Battle lines drawn as emissions trading rules divide shipowners and charterers

The European Union’s Emissions Trading System is driven by the concept that the polluter pays for carbon credits used under the scheme.

But under the proposal to add shipping to the system as early as January of 2023, deciding who is “the polluter” had been an open question.

Is it the shipowner, which owns the asset and is in control of shipboard technology (or lack thereof)? Or is it the charterer, which buys the fuel and controls the ship’s trading pattern?

Proposed amendments to the looming ETS rules now seek to answer that question by allowing shipowners to pass on costs to commercial operators, which are often time charterers.

They’re dividing owners and charterers as the industry hurtles toward new rules that these same amendments seek to accelerate.

But for those on the outside of this divide, putting the cost of compliance on the operator will ultimately hew closer to the notion that the polluter should pay.

As Green Seas explained only a few weeks ago, draft language previously left open the possibility that paying for carbon credits under the ETS plan could fall to the shipowner, the charterer or even, in some cases, a ship manager. That would leave the question to be sorted out in their contract negotiations.

Proposed amendments by the European Parliament’s rapporteur, which will be up for consideration in the months ahead, seek to change that.

The report by Member of the European Parliament Peter Liese calls for the entity ultimately responsible for decisions that affect a ship’s CO₂ emissions will pay for emissions credits. That will put the burden on the commercial operator and will put more liability for the scheme toward charterers rather than shipowners.

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The European Community Shipowners Association is pleased with that shift, and with Liese’s conclusion that revenue from selling ETS credits should be placed in a fund dedicated to the industry’s decarbonisation.

But as we reported in TradeWinds, container ship operators have come out swinging.

The World Shipping Council, which represents the vast majority of the world’s liner operators, said the proposed amendments would shield shipowners from ETS costs and then put them at the front of the line for revenue, putting the goals of the EU Green Deal at risk.

“This would corrupt the whole idea of the ETS, changing it from a ‘polluter-pays’ policy to a system where the ‘polluter-gets-paid’, and vastly reduce its effectiveness.”

But there’s a problem with putting the costs solely in the hands of the shipowner.

It’s the commercial operator that ultimately has control of how a ship trades, including route, speed and fuel type. And fundamentally, charterers often decide which ships to send to the EU.

“This amendment seeks to acknowledge that the shipping company is not always responsible for purchasing the fuel or taking operational decisions that affect the CO₂ emissions of the ship,” Watson Farley & Williams environmental lawyers Nick Walker and Valentina Keys said in a note to clients.

Better reflection of ‘polluter pays’

In a study commissioned by green group Transport & Environment, Opportunity Green concluded that ensuring shipowners can pass on costs of ETS compliance to charterers is a closer reflection of the EU’s polluter pays principle.

And that comes as those polluters could face paying more sooner.

Under Liese’s proposal, which will be considered in the months ahead and potentially approved in June, ETS credits will have to cover 33.3% of emissions in 2023, rather than the original 20%. Instead of covering 70% of carbon emissions by 2025, 100% of the emissions will have to be covered by allowances by 2025, if the proposal is adopted.

“The draft report includes a number of ambitious amendments to emissions trading for the maritime sector — the Maritime ETS — which, if agreed, will put more pressure on the maritime industry to switch to cleaner fuels sooner than originally planned,” wrote Walker and Keys.