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Gard: Emission trading schemes and international shipping

ETS application to shipping is still under discussion but owners and charterers should start thinking about how they are going to deal with it once it is in force, says Louis Shepherd.

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Norwegian maritime insurance company Gard on Tuesday (31 May) published an insight discussing interest in the expansion of existing emission trading schemes to also cover international shipping in the EU, China and Japan, as well as urging owners and charterers to think ahead before its implementation:

By Louis Shepherd, Senior Claims Adviser, Lawyer, London

On a nation state level, governments can impose taxes on the sources of pollution at the point of production or sale, e.g. on petrol, with the aim that the taxes generated will cover the cost of dealing with the resulting pollution and incentivise reduced consumption. The difficulty in international shipping is that if just a few governments took this approach for bunker fuel, the buyers would likely adjust their arrangements so that they avoided bunkering at the taxed ports. For a sales tax on bunker fuel to be effective, governments of all the major bunkering ports around the world would need to coordinate and agree to tax bunker fuel in the same way. With such cooperation looking very unlikely in the near term, governments are now looking at imposing costs on emissions, rather that at the point of sale.

An emission trading scheme (ETS) is a tool that governments and regulators are expected to use increasingly often in the fight to reduce the pollution created by international shipping. The central idea behind an ETS is to have a market mechanism to ensure that “the polluter pays” – the payment being for the environmental and social cost of pollution, its clean up cost and potentially also research into technology that will reduce or remove it. Of course, increasing the cost of pollution also creates an incentive to create less of it.

For this reason there has been increasing interest in expanding existing ETS to include international shipping, including in the EU, China and Japan. The basic idea of an ETS is that a capped number of emission permits are bought and sold on the market, with emitters having to purchase and surrender enough allowances to cover their emissions. The price of the allowances will change over time to reflect the balance of supply and demand, and emitters then are incentivised to find the cheapest (ie. most efficient) ways to reduce emissions.

The EU Emission Trading Scheme 

Launched in 2005, the EU’s ETS works as a “cap and trade” scheme where emitters of CO2 in certain sectors have to purchase allowances to cover their carbon emissions during the relevant trading period. 

The number of allowances at any one time are fixed, but they reduce each year, so that emissions within the EU also fall.

How the scheme will be applied to shipping is still under discussion, but if current proposals are adopted, the key features will be:

  • Application to all vessels over 5,000 GT trading within EU waters, irrespective of flag
  • Start date 1 January 2024 (pushed back from 1 January 2023)
  • Full implementation right away, with no phase-in (originally suggested phase-in until 2026)
  • 100% of intra-EU voyage emissions to be covered by the scheme
  • 50% of EU in-bound/out-bound voyage emissions will be covered, increasing to 100% from 2027
  • The ‘shipping company’ (defined as owner, manager or bareboat charterer) will be responsible for surrendering the allowances
  • The ETS will cover carbon dioxide, methane and nitrous oxide
  • 30 April deadline for surrender of allowances for previous calendar year (ie. 30 April 2025 deadline for 2024 emissions)
  • Non-compliance can lead to penalties and expulsion orders

Several parts of the scheme are still unclear, and questions have been raised about two particular areas relating to shipping. First, in the Special Rapporteur’s report of 24 January 2022, it says that where a ship is on charter and the owner is not responsible for purchasing fuel or making decisions about the vessel’s speed, cargo or route, then:

“… a binding clause should be included in such arrangements for the purpose of passing on the costs so that the entity that is ultimately responsible for the decisions affecting the CO2 emissions of the ship is held accountable for covering the compliance costs paid by the shipping company under this Directive.”

Whilst many vessel owners would support the motivation behind this, it is far from clear how EU law would impose such a clause in private contractual arrangements between parties that may not be based in EU states. What happens if the charterparty contains no such clause? Could the owners rely on EU law to seek recovery from the charterers in the EU even if there was no such clause in the charterparty? Might it result in some voyage-charterers being forced to pay for EU ETS allowances even though they did not supply the fuel?

A second area of discussion is how voyages into or out of the EU are to be determined, and if operators may seek to evade the full application of the EU ETS. For example, if a vessel calls at an intermediate port just outside of the EU shortly after leaving EU waters, that may result in the out-bound voyage being assessed as much shorter than one from/to the actual next load port. The change of routing may cause the operator extra costs, but the benefit of the avoided allowances could be greater, depending on the assumptions made. We would expect this issue to be covered by the scheme once implemented, but at the moment it is an area that needs more thought.

Emission trading schemes and time charterparties 

Operating vessels under an ETS is a completely new situation for vessel owners and time charterers, so the learning curve will be steep. The issues under each scheme may be different, but the following points are likely to be of general relevance, not just the EU scheme.

In the first instance, the practical steps needed to comply with ETS requirements are likely to fall on vessel owners. This will include (i) registration with the scheme, (ii) recording, documenting and submitting the vessel’s emissions data needed for compliance, and (iii) opening an account to receive, hold and surrender the necessary allowances. It may be that some of these tasks can be handled by a third party, such as a vessel manager or broker.

How a vessel owner and charterer share the costs of complying with an ETS, i.e. purchasing the allowances, is more open to negotiation. The general view seems to be that as ETS costs will be directly linked to the fuel used by the vessel, as between an owner and a charterer, whoever is responsible for the cost of the fuel should also cover the cost of ETS compliance, e.g. buying allowances. This seems logical as the cost of ETS allowances could be seen as just part of the fuel cost and may in fact be included in bunker prices if bunker sellers decide to sell fuel and allowances together.  

New BIMCO clause

BIMCO is in the process of drafting/finalising a clause for use in time charterparties, which is expected to be published soon. The arrangement is likely to be that the charterer is responsible for purchasing allowances to cover vessel’s actual emissions used in ETS areas while on hire. The clause will also have to cover other issues, such as sharing data to enable compliance with an ETS, reconciliation between the allowances and actual consumption at the end of a charter, and the owners’ rights if allowances are not surrendered on time.

Ideally, the clause published by BIMCO will be wide enough to apply to any scheme around the world, and to cover any greenhouse gas that may be subject to a scheme, not just carbon.

Under most time charterparties, the vessel owner does what they can to reduce their credit risk to the charterer – for example by requiring hire to paid in advance, and bunkers arranged and paid for by the charterer. One issue that some vessel owners may also wish to consider is if they want similar principles to apply for ETS allowances – e.g. to avoid allowances being transferred in arrears, and instead require the charterer to transfer enough allowances up front to cover the bunker fuel to be used under the ETS, to be topped up as/when the vessel receives new fuel. From a time charterer’s point of view, it may also be necessary to consider how the reconciliation and accounting will be carried out for emissions, which are arguably for owners’ account, such as during off-hire or deviation for owners’ purposes.

These issues are unlikely to be relevant in the context of voyage charters, where the owner will generally be responsible for supplying the fuel, and hence the cost of any allowances that arise from using it. Voyage charter owners will need to build something into their freight/demurrage rates for ETS costs. The costs of ETS allowances may be relevant under some consecutive voyage charterers if they have clauses to adjust freight rates depending on bunker prices – e.g. if bunkers are sold includes of allowance cost, or as allowance prices change.

What to do now?

The application of the EU ETS to shipping is still under discussion, and we may not know the final details for several months. Even so, where time charterparties are being concluded that will run into 2023, 2024 and beyond, it would be wise for the owners and charterers to think about how to deal with ETS issues. The BIMCO ETS clause will be helpful once it has been published, but it is of course open to parties to come to alternative arrangements. Please contact your defence case handler for further information or guidance.

 

Photo credit: Photoholgic on Unsplash
Source: Gard
Published: 6 June, 2022

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Technology

SMW 2024: MPA partners with S&P Global and Bunkerchain in digital ship identity

MPA signed a MoU with S&P Global and Bunkerchain to use Singapore as test bed to trial and pilot use of digital ship identity in maritime applications such as digital port clearance and digital bunkering.

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SMW 2024: MPA partners with S&P Global and Bunkerchain in digital ship identity

The Maritime and Port Authority of Singapore (MPA) on Tuesday (16 April) announced it signed a Memorandum of Understanding (MoU) with S&P Global Market Intelligence and Bunkerchain to pilot the use of digital ship identity in the republic. 

The signing took place at the ‘Accelerating Digitalisation and Decarbonisation Conference’ at Singapore Maritime Week (SMW) on the same day.

The parties agreed to use the Port of Singapore as the test bed to trial and pilot the use of digital ship identity in maritime applications such as digital port clearance and digital bunkering.

Digital identity refers to the unique representation of an entity in the digital world, which consists of various attributes and data that distinguishes it from others.

“Electronic transactions may be vulnerable to various risks as such identity fraud and data integrity breaches,” MPA said.

“Digital ship identity plays a crucial role in making electronic transactions more secure, trusted, and efficient in the maritime sector. When deployed in tandem with electronic signatures, these digital technologies will eliminate the need for physical ship stamps and wet ink signatures, and accelerate the transition towards a truly digital, secure, and paperless operations.”

MPA, together with Esri Singapore, the Agency for Science, Technology and Research’s Institute of High Performance Computing and the Technology Centre for Offshore and Marine, Singapore, also developed a digital twin proof-of-concept of a methanol bunkering leak incident. 

“The digital twin runs on an interactive web application that integrates weather and ocean current predictions and AIS data to present visualisation of chemical plume dispersions in the event of a bunkering incident involving alternative fuels,” it said.  

“The capability can help enhance planners’ understanding of the behaviour of the plume clouds under various conditions and guide the development of safety and incident response plans and standards.”

The port authority also announced a collaboration with Amazon Web Services (AWS), an Amazon.com company, to support the maritime industry’s digital transformation and green transition. 

MPA will tap on AWS services including cloud, artificial intelligence (AI), and digital twins to enhance the industry’s efficiency, safety, and sustainability outcomes. 

As part of the collaboration, MPA and AWS will develop the maritime Artificial Intelligence and Machine Learning (AI–ML) Digital Hub, the first-of-its-kind in ASEAN region. 

The AI–ML Digital Hub will leverage AWS cloud to enable the maritime industry to pilot innovative AI and generative AI (GenAI) capabilities to trial on the Green and Digital Shipping Corridors, optimising routes and fuel consumption, carbon emissions accounting, and just-in-time arrivals to help ships operate more efficiently, reduce greenhouse gases emissions, and enhance safety of operations.

A memorandum of understanding was signed between Mr David Foo, Assistant Chief Executive (Operations Technology), MPA and Ms Elsie Tan, Country Manager, Worldwide Public Sector, Singapore, AWS.

Related: SMW2024: 18th Singapore Maritime Week opens with ‘Actions meet Ambition’ theme
Related: SMW 2024: MPA to set up facility for maritime workforce to train in handling new bunker fuels
Related: SMW 2024: Singapore-Rotterdam Green and Digital Shipping Corridor partners to implement first-mover pilot projects

 

Photo credit: Bunkerchain
Published: 16 April 2024

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Bunker Fuel

SMW 2024: Singapore is preparing port for multi-fuel future, says Transport Minister.

‘Our industry has brought in new bunker tankers capable of bunkering higher blends of biofuel and methanol, paving the way for greater emissions reduction for vessels,’ says Chee Hong Tat.

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SMW 2024: Singapore is preparing port for a multi-fuel future, says Transport Minister.

Singapore has moved decisively to ensure energy and fuel resilience as international shipping looks to alternative fuels to meet global decarbonisation targets, said Singapore’s Minister for Transport Mr Chee Hong Tat on Monday (15 April).

In his speech at the Singapore Maritime Week (SMW) 2024 opening ceremony, he said Singapore is preparing its port for a multi-fuel future.

“Our industry has brought in new bunker tankers capable of bunkering higher blends of biofuel and methanol, paving the way for greater emissions reduction for vessels,” he said.

“MPA has also issued Expressions of Interest (EOI) for the alternative fuels ammonia and methanol over this past year.

“For our ammonia EOI, we have shortlisted six consortiums, and are studying their comprehensive proposals for the supply of ammonia for bunkering and power generation in Singapore.”

Chee added reliability and resilience also mean that Singapore upholds the highest standards for safety, efficiency, and quality. 

“Enterprise Singapore, through the Singapore Standards Council, has been working closely with industry partners to introduce national standards to support the digitalisation of bunkering supply chain documentation, as well as on methanol and ammonia bunkering.”

“As a major maritime and bunkering hub, Singapore is committed to continue serving as a trusted node for international shipping.”

Chee said this when elaborating on Singapore’s focus to grow the republic as a hub for reliable and resilient maritime operations, one of three important areas the republic will prioritise on growing its maritime sector. 

The other two areas are to grow Maritime Singapore as a hub for maritime innovation and as a hub for maritime talent development.

“Looking ahead, we expect some turbulence along the way, but we are confident that the global maritime industry will continue to grow,” Chee said.

“And Singapore as a hub port and International Maritime Centre can benefit from this growth and the opportunities it brings, including in emerging areas like digitalisation and decarbonisation.”

However, Chee warned Singapore shouldn’t take its success for granted and to continue improving productivity and competitiveness while staying relevant to changing requirements to be able to meet the needs of local and international stakeholders. 

“But we must not rest on our laurels, or make the mistake of thinking that these positive outcomes will happen on auto-pilot. A rising tide can indeed lift all boats, but the boat and its crew can only benefit if they are well-prepared when the water level rises,” he said.

Related: SMW2024: 18th Singapore Maritime Week opens with ‘Actions meet Ambition’ theme
Related: SMW 2024: MPA to set up facility for maritime workforce to train in handling new bunker fuels
Related: SMW 2024: Singapore-Rotterdam Green and Digital Shipping Corridor partners to implement first-mover pilot projects
RelatedSMW 2023: EOI for ammonia power generation and bunkering closing by 30 April
Related: Singapore gets its first dedicated methanol bunkering tanker “MT MAPLE”
Related: Singapore: Vitol Bunkers takes delivery of specialised biofuel bunker barge “Marine Future”

 

Photo credit: Maritime and Port Authority of Singapore
Published: 16 April 2024

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Biofuel

Banle Energy arranges B24 bunkering services for “YM Utility” in Yantian

Transaction supports the first B24 biofuel supply in Shenzhen and Yang Ming’s inaugural B24 biofuel bunkering supply in China, says firm.

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Banle Energy arranges B24 bunkering services for “YM Utility” in Yantian

Banle Energy International Limited, a subsidiary of CBL International Limited, on Monday (15 April) announced the arrangement of B24 biofuel bunkering services for Yang Ming's vessel YM Utility at a port in Yantian, Shenzhen on 14 April.

“By providing Yang Ming with our B24 biofuel bunkering services, this transaction supports the first B24 biofuel supply in Shenzhen and Yang Ming's inaugural B24 biofuel bunkering supply in China,” the firm in a social media post. 

“As a company actively promoting the use of biofuels, we are making a significant contribution to the International Maritime Organization's (IMO) goal of reducing greenhouse gas emissions (GHG) from international shipping.”

“The B24 biofuel blend, as indicated by a study, is projected to reduce approximately 20% of Greenhouse Gas (GHG) emissions when compared with conventional fuel oil.”

As the firm focuses on expanding its operations in Europe, the firm added it will continue to forge strategic partnerships and explore new opportunities to provide efficient and reliable solutions.

 

Photo credit: Banle Energy International Limited
Published: 16 April 2024

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