Authored by Antonia Panayides, Laura Hyne and Grace Durnall
The EU Emission Trading Scheme (the “EU ETS”) has been extended to cover the maritime sector from 2024.
The amendments to the EU ETS (the “Directive”) require compliance by the “shipping company”. The definition of “shipping company” under the Directive extends to a “…manager or the bareboat charterer, that has assumed the responsibility for the operation of the ship from the shipowner and…responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention….”.
It is critical to establish which entity is the shipping company as they are responsible for compliance and, in particular, surrendering sufficient EU Allowances (“EUAs”) under the Directive. A failure to comply could result in fines and, at worse, vessels can be denied entry to EU ports following two or more consecutive years of non-compliance by a shipping company.
The EU Commission (the “Commission”) has published a draft paper laying down rules for the application of the Directive. Much needed clarity has been provided on the definition of “shipping company”. The draft provides that responsibility for compliance with the EU ETS falls on the registered shipowner, not a manager or bareboat charterer. However, that responsibility can be transferred, as set out below.
Transferring responsibility for compliance
The shipowner can delegate responsibility for compliance with the EU ETS by mandate.
The shipowner would need to provide its administering authority with a document confirming that it has duly mandated that another organisation will be responsible for compliance with the EU ETS obligations on behalf of the shipowner. There are several requirements this document must meet. For example, the document must either be an original signed by both the shipowner and the organisation assuming responsibility for compliance, or if a copy is provided, it must be certified as a true copy. A list of the information that must be provided in the document can be found in the draft paper.
If such documentation is not submitted to the administering authority, or the documentation is not in accordance with the requisite requirements, the shipowner shall be considered as the shipping company responsible for EU ETS obligations.
Although the paper is a draft, it provides clear guidance on the Commission’s views on how the EU ETS is expected to operate in practice.
Considerations for EU ETS compliance
Shipowners will need to surrender allowances in the EU Member State which corresponds to their administering authority. To do this, shipowners will need to open a Maritime Operator Holding Account in that EU Member State. Through this account, it will be possible for the shipowner to surrender EUAs. Whilst a shipowner may have an arrangement with a charterer, who will purchase the EUAs required to cover their charter of a vessel, it is important that a shipowner has an account to enable them to surrender the EUAs. Further, should issues arise with the charterer, it is important a shipowner can proceed to purchase and surrender their own EUAs as necessary to avoid breach.
Member States can impose additional penalties for non-compliance with the EU ETS, provided they are “effective, proportionate and dissuasive”. Differences in penalties could lead to new shipping companies strategically choosing where to register / what EU port to travel to first.
If you would like further information, please do not hesitate to contact Antonia Panayides.