Impact of EU ETS on Charterers

The maritime industry is entering a new era with the European Union’s Emissions Trading System (EU ETS) extending its reach to shipping. As vessels set sail into these uncharted waters, charterers find themselves facing a sea of challenges and opportunities. In this article, we explore the impact of the EU ETS on charterers and delve into the BIMCO clauses designed to navigate the complexities of emissions trading in both voyage and time charters.

Transition to Low-Carbon Technologies

The EU ETS is meant to act as a catalyst for the maritime industry’s transition to cleaner and more sustainable technologies. The idea is that shipowners and charterers are compelled and incentivised to consider their vessels to be equipped with advanced propulsion systems, alternative fuels, or energy-efficient technologies to comply with stringent emission standards. This shift towards sustainability will cover CO2 emissions from all large ships (of 5 000 gross tonnage and above) entering EU ports, regardless of the flag they fly.

The EU ETS covers CO2 (carbon dioxide), CH4 (methane) and N2O (nitrous oxide) emissions, but the two latter only as from 2026.

To ensure a smooth transition, shipping companies only have to surrender allowances for a portion of their emissions during an initial phase-in period:

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

Market Dynamics and Competition

The EU ETS has the potential to reshape market dynamics, introducing a new layer of competition. Charterers operating more sustainable fleets may gain a competitive advantage in a market increasingly driven by environmental concerns. As a result, charterers must factor in not only the price but also vessel environmental performance when making strategic decisions to remain competitive. Long-term charterers should consider the value in investing in vessels that align with environmental standards, ensuring a smoother voyage through future regulatory and possibly tightening developments.

Increased Operational Costs

One of the most immediate impacts charterers face is the surge in operational costs. The EU ETS introduces a carbon pricing mechanism, requiring shipowners to purchase emission allowances, who in turn, will pass down the costs to charterers.

Charter Agreement Considerations

Charter agreements must adapt to the new regulatory landscape. Inclusion of clauses related to emissions compliance becomes unavoidable for charterers.

Shipowners and charterers or managers responsible for the purchase of the fuel and/or the operation of the ship are expected to develop contractual clauses to pass on the ETS surrendering costs as appropriate. Nevertheless, the shipowner remains the responsible entity for surrendering allowances.

 

Global Implications

The system is flag-neutral and route-based. This means it covers emissions from maritime transport as follows:

  • 100% of emissions from ships performing voyages departing from a port under the jurisdiction of an EU Member State and arriving at a port under the jurisdiction of an EU Member State (e.g. Hamburg to Marseille and Marseille to Hamburg);
  • 100% of emissions from ships within a port under the jurisdiction of an EU Member State (e.g. in the port of Antwerp), i.e. emissions released at berth and during movements within such a port;
  • 50% of emissions from ships performing voyages departing from a port under the jurisdiction of an EU Member State and arriving at a port outside its jurisdiction (e.g. Rotterdam to Shanghai);
  • 50% of the emissions from ships performing voyages departing from a port outside the jurisdiction of an EU Member State and arriving at a port under the jurisdiction of an EU Member State (e.g. Shanghai to Rotterdam).

Some derogations will apply, for instance for certain voyages to outermost regions or some small islands, or to the benefit of ships using renewable fuels.

While the EU ETS is region-specific, its implications extend globally. Ship charterers operating on an international scale need to be aware of potential ripple effects. The EU’s regulatory precedent sets the stage for similar measures in other regions, necessitating a global perspective in chartering strategies.

Collaboration

To navigate the complexities of emissions reduction and compliance, charterers should actively collaborate with shipowners. Engaging with shipowners enables a collective effort to meet environmental targets and shape a sustainable future for the maritime industry.

 

 

BIMCO Clauses for EU ETS in Voyage and Time Charters

BIMCO, the Baltic and International Maritime Council, provides standardized clauses to help streamline and clarify contractual arrangements in the maritime industry.

As charterers navigate the regulatory fog of the EU ETS, BIMCO clauses provide a crucial beacon. Bimco introduced clauses tailored for both voyage and time charters, to offer a standardized framework for addressing the challenges posed by emissions trading. These clauses serve as essential tools for shipowners, charterers, and other stakeholders to navigate complex regulatory landscapes such as the European Union Emissions Trading System (EU ETS).

Voyage Charter BIMCO Clause

The BIMCO Voyage Charter Party clause tailored for the EU ETS focuses on the obligations of both the charterer and the owner in complying with emissions trading regulations. BIMCO developed three clauses for voyage charters:

ETS – Emission Scheme Freight Clause For Voyage Charter Parties 2023
This clause deals with all costs arising from the surrender of emission allowances for the voyage by including them into the freight rate. The basis of the clause is that the voyage charterer will be the one effectively paying the owner for the emission allowances required for the voyage. The owners then remain responsible for surrendering the appropriate number of emission allowances in accordance with the applicable Emission Scheme

ETS – Emission Scheme Surcharge Clause for Voyage Charter Parties 2023

This clause deals with the transfer of emission allowances. The basis of the clause is that the voyage charterer will be the one transferring emission allowances to the owners for the voyage. The owners, as a matter of contract, then remain responsible for surrendering the appropriate number of emission allowances in accordance with the applicable Emission Scheme.

ETS – Emission Scheme Transfer of Allowances Clause for Voyage Charter Parties 2023

Deals with all costs arising from the surrender of emission allowances for the voyage by the payment of an Emission Scheme Surcharge to the owners. The basis of the clause is that the voyage charterer will be the one effectively paying the owner for the emission allowances required for the voyage. The owners then remain responsible for surrendering the appropriate number of emission allowances in accordance with the applicable Emission Scheme.

Cost Sharing:

Depending on the negotiated terms, the clauses may stipulate how the costs associated with emission allowances are shared between the charterer and the owner. This can vary and may be subject to negotiation based on market conditions and the specific terms of the charter agreement.

BIMCO Time Charter Clause

For time charters, BIMCO has developed a specific clause to address the intricacies of the EU ETS:

ETS – Emission Trading Scheme Allowances Clause For Time Charter Parties 2022
The basis of the clause is that the party providing and paying for the fuel under the time charter is the party that is responsible for providing and paying for emissions trading allowances. The shipowners must monitor the ship’s emissions and provide the relevant emissions data and the basis of calculations to the charterers. Using this information, the charterers transfer the appropriate allowances to the shipowners monthly. The clause addresses the adjustment of allowances due to off-hire events and what happens if the charterers fail to transfer allowances when due.

Key Considerations

Negotiation Flexibility
BIMCO clauses provide a framework, but they are not one-size-fits-all. Parties involved in charter agreements have the flexibility to negotiate specific terms based on their unique circumstances and preferences. They are contractual agreements.

Market Dynamics
The clauses recognize the dynamic nature of the carbon market. As such, they provide a foundation for addressing the costs associated with emission allowances while allowing for adjustments based on market fluctuations and negotiations.

Transparent Reporting
Both clauses emphasize the importance of transparent reporting to ensure compliance. This transparency not only fulfills regulatory requirements but should also promote a collaborative approach between charterers and shipowners in achieving environmental goals.

In summary, BIMCO clauses for the EU ETS in voyage and time charters provide a structured and standardized approach to addressing the challenges posed by emissions trading regulations. By clearly agreeing and defining responsibilities, cost-sharing mechanisms, and reporting requirements, later disputes may be avoided. Eventually these clauses contribute to a more transparent and efficient maritime industry in the era of increased environmental scrutiny.

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