News & Events

ETS: A headache over who pays.

  • 06/11/2023

The shipping industry is already in the process of entering a new era, through its inclusion in the EU’s Emissions Trading Scheme. However, issues over who’s liable for the added costs remain. In its latest weekly report, shipbroker Gibson said that “in less than two months’ time, the shipping industry will for the first-time face emission taxes. For many in the market, the inclusion of shipping in the EU’s Emissions Trading Scheme (ETS) has been a ‘tomorrow problem’, but owners and charterers will soon be fixing voyages which are set to arrive in Europe after the 1st of January, and thus incur an offsetting requirement for the portion of the voyage which falls into the new year”.
“So, the question now is who pays? It is the ship owner who will be liable for reporting and offsetting the emissions. Under the existing monitoring, reporting and verification (MRV) system, it has been the DOC holder (i.e. the shipmanager) who has been responsible for reporting emissions to the EU. However, this obligation now shifts to the shipowner unless there is an explicit contractual agreement to make the DOC holder responsible. Simultaneously, the owner will be responsible for acquiring and surrendering EUAs. Therefore, a mandatory carbon account needs to be established where EUAs can be stored, transferred to and from other parties and ultimately surrendered to the relevant authority”, Gibson said.
According to the shipowners, “despite the shipowner being responsible, it is still being debated how the cost will be ‘passed on’ to the charterer. Under a time charter, it is generally accepted that the charterer will foot the bill; however, for spot voyages it is more complicated. Owners are likely to prefer submitting a claim upon completion of the voyage to charterers for settlement. Yet, charterers may prefer to not have it specified as an additional cost, leaving owners to attempt to recover the cost through higher freight rates (or lower profitability). Some charterers may also prefer to transfer EUAs to the owner’s carbon account, instead of a cash settlement. In the end, the standard industry practice which emerges may be a result of who (owners or charterers) has market power upon the implementation of the rules. It is also debateable whether ballast legs will be compensated. As owners will need to pay for both inbound and outbound voyages, vessels with long ballasts into an EU port will have a greater ETS liability, making them less competitive compared to vessels with shorter ballasts, thus trading dynamics are likely to be impacted”.
Gibson added that “the scope of the scheme is expected to be largely unchanged from the draft text released earlier this year, as covered in previous Gibson reports. The ETS will be phased in over three years (see chart) with voyages in 2024 having to surrender allowances for 20% on voyages from non-EU port to EU port, and 40% for intra EU trade, rising to 50% and 100% respectively by 2026. Some changes are, however, expected. It was reported this week that loopholes for container ships calling at transhipment ports just outside the European Union are said to have been introduced in the final text, and more changes are likely. Under the current rules, STS operations outside ports are not subject to the scheme and could be used to avoid an offsetting liability. The EU has stated that evasive practices will also be closely monitored and addressed where appropriate”.
The shipbroker concluded that “the emergence and standardisation of trading practices around the ETS is likely to take several months to emerge. However, it is not the end of the regulatory journey. Just 12 months later, the FuelEU Maritime initiative will come into force requiring the GHG intensity of the fuel used on board to decline by 2% on a well to wake basis – for many requiring the use of biofuels. More on that later this month”.
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