Camilla Søgaard Hudson
Bech-Bruun Law Firm, Copenhagen
csm@bechbruun.com

Johannes Grove Nielsen
Bech-Bruun Law Firm, Copenhagen
jgn@bechbruun.com

The European Union has set ambitious goals when it comes to the climate and has the objective of economy-wide climate neutrality by 2050. The EU also has the ultimate goal of achieving negative emissions. All economic sectors must contribute to achieving emission reductions, including the shipping industry, which is the most recent industry to be included in the EU Emissions Trading System (ETS) regulation as set out in Directive 2003/87/EC through the adoption of Directive 2023/959.

Ships and emissions covered

Not all ships are included in the EU ETS. Ships covered by the EU ETS regulation are:

• cargo and passenger ships of or above 5000 GT; and

• offshore ships of or above 5000 GT (entering into force from 2027).

The EU ETS provides a total amount (a 'cap') of greenhouse gases that can be emitted.

However, below the cap, companies can acquire allowances through the EU carbon market. There are no free allowances as known in other sectors. For travel between two EU ports, it includes all emissions, whereas the EU ETS rules will only apply to 50 per cent of emissions from journeys commencing or concluding outside the EU.

Companies can exchange allowances (a 'trade'), or a company can retain excess allowances for future emissions or sell these on the market. EU ETS is operating based on the tools set out by the monitoring, reporting and verification system set out under EU Regulation 2018/2066 (Monitoring, Reporting and Verification (MRV)).

Compliance with the EU ETS regulation

The party accountable for ensuring compliance with emissions regulations for a specific ship may either be the shipowner or the ISM company associated with that ship. It is the joint responsibility of the registered owner and ISM company to determine who is to undertake obligations under the EU ETS and EU MRV regulations. In the absence of an explicit agreement, the registered owner will be responsible for fulfilling ETS and MRV obligations.

Shipping companies are required to provide their administering authority with information concerning the ships for which they are responsible. In Denmark, the responsible authority for this is the Danish Business Authority.

Shipping companies must request the opening of a maritime operator holding account (MOHA) through the relevant national administrator within 40 working days from the EU publication of a list of shipping companies. Other shipping companies not included on the list must open a MOHA within 65 working days from the first port of call within the scope of the EU ETS regulation.

The consequences for failing to adhere to the EU ETS Regulation includes fines, being expelled from port and even having ships detained by authorities until compliance is ensured.

The Danish ETS Registry

The European Commission has established a Union Registry, under which Member States each administer their own section of the registry. Danish companies or persons with residency in Denmark registered with a VAT number are eligible for the creation of a trading account within the Danish ETS Registry subject to fees set out by the Danish Business Authority.

The transfer of allowances in Denmark is exclusively done through the Danish ETS Registry and is not subject to notification to the Danish Business Authority.

EU ETS and its impact on the utilisation of ships

As stated, shipping companies are obligated to acquire and surrender emission allowances equivalent to their ships’ emissions during voyages within the European Economic Area (EEA). This is a cost that must be factored into operating expenses (opex) going forward and this cost on emissions will, like any other cost, provide grounds for the optimisation of the operational performance of ships.

If the ship is being operated by its owner, the owner is obviously in control of the ship and can run it as it wishes. However, if a ship is on charter, issues may arise between the charterer and the shipowner with respect to emissions allowances.

The Baltic and International Maritime Council (BIMCO) has therefore released an Emission Trading Scheme Allowances Clause for Time Charter Parties 2022 (the 'ETS Clause'). The clause is based, in accordance with the expectations set out by the EU, on the principle that the party furnishing and covering the cost of fuel in the time charter arrangement is also accountable for supplying and covering the expenses of emissions trading allowances. It also mandates that the shipowners are to oversee the emissions from the ship, and have the responsibility for communicating emissions data and calculation methodology to the charterers.

On this basis, charterers will be responsible for monthly transfers of appropriate allowances to the owners. The clause specifically addresses the adjustment of allowances in the event of off-hire incidents and outlines the consequences if charterers neglect to make timely transfers of allowances.

The ETS Clause can therefore be introduced in current and future charter parties to align the responsibilities of the shipowner and charterer under the EU ETS regulations.