Nick Austin, transportation partner at global law firm Reed Smith, on Thursday (15 February) shared with bunkering publication Manifold Times his view on how the maritime operator holding account works which is required to submit allowances under the EU Emissions Trading System (EU ETS), which party is responsible for the cost of this scheme in a chartering contract, and a list published showing which shipping companies have been allocated to which Member State’s Administering Authority within the EU ETS:

It’s a brave new world for the maritime sector. Obviously, the EU ETS has been around for many years in other industries but it’s new to shipping from this year, with the recent inclusion of shipping in the EU ETS since 1 January. This is bringing with it significant implications as the EU continues to unveil new details, rules, and regulations on a regular basis.

Presently, the EU ETS covers ships of over 5000 tons, placing obligations on entities known as ‘shipping companies’ – In the coming weeks, these companies will need to set up a Maritime Operator Holding Account (MOHA) to comply with the evolving framework. The key responsibility lies in surrendering allowances corresponding to carbon emissions by September 30 each year, with verification required in the preceding March.

There are no free allowances being made available but instead a phase-in has been offered on the allowances that need to be surrendered. For 2024, it is 40% only of those emissions from intra EU voyages, and 20% from an EU port to a non-EU port or vice versa. Over time, these percentages will increase to 100% of emissions.

The scheme will also start tightening in terms of the vessels covered, including to offshore vessels. And the commercial consequences are significant – there are various estimates flying around of the additional cost to the industry of ETS – some have said it could be up to USD 100,000 for a US Gulf Coast to EU round trip in the tanker sector. Cruise ships will be hit particularly hard because their energy consumption needs tend to mean higher emissions.

There are significant implications for the chartering market – how does it all work in the complex contractual structures and who is going to pay?

A maritime publication recently reported that no owner or registered manager has been able to open a MOHA thus far.

An important question is how do you allocate the cost of this scheme in a chartering contract?

The starting point is the rules – the ‘shipping company’ is defined as the registered owner, or another company that has essentially assumed the running of the ship. That is going to be the bareboat charterer or a ship manager, either of whom can be the ‘shipping company’. 

It was originally thought this would happen automatically, in other words that if you were the bareboat charterer or the ship manager you could just set up an account – and that was the accepted view. However, it is now clear that the registered owner needs to produce a written mandate to the bareboat charterer or ship manager authorising it as the “shipping company” responsible for EU ETS compliance. So, in order to open a MOHA, the delegate will need a document that says ‘I am mandating the bareboat charterer or the ship manager to comply with these obligations’.

The second layer to this is the cost of compliance. It will vary from ship to ship, and place to place. Who is paying? The rules again tell you what happens, to an extent. 

The Member State associated with the “shipping company”, and where it must open a MOHA, must be identified. This Member State is required to enact legislation enabling the shipping company to recover the costs associated with surrendering EU ETS allowances from the party effectively directing the ship, purchasing the fuel or determining the cargo carried. This will include time and voyage charterers.

What I am seeing a great deal of is work and active discussion around the clauses in time charter parties, and to a lesser extent voyage charters where the contractual scheme is different and usually shorter in time. This means thinking about, through appropriate clauses, the allocation and mechanics of getting the charterer to pay the owner back for the cost of the allowances that they will have to submit every 30 September. And those clauses come in different shapes and sizes. They’re more complex in time charters because of the nature of that contractual arrangement.

Essentially, a time charterer must pay the shipping company for the cost of the allowances, either by opening its own account and transferring allowances in time for the shipping company to surrender them, or through an equivalent payment with hire, which means less administration for the charterers.

On 31 January 2024, the European Commission published a list showing which shipping companies have been allocated to which Member State’s Administering Authority within the EU ETS and in which the shipping companies must register to open a MOHA.  

However, the list has been described by some as “a mess”. It was created by an algorithm using a database of companies who were already reporting emissions in the EU under different rules. But the list lacks a consistent approach and contains owners, operators and managers with, in many cases, no obvious connection to the Member State assigned to them, creating several uncertainties and more questions.

The EU’s approach to producing the list has led to some countries accumulating a substantial number of companies assigned to them, notably Spain. But there may be a pressing need for those on the list to act swiftly, given that within 40 working days from 31 January, a crucial deadline for the registration of a MOHA looms – the clock is ticking.

However, challenges to the opening of a MOHA remain in Member States that are not as digitally advanced as others, adding another layer of intricacy to an already complex situation.”

Photo credit: Shaah Shahidh on Unsplash
Published: 20 February, 2024