ITIC circular: EU ETS update

Wednesday 10th January 2024

To all ship management and shipbroking members and their insurance brokers

The EU Emission Trading Scheme (ETS) came into force 1st January 2024. This requires all commercial vessels over 5,000 GT (with some exemptions) sailing to or from an EU port to report CO2 emissions and to surrender one carbon credit known as a European Allowance (EUA) for each tonne emitted. The surrendering of an allowance does not become due until September 2025. However, any vessel that is now calling at an EU port will be accruing a liability.  

The responsible entity for reporting and surrendering the EUA is considered by the EU to be the registered owner of the ship. However, the registered owner can transfer this responsibility to their manager if they are the Document of Compliance (DOC) holder.  

ITIC does not recommend you agree to be the responsible entity until you have fully understood the risks and put in place mitigation.  

A failure to comply could result in fines (EUR 100 per tonne), detention or at worst the black listing of your entire managed fleet from EU waters.  

ITIC is on the BIMCO drafting subcommittee of the new version of SHIPMAN, which is planned to be published in 2024.  Much of the work of  the  subcommittee to date has been spent on a new ETS clause which is ready for incorporation into SHIPMAN now.

There are three scenarios which are envisaged:

1. In the first the ship owner remains the responsible entity for the surrendering of the emission allowances. It is likely that larger ship owners who have the ability and the capacity will want to keep the responsibility within their control. However, the manager will remain crucial to the owner as they have to provide the emission data to the owner so they can calculate and surrender the allowances. 
2. In the second scenario the owner retains responsibility but engages the ship manager on a consultancy basis to collect the emission data, arrange for it to be submitted and for the surrendering of the allowances.
3. The third scenario is where the owner transfers the responsibility to the manager by a strict written mandate. Amongst the requirements for the mandate are that it must be an original signed by both the ship owner and the organisation assuming responsibility for compliance, or if a copy is provided, it must be certified as a true copy. It is this scenario that is the most risky for  the manager as the credit risk will be significant. Many owners will not want to pay the manager in advance, but only on actual emissions and paid for in arrears. If this is agreed then the contract must be explicit on the financial security for the manager. This could be a cash deposit, or issued as a number of allowances to be held on account (such as 45 days of allowances for the ship at full steaming).  

ITIC’s advice at this time is that if ship managers are not totally satisfied that they have adequate financial security from the owner they should not agree to be the responsible entity. They should limit their role to only assisting the owner in the latter’s own compliance with the scheme. The credit risk and penalties for non-compliance as a responsible entity are just too onerous.

For detailed information on the legal and practical structure of the ETS we refer you to the FAQ page of the EU Commission.