EU Emissions Trading Scheme (“EU ETS”): Regulatory and contractual perspective

EU Emissions Trading Scheme (“EU ETS”): Regulatory and contractual perspective

in International Shipping News,Shipping: Emission Possible 17/07/2023

On 18 April 2023, the European Parliament decided that from 2024, the EU ETS would also apply to emissions from shipping. According to the EU regulations, the ‘shipping company’ concerned is responsible for compliance with the EU ETS vis- à-vis the authority. First, emissions from a ship in a calendar year are measured and verified. Then, the shipping company must submit the allowances to the authority in September of the following year. The first time allowances are to be submitted in September 2025 for emissions in the calendar year 2024.

But what does the term “shipping company” mean? In a nutshell, a shipping company can be the owner (probably the one ship company as owner of the ship in question), or the holder of the document of compliance (“DOC holder”). In the first instance, it must be assumed that the owner and DOC holder are jointly and severally liable to the authority. In other words, if the DOC holder does not submit the allowances to the authority on time, the authority will hold not only the DOC holder, but also the owner responsible.

But who should bear the costs for the procurement of the allowances? BIMCO (the Baltic and International Maritime Council) has already published a clause for time charters, according to which the charterer must procure the necessary allowances for the owner. The BIMCO clause is a good basis for the negotiations between the owner and the charterer. Particularly in the case of already existing time charters, however, it can be observed that charterers refuse to subsequently agree to the BIMCO clause, or only want to accept the content in a strongly diluted form.

What is the European legislator’s position on the distribution of costs? It seems clear that it is their intent that the shipping company is obliged vis-à-vis the authority to submit the allowances. However, the shipping company shall be provided with a statutory claim for reimbursement against the charterer on the basis of the polluter-pays principle in the internal relationship between owner and charterer. Thus, the European Parliament’s resolution stipulates that EU Member States shall provide, in their national law, for a statutory claim of reimbursement for the shipping company against the charterer, and the corresponding access to justice for the purpose of enforcing this claim. However, the European Parliament also clarifies that conflicts in the internal relationship between owner/charterer (e.g. if the charterer does not want to procure the allowances) do not affect the obligation of the shipping company to submit the allowances to the authority in due time. In other words, if the charterer does not procure the allowances, the shipping company remains liable to the authority.

Even if the European legislator wants to give the shipping company a statutory claim for reimbursement against the charterer, it is still necessary for each individual EU Member State to enact a national law to this effect. National legislators of the EU Member States must therefore still pass a corresponding national law by the end of 2023 with regard to shipping companies for which they are responsible. However, this is still a long way away and EU member states do not always comply with the EU’s requirements to transpose a EU regulations into national law on time.

What happens if a legislator of a Member State fails to enact a law by the end of 2023 providing shipping companies with a statutory claim against the charterer? In this case, the European Commission can initiate infringement proceedings against the Member State concerned for failure to transpose within the time limit.

Can the shipping company exceptionally invoke direct effect of the EU regulation against the charterer in a lawsuit? This is very unlikely, as direct effect of a EU directive is only possible in the relationship between the citizen and the state; a citizen can invoke the provisions of a directive against a Member State if the directive has not been transposed. However, according to the prevailing opinion, this does not apply between citizens or companies. It should be pointed out, however, that a citizen or company can assert a state liability claim against a Member State if a directive is not transposed in due time.

What is the conclusion to be drawn from this? It is important for shipping companies that the legislators of the Member States enact a law by the end of 2023 that grants shipping companies a claim for reimbursement. If this is not done and no clause is agreed in the time charter according to which the charterer has to provide for the allowances (for example in the form of the BIMCO clause), shipping companies are in an awkward situation whereby they remain obliged to submit the allowances to the authority. The consequences for the shipping company in the event of failure to submit range from drastic fines to detention of ships by the authority. Whether a shipping company can set-off any state liability claim against a fine claimed by an authority is highly questionable in this regard. However, this is a question that a shipping company does not want to face. Shipping companies must now press national legislators for swift implementation in order to create more legal clarity.

Another important point to watch will be the contract documentation. If the owner and time charterer agree on an EU ETS clause in the time charter, according to which the time charterer has to procure or pay for the allowances, it should be regulated, among other things, by how the emissions are to be reliably determined for both parties in order to avoid later disputes. Another important point will be the addendum to the existing management agreement between the owner and the manager as DOC holder. BIMCO has not yet published a clause with a proposal on this. Each party will have to protect itself against the insolvency of the other party, for example, in order to ensure that allowances do not fall into the insolvency estate of one party and that the other party has to procure the allowances again in order to file them with the authority. A manager will also want to be indemnified against extensive liabilities to the authorities by the owner.

In summary, there are still many steps to be taken by the parties between now and the end of the year to make the contract documentation watertight.
Source: Ocean Score