Against a backdrop of extensive criticism raised against the position introduced under the ETS Directive, whereby the DoC holder under the ISM Code – often the technical manager – was assigned the financial obligation to surrender the EUAs, the European Commission has capitulated and instead designated the shipowner as the default responsible party – but who is the shipowner?
Maritime transport activities have been included in the EU ETS based on the expanded scope of the MRV Regulation[1] and the ETS Directive[2]. The responsible entity under both instruments is the “shipping company”. Under the MRV Regulation, the “shipping company” must monitor, report, and verify emissions from vessels, whereas the ETS Directive requires the “shipping company” to surrender EUAs corresponding to the verified MRV emissions data.
The MRV Regulation has direct effect in the EU Member States, whereas the EU ETS Directive must be implemented into national law. When defining the “shipping company”, the MRV Regulation refers to the ISM code’s definition for the “company” which means the shipowner or any such entity that may have assumed the responsibility for the operation of the vessel, either a bareboat charterer or the technical manager, which will thereby hold the Document of Compliance (“DoC”) under the ISM Code. The MRV data is hence being submitted by the DoC holder. The shipowner will only do so if the owner is (still) the DoC holder.
The amended ETS Directive adopted in May 2023 applies the exact same definition of the “shipping company”. Based on the wording, it will thus require the technical manager to surrender the EUAs. The Implementation Regulation[3] has, however, changed this.
The Implementing Regulation seeks to provide much-needed clarification on the “shipping company”. It sets out that this should now by default be the “shipowner”[4], even if the vessel is chartered out on bareboat terms (thereby transferring the ISM responsibility). While not provided explicitly it appears to refer to the registered shipowner.
The registered shipowner may, however, transfer the ETS responsibility to the DoC holder by procuring a so-called mandate letter, signed by both parties, listing the date of the transfer (mandate) and the vessels covered by the mandate together with corporate information on each party[5]. The registered shipowner may hereby shift the ETS responsibility to the technical manager or delegate this to a bareboat charter by way of explicit agreement[6].
Where no mandate letter is provided and approved by the administering authority, the Implementation Regulation, Art. 1 (4), stipulates that the (registered) shipowner will then by default be considered the entity responsible for surrendering the EUAs[7].
The information obligation of the registered owner is provided in Art. 2. By an apparent error, Art. 2 (1) refers to the situation where “the entity that has assumed responsibility for ETS obligations is the shipowner” even though this responsibility is, as set out in Art. 1 (4), by default on the (registered) shipowner and can only assumably be assumed by a bareboat charterer or technical manager. This responsibility cannot be assumed by the shipowner.
In any event, Art. 2 provides that the owner shall (in such event) inform its own administrating authorities of a list of the vessels for which it shall “has assumed responsibility” (presumably meaning the vessels for which no other entity has not assumed the owner’s responsibility. This shall allow the administrating authority to request that the EUAs be surrendered.
The Implementation Regulation requires the owner to update this list of vessels and provide it to its administrating authority, whereas the Implementation Regulation does not as such require the entity, which has been mandated to assume this responsibility, to update the mandate letter (e.g. if a vessel is no longer chartered by this entity). Presumably, the national authorities therefore to put in place regulations to institute such an obligation.
As to EU-domiciled companies, the registered shipowner or the company having assumed ETS responsibility (the DoC holder) must submit EUAs in a EUA account opened by administrating authorities in their own member states[8]. For non-EU shipping companies, determining the relevant administrating authority becomes more complicated.
Under the ETS Directive, the Commission is tasked with determining the applicable administrating authority for the non-EU based shipping companies on the rules of the ETS Directive and as supplemented by the Implementation Regulation. Under the ETS Directive, the Commission shall no later than 1 February 2024 and then every two years update the list of shipping companies which includes the corresponding administrating authority for each shipping company. Following the introduction of the Implementation Regulation, this obligation ostensibly also applies to non-EU shipowners who are not DoC holders.
The ETS Directive provides that a non-EU shipping company will be subject to the administering authority of the Member State where the shipping companies’ vessels have the most port calls in the preceding four years. In case of an equal number of port calls in two or more Member States, the administering authority shall be the Member State where the shipping company had its first port call among the voyages that started or ended in those Member States. The ETS Directive also provides – in case the non-EU shipping company has not performed any voyages to an EU port in the preceding four years – that administrating authority shall be that of the Member State where the company makes its first port call[9]. The Implementation Regulation clarifies that if the first voyage is between two Member States, the administrating authority shall be that of the Member State in the port of departure[10]. Similarly, if a shipping company has the greatest number of voyages in two or more Member States, the administrating authority shall be that of Member State with the port of departure of the first voyage in the reporting period.
The Implementation Regulation provides that the determination of the port calls will be based on the EU-wide database SafeSeaNet but that the Commission reserves the right to use AIS or other useful data if the SafeSeaNet data does not provide sufficient basis[11].
With the introduction of the Implementation Regulation, some uncertainty has been cleared as to the criteria to be applied by the Commission in determining the applicable administrative authority. Some uncertainty may, however, persist in respect of the Commission’s determination of relevant port calls (where SafeSeaNet data may not suffice).
The Implementation Regulation provides that the information of the shipping company shall be based on the Thetis MRV, i.e. the database where the MRV emissions reports are included. The MRV emission reports include various information including the identity of the “owner”[12].
As noted above, the Implementation Regulation requires an entity (DoC holder) who has assumed the ETS responsibility from the shipowner to inform its administrating authority of the owner’s details. The Implementation Regulation does, on the other hand, not require the DoC holder to provide the owner’s details to the authorities when the ETS responsibility is not assumed – despite the owner then being ETS responsible (as this is the default position).
The owner on his part is, as noted above, required to provide the list of its vessels for which the owner is (still) responsible to its administrating authority. As to non-EU owners, this appears to be difficult as the owner may likely not (yet) have assigned any administrating authority (if no preceding port calls in EU). The owner can thus not fulfil its obligations until after the Commission has actually attributed the owner to a specific member state and according to the ETS Directive, this is only done every second year[13]. The regulation appears to give no guidance as to how the non-EU owner should fulfil these obligations under the regulation.
As the Commission has not yet provided any guidance on the Implementation Regulation, it is difficult to discern the Commission’s strategy going forward. It seems that it would be more practicable if the Commission allocated the non-EU shipping companies among the member states at least on a yearly basis (or even more often) to take new shipping companies into account. This might ensure that compliance for the preceding year is possible at any given time.
In case, the bareboat charterer has assumed the responsibility for the operation of the ship and for the DoC under the ISM Code, the responsibility to comply with the EU ETS is not automatically assumed by the bareboat charterer, and the registered shipowner is advised to request the bareboat charterer to comply with all ETS related obligations and delegate the ETS responsibilities to the bareboat charterer (if this is the intention). Parties are also advised to implement clauses into bareboat charter arrangements catering for the tedious documentary requirements necessary to obtain an acceptance of delegation by the administering authority.
Another issue arising in the situation where a bareboat charterer has a dual-flag registration and where the ownership registration in made by the registered owner in one ship-registry and another bareboat registration is made by the bareboat charterer in another ship-registry to fly this registry’s flag. It appears based on the Implementation Regulation that the ETS responsibility is on the registered owner as default even though the bareboat charterer is registered as well. As the bareboat charterer may generally revoke the bareboat registration unilaterally, the registered ship owner should ensure that the ETS responsibilities are delegated to the charterer in accordance with the rules of the Implementing Regulation.
The Implementing Regulation does not cater for a situation where a bareboat charterer having assumed the ETS responsibilities want to re-delegate this to a technical manager. Instead, the delegation can only stem from the registered shipowner based on the wording of the Implementation Regulation. In such a scenario, it is important that the ship management agreement is adjusted to explicitly set out the obligations of the parties and that the bareboat charterer puts into the charter party that the (registered) owner is required at the bareboat charterer’s request to mandate the technical manager to assume the ETS responsibility.
While the Commission is required to allocate the non-EU shipping companies to the respective member states, it is up to the member states to demand the (locally domiciled and allocated non-EU) shipping companies under their jurisdiction to submit the required EUAs.
Noteworthy, the ETS Directive and the Implementation Regulation do not as such consider the situation where the information provided by the shipowner to his administrating authority (Art. 2) and the information provided by the entity who has assumed the responsibility (e.g. bareboat charterer) (Art. 1) according to the mandate letter. This mismatch may be due to a simple failure of either party to update the information, but it may also be due to a dispute between the parties under the underlying bareboat charter or technical management agreement. If for instance the parties to a bareboat charter party agrees for the charterer to surrender the EUAs, and if the owner then withdraws the vessel based on an alleged breach of the charterer, who should be required to surrender the EUAs? Based on the default rule of Art. 1 (4), the bareboat charterer would probably be allowed to unilaterally relieve itself of this obligation (though this would obviously not bar the bareboat charterer from incurring civil liability towards the owner for such failures).
The administrating authority of the bareboat charterer may, however, consider this differently depending on the wording of the mandate letter. If the mandate letter – signed by both parties – provides that the charterers assume the ETS responsibility for a specific period (the charter party period), the administrating authority may insist on the charterer’s obligation to submit EUAs. It is therefore crucial for the charterers to phrase these mandate letters appropriately to allow the charterers to walk-back on the mandate letter e.g. at owners’ breach.
Unfortunately, the Implementation Regulation suffers from some unclear wording and the industry must hope that the Commission clarifies the wording, either through guidelines or through an updated implementation regulation. In any event, it is important for each member state to now align their legislation with the new Implementation Regulation and for the industry stakeholders to update their contractual arrangements – to the extent possible.
[1] Regulation (EU) 2023/957 of the European Parliament and of the Council of 10 May 2023 amending Regulation (EU) 2015/757 in order to provide for the inclusion of maritime transport activities in the EU Emissions Trading System and for the monitoring, reporting and verification of emissions of additional greenhouse gases and emissions from additional ship types (the “MRV Regulation”).
[2] Directive (EU) 2023/959 of the European Parliament and of the Council of 10 May 2023 amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union and Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading system (the “ETS Directive”).
[3] Implementing Regulation (EU) 2023/2599 of 22 November 2023 (the “Implementing Regulation”)
[4] Implementing Regulation, Art. 1 (4).
[5] While the Implementation Regulation does not include a specific form to be used for such mandate letter, the Implementation Regulation requires the mandate letter to contain basic corporate/IMO information on the shipowner and the mandated entity (i.e. either the bareboat charterer or the technical manager), IMO numbers for the vessel(s) covered by the mandate, the date of application of the mandate and contact information on the shipowner.
[6] Implementing Regulation, Art. 1 (1) and (2).
[7] Implementing Regulation, Art. 1 (4).
[8] This compliance account used to surrender EUAs is not to be confused with the trading account allowing entities, including entities who are not ETS responsible, to trade and hold EUAs.
[9] The ETS Directive, Art. 3gf(1)(a)-(c).
[10] Implementing Regulation, Art. 4.
[11] Implementing Regulation, Art. 3 (2).
[12] The MRV Regulation, Art. 11.
[13] ETS Directive, Art. 3gf (2)(b), cf. Art 3gf (1)(c).