As another year draws to a close, the shipping market is again faced with environmental legislation which comes into effect on 1 January 2024. This time it’s the EU’s Emissions Trading Scheme or “ETS”. Strictly speaking this is not a new scheme but an extension of an existing scheme to shipping. However, ships are very different to factories.
Those who follow our blog might recall that a similar thing happened back in 2019 with the mandated switch to low sulphur fuel and/or compulsory use of scrubbers to remove excess sulphur coming in from 1 January 2020. That rather ruined our Christmas as there was a mad scramble to get legal advice before the scheme came into effect. We’re hoping that the same thing won’t happen this year, but the flurry of recent instructions suggests otherwise.
To be fair, BIMCO have done their best to respond to this important change with a raft of new suggested clauses being released that cover the proposed change. The problem is that those clauses are quite recent and they are controversial because they are perceived to be sympathetic to ship owners. There is no issue that charterers are to pay for emissions produced by ships that are trading for their account but there is a lot of wrangling over when and how they must pay. Ship owners would rather emissions allowances be paid in advance like hire. Charterers would prefer to pay only when the ship owner is required to surrender the emission allowances to the EU and that may not be for some time given that the logistics of the scheme are still being worked out.
The issue of concern to ship owners is that they remain legally responsible for emissions and they are concerned about what happens if the charterers don’t pay or can’t pay when they need to do so. Charterers are also scrambling to set up accounts to purchase “emissions allowances” and debating how to deal with market fluctuations. Is it best to purchase those allowances now or wait? What sort of investment strategy should they adopt given that there could be a rush to market to procure allowances as the ramifications of the scheme become apparent?
We have recently been advising on these aspects including on how emission allowances will be purchased, how and when they will be transferred to ship owners and when they need to be surrendered. By and large, ship owners and charterers have reached agreements on this or are in the process of doing so. However, the process is not easy given the number of legal entities that are involved in any particular ship. Many ships are owned via finance structures that involve lessors and finance owners. Those registered owners may have concluded bareboat charters for the vessels under which responsibility for the management and operation of the vessels is transferred to other parties who we refer to as bareboat charterers or demise charterers. There may be a long-term time charterer, a sub time charterer or a time charter trip charterer. Finally, there may be voyage charterers and even sub voyage charterers or shippers who are selling on a CIF basis. Confusion reigns as to who is to buy the allowances and how they are to be transferred and surrendered.
We expect that ship owners and charterers will have more time to adapt given that the surrender date for EU emission allowances is some way off. Having said that, if allowances are to be transferred on a more regular basis, then we could see this start to happen in early 2024 with allowances being transferred from charterers to owners’ scheme accounts. As such, there is some element of urgency involved as it takes time to set up emissions trading accounts.
We also don’t know what sorts of legal problems may arise from the EU ETS. There may be disputes over how emissions are calculated and verified but the bigger problem is likely to be what happens if one or more parties in the charter chain default when it comes to procuring and transferring allowances. In that situation it seems likely that the ship owner will be left carrying the can and many ship owners will not be happy carrying that sort of exposure.
We continue to monitor this fast-moving situation and we shall update our clients and followers in the event of any more notable developments.