What does the ETS mean for parties owning, operating or chartering a ship as of 1 January 2024?

As of 1 January 2024 the scope of the EU Emission Trading Scheme (ETS) is broadened and from then on also applies to the maritime industry. What does this mean for parties owning, operating or chartering a ship?

The basis for the EU ETS can be found in the EU ETS Directive (Directive 2003/87/EC) and in the Monitoring, Reporting and Verification (MRV) Regulation (Regulation 2015/757). The EU ETS is regarded as the cornerstone of the EU's policy to combat climate change and its key tool for reducing greenhouse gas emissions and works on the so called ‘cap and trade’ principle. A cap means that a limit is set on the amount of greenhouse gasses that can be emitted per installation, aircraft or per the 1st of January 2024 also per ship. The cap is expressed in emission allowances which must be acquired by the company owning or operating the installation at the so-called EU carbon market. Emission allowances can also be traded between companies. If an installation or operator reduce their emissions, they can either keep the spare allowances to use in the future or sell them.

It is important to note that the EU ETS scheme will be introduced gradually. From 2024 the EU ETS will include ships above 5000 GT transporting cargo or passengers for commercial purposes. The system will be extended from 2025 to apply to offshore ships above 400 GT and general cargo ships between 400 and 5000 GT transporting cargo for commercial purposes. Offshore ships above 5000 GT will from 2027 be included in the ETS. By 2026 the European Commission will review whether general cargo and offshore ships between 400 and 5000 GT will also be included in the ETS.

Initially the EU ETS will only apply to carbon dioxide emissions and emission allowances will only be necessary for part of the total emissions (40% in the first year, 60% in the second year and 100% for 2026 onwards).

The responsibility for compliance rests with the shipping company. The EU ETS Directive and the MRV Regulation include the following definition of shipping company: the shipowner or any other organisation or person, such as the manager or the bareboat charterer, that has assumed the responsibility for the operation of the ship from the shipowner and that, on assuming such responsibility, has agreed to take over all the duties and responsibilities including duties and responsibilities imposed by the ISM Code.

Given the above definition it is therefore advisable to carefully consider this additional responsibility and costs when entering into ship management agreements, but also in respect of charterparties a so called emission allowances clause may be worth including in order to allocate costs and responsibilities connected with obtaining the emission allowances.

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