

Owners however are still responsible for monitoring the vessel's emissions, providing the relevant emissions data to the authorities and provide information to the charterers. Charterers are to transfer the appropriate allowances to the owners on a monthly basis.

Penalties for failing to comply with the EU ETS

Not surrendering allowances within the deadline for a single vessel can affect the entire fleet. When companies fail to surrender allowances within the deadline, they will be liable to pay an emissions penalty of 100 Euros per tonne of CO2. Failure to comply for two or more consecutive periods may lead to the company's fleet being prohibited from trading within the EU.

The UK position

On 1 January 2021, the UK introduced the UK Emissions Trading Scheme (“UK ETS”) which substituted the UK’s participation in the EU ETS.

The UK ETS regime is very similar to the EU ETS. The main differences are the scope of applicability (the UK ETS only applies to the UK) and the approach to emission reduction over time. The UK ETS began in 2021 with a cap of 5% lower than it would have been under the EU ETS. As of 2024, this cap is consistent with net-zero targets. Whereas the EU supports a linear reduction of 2.2% yearly until the current phase ends in 2030.

Takeaway points

• Do not forget that shipping companies are required to submit their emissions data to the national administering authority by 31 March (the next deadline being 2026).
• By 30 September the following year, companies must surrender their EUAs in the EU ETS registry.
• There are strict penalties for not complying with your obligations under the EU ETS. If one vessel is not compliant, the entire fleet can be affected.
• Make sure to include suitable contractual wording (such as the BIMCO ETS Clause) in the charterparty to deal with the risk of providing and paying for EUAs. Whether you are an owner or charterer will dictate how you want that risk to be allocated.
• Even if charterers are the paying party, owners are still responsible for monitoring and providing information to charterers regarding their obligations.
• Additional information on the EU ETS can be found in the following link FAQ - Maritime transport in EU Emissions Trading System (ETS)

Please do not hesitate to contact us if you have any questions about the impact of the EU ETS on your business.