About
Emissions and allowances
The EU ETS is being gradually phased in for the shipping industry. Shipping companies will have to surrender allowances that cover:
- 40% of their emissions in 2024
- 70% of their emissions in 2025
- 100% of their emissions in 2026 (and onwards)
Emissions of greenhouse gases will be covered under the EU ETS in the following manner:
- 100% of emissions from intra-European routes
- 100% of emissions from ships at berth in EU ports
- 50% of emissions from voyages to and from the EU
Methane (CH₄) and nitrous oxides (N₂O) was included in the EU MRV (Monitoring, Reporting, and Verification) Regulation from 1 January 2024, and the EU ETS will be extended to cover these emissions, in addition to CO₂, from 2026.
The shipping company will only be required to submit allowances if it makes a port of call in the EU. A port of call entails that the vessel embarks or disembarks passengers or engages in cargo operations. For the purpose of the EU ETS, stopping to refuel, relieving crew, distress calls, obtaining supplies, dry-docking or yard stays are not considered a "port of call".
Vessel applicability
The EU ETS applies to all cargo vessels and passenger ships exceeding 5,000 GT. There are a number of exceptions, including:
- warships
- naval auxiliaries
- fish-catching ships
- fish-processing ships
- wooden ships of a primitive build
- ships not propelled by mechanical means
- government ships used for non-commercial purposes
For fish-processing ships, ships that have as their primary purpose to transport fish as cargo will be included, whereas ships that have as their primary purpose to process fish will be excluded.
Offshore vessels between 400 and 5,000 GT or more will be included in the EU MRV Regulation from 1 January 2025. Offshore vessels exceeding 5,000 GT will be included in the EU ETS from 1 January 2027.
The European Commission has published a list of types of vessels that will be considered "offshore vessels" and therefore will be required to report under in the EU MRV Regulation from 1 January 2025. The type of vessels included in EU MRV include offshore supply ships, drilling ships, FPSOs, accommodation ships, offshore construction vessels, wind turbine installation vessels and many other categories of offshore vessels. The determinative question is whether vessel is designed or certified to perform certain service activities offshore or at offshore installations, not whether the vessel is actually performing such services.
There are still questions that need to be resolved prior to the inclusion of offshore vessels in the EU MRV and EU ETS, especially how the terms "port of call" and "voyage" are to be understood in the context of offshore vessels. We expect there will be clarifications in this respect from the European Commission and Thommessen is monitoring developments in this respect.
General cargo vessels and offshore vessels between 400 – 5,000 GT was included in the EU MRV Regulation from 1 January 2025. Following on from the inclusion of these vessels in the EU MRV Regulation, the Commission will review the possibility of including smaller vessels in the EU ETS, and present a report on its consequences to the European Parliament and to the Council no later than 31 December 2026.
Procedure for verifying emissions
The EU ETS is closely linked to the EU MRV Regulation, which requires shipping companies to monitor, report and verify their emissions on an annual basis.
Each year, the vessel's emissions will be reported pursuant to the EU MRV Regulation, and an accredited verifier (e.g. certain classification societies) will verify the reported emissions. Once the emissions have been verified, this will form the basis for the calculation of how many allowances must be submitted.
The calculation of how many allowances will have to be surrendered will be based on the emissions made between 1 January and 31 December of a given year. An aggregated emissions report must be sent to the verifier, that will verify the emissions reported. The verified emissions report must be submitted to the European Commission by 31 March each year. By 30 June, the shipping company must have an approved Document of Compliance on board to show that the requirements under EU ETS have been met.
The deadline for surrendering allowances will be on 30 September.
The party responsible
As mentioned, the default responsible party is the registered shipowners, regardless of nationality. The shipowners can delegate responsibility to the ISM Company, which could be the technical manager or a bareboat charterer.
In order to delegate responsibility, the shipowners must complete a mandate letter which must be submitted to the administering authority. The mandate letter must comply with certain formalities, and make it clear that the shipowners have delegated the responsibility for compliance to the ISM Company for the relevant vessel(s).
The shipping companies responsible for compliance will be allocated to an administering authority based on these criteria:
- Companies that have an EU Member State as their country of registration in THETIS MRV (the system used for reporting emissions under the EU MRV Regulations) will be allocated to this Member State. This allocation may be accessed in this list.
- Non-EU shipping companies will be allocated to the Member State in which their vessels have had the most port calls in the preceding four years.
- Non-EU shipping companies with no port calls in the EU in the preceding four years will be allocated to the administrative authority in the Member State in which the shipping company has its first voyage falling within the EU ETS.
In Norway, the administering authority is the Norwegian Environment Agency (Miljødirektoratet).
The same company needs to be responsible for compliance with the EU MRV and the EU ETS. This means that a shipowner cannot assume responsibility for the EU ETS whilst a technical manager assumes responsibility for EU MRV.
Account types and purchase of allowances
The shipping companies that will be responsible for compliance must open a Maritime Operator Holding Account. An account application should be made to the relevant administering authority, and the application process may vary somewhat between the Member States.
The Maritime Operator Holding Account must be used for surrendering allowances to the EU. It may also be used for purchasing, transferring and receiving allowances.
The shipping company may only open one Maritime Operator Holding Account, despite being responsible for compliance for several ships.
If the registered owner has delegated responsibility to the ISM Company, it is the ISM Company that must open the Maritime Operator Holding Account.
A registered owner or charterer may wish to set up a Trading Account. This account can be used to receive allowances from other parties, purchase allowances and transfer allowances. The application for a Trading Account should also be made to the administering authority.
Anyone may open a Trading Account, including any party that is not subject to the EU ETS. Due to the price fluctuation of EU allowances, there is a market which includes companies interested in trading for financial reasons.
Shipping companies, especially shipping companies subject to the tonnage tax regime in Norway, should be aware of the tax implications of trading allowances for financial gain.
Sanctions and enforcement
In case of non-compliance, the shipping companies are liable to pay an excess emissions penalty of EUR 100 (corrected for inflation) per tonne of CO2 equivalent, and are still liable for the surrender of the required allowances. The names of the penalized companies will also be disclosed to the public by the EU.
Furthermore, in case a shipping company has failed to comply with surrendering its obligations for two or more consecutive reporting periods, and where other enforcement measures have failed to ensure compliance, the competent authority of the EU Member State of the port of entry may, after giving the opportunity to the company concerned to submit its observations, issue an expulsion order.
In practice, this means that every EU Member State is required to refuse entry to the ships under the responsibility of the shipping company concerned into any of its ports, until the company fulfils its surrendering obligations.
If a ship flies a flag of an EU Member State, it may be detained upon making a port call in the home Member State.
Contractual regulation
Due to the registered shipowner being the default responsible party for compliance with the EU ETS, contractual regulation is required in order to allocate financial and actual responsibility as required.
BIMCO has released a clause for the regulation of the relationship between the manager and the shipowners, which is accessible here: ETS – SHIPMAN Emission Trading Scheme Allowances Clause 2023
This clause now forms part of the default SHIPMAN 2024.
For charterparties, BIMCO has released a number of clauses addressing different types of charterparties, such as:
- ETS – Emission Scheme Transfer of Allowances Clause for Voyage Charter Parties 2023
- ETS – Emission Trading Scheme Allowances Clause for Time Charter Parties 2022
- ETS – Emission Scheme Freight Clause for Voyage Charter Parties 2023
These clauses often form the basis for a contractual negotiation, however, parties frequently make some modifications to their contents.
For Memoranda of Agreement or share purchase agreements used for the sale and purchase of ships, parties need to ensure that they take into account compliance with the EU ETS before concluding the negotiations.
Changing the responsible company mid-year will involve that the responsible party (seller side) will only be responsible for the part of the year that the vessel was under its control, i.e. up to the closing date. However, due to the sanctions regime which involves a risk of expulsion against the vessel, buyers may want to include mechanisms to ensure that previous owners will uphold their responsibility under the EU ETS when the allowances fall due the next year.
In sales where there is no change of the responsible entity, e.g., because there will be no change of technical manager, or the sale is of a shipowning company rather than the vessel, further contractual regulations may be required to avoid making the buyer responsible for the emissions made before the closing date.
Who does it impact?
Stakeholders in the shipping industry that have any operations in the EU.
Status: In force
The EU ETS is in force in all EU countries as well as Iceland, Liechtenstein and Norway.
Being in operation since 2005, the EU ETS is the world's first international emissions trading system. It has applied to the shipping industry from 1 January 2024, and is currently being gradually phased in.
Relation to other initiatives and regulations
The most recent revisions of the EU ETS forms a part of the EU Fit for 55-package.
The EU ETS is reliant on data which is collected under the EU MRV Regulation. Therefore, before introducing new measures in the EU ETS, the EU MRV Regulation is amended first.
Participants
The EU ETS applies in the EU Member States as well as the three members of the European Economic Area: Norway, Iceland and Liechtenstein.
Thommessen's comments
The inclusion of the shipping industry in the EU ETS has brought about a number of new points to consider for stakeholders in the industry.
The EU ETS applies to vessels over a certain size that are involved in transport of cargo or passengers to, from or within the EU. The EU ETS will apply irrespective of the flag state of the vessel, the nationality of the owners, or the ISM Company.
The default position is that the registered owners are responsible for compliance. This means that shipowners need to ensure that the responsibility for compliance is delegated to the ISM Company, being either the technical manager or a bareboat charterer, unless the shipowners wish to assume the responsibility themselves.
Charterers and shipowners need to negotiate how to contractually allocate the financial responsibility of compliance to the charterer, ensuring mechanisms that are effective and well-suited for the particular charterparty. This may involve the charterers transferring allowances to the owners, or the cost of the allowances being built into the hire or freight payments. However, shipowners will always need to be in a position to acquire allowances themselves, as there will usually be situations in which the charterer will not cover the cost of allowances, such as an off-hire situation.
Shipping pools will also need to take into account the added cost of compliance with the EU ETS into their distribution of pool points and liabilities.
Additionally, compliance with the EU ETS will also need to be taken into account in negotiations and drafting of ship sale and purchase contracts.
Thommessen has been assisting clients in a number of complex contractual negotiations as the industry moves to adapt. In our experience, many contracts use the BIMCO EU ETS Clauses as a baseline for negotiation, however, tailoring is often required, and at the same time there are many bespoke clauses in circulation.