Following the EU Emissions Trading System (“EU ETS”) adopted by the European Union (“EU”), the EU is one step closer to achieving its goal of decarbonising the shipping industry. With other schemes in Japan, China and the UK still under development and likely to closely follow suit, their impact on global shipping will continue to expand.
Whilst the EU ETS is to take effect from 1 January 2024, Assureds should ensure that they are now aware of the fundamentals of the system and their rights and obligations, particularly those Assureds engaged in long term time charter fixtures and trading in EU waters, where Owners will now be looking to incorporate the BIMCO ETSA Clause for Time Charter Parties 2022 (“ETSA Clause”) into their fixtures.
Background and Scope of Application
On 31 May 2022, BIMCO published the ETSA Clause which provides for the allocation of rights and obligations between Owners and Charterers under ETS.
The largest ETS is currently operated by the EU as a result of the adoption of the EU ETS with shipping now added to this system, following the EU’s “Fit for 55 in 2030 package” and goal to reduce greenhouse gas emissions (“GHGE”) by at least 55% by 2030 compared to 1990 levels.
The ETSA Clause applies to any GHGE trading scheme including the EU ETS and any other similar systems imposed by applicable lawful authorities that regulate the issuance, allocation, trading or surrendering of Emission Allowances (“EA”). The scope of the ETSA Clause ensures that it remains relevant as more schemes are implemented to target and reduce emissions.
What are Emission Trading Systems (ETS)?
ETS are “cap and trade” schemes that permit the emission of greenhouse gasses in exchange for allowances. These schemes are used by governments to minimise the impact of pollution from vessels and seek to incentivise participants to take early steps to decrease emissions.
To reduce pollution, over time the quantity of available allowances are reduced as an incentive to lower emissions through increased efficiency and the use of alternative fuels.
Allocation of Rights and Obligations
The ETSA Clause provides for the allocation of responsibilities between Owners and Charterers under ETS, including the EU ETS.
The opening wording “notwithstanding any other provisions in this Charter Party” demonstrates that the ETSA Clause takes precedence over any other conflicting terms.
The “polluter pays” principle is followed ensuring that the party responsible for paying for fuel is required to cover the emissions emitted by that fuel. ETSA works on the principle of the transferring of allowances with ETS charges to be settled by Charterers as the commercial operators of vessels.
Charterers are therefore responsible to “provide and pay for” allowances corresponding to the vessel’s emissions during the time charter period and to transfer the appropriate allowances to Owners monthly so as to achieve compliance.
The onus is on Owners to monitor GHGE and to report the relevant emissions of the vessel as well as provide the necessary calculations and data in support of emission quantities.
Provisions of the ETSA Clause
Obliges Owners and Charterers to co-operate with one another and exchange relevant data to calculate EA surrendered during the period of the Charter Party; its therefore important that Owners and Charterers need to co-operate to ensure data is shared timeously in compliance with their obligations.
Obliges Owners to monitor GHGE for verification by an independent verifier.
Requires Charterers to “provide and pay for” allowances within 7 days from the date Owners notify Charterers of the quantity of emissions for the previous month. During off-hire periods, Charterers have the right to off-set against EA due or for Owners to return a quantity of EA equivalent to what Charterers would otherwise be responsible for, had the vessel remained on hire. This is a fairly short time period and Charterers may wish to explore whether a longer period can be agreed with Owners.
Should Charterers fail to transfer any of the EA, Owners have the right to suspend performance of any or all their obligations under the Charter Party until such time as the EA are received by Owners in full. 5 days’ notice is required to be served on Charterers prior to Owners exercising their right to suspend performance.
This is arguably an extreme mechanism and Owners may likely be reluctant to agree to do away with this contractual remedy should Charterers fail to settle EA in full as required.
Owners and Charterers will be required to ensure that appropriate arrangements are in place to comply with the applicable ETS which may apply to their Charter Party agreements.
With long period charters, Owners will be looking to tie in Charterers and provide certainty when fixing new charters, particularly if the vessel will be trading in EU waters. We expect Owners will therefore require the ETSA Clause to be incorporated.
Charterers should ensure if they re-let on a time charter basis such that their Charterers stem the bunkers, that the terms of the sub-charter contain the ETSA Clause on a back-to-back basis.
It is therefore important to ensure that the cost and risk of compliance is mitigated and properly allocated up and down the contractual charter chain.
Assureds should contact the Club if they require specific guidance on the ETSA Clause and wording, considering their factual circumstances or generally should they require assistance to understand the impact of the provisions and their obligations.