BIMCO Adopts Four Emission Trading Scheme (ETS) Clauses

BACKGROUND

Emission Schemes are “cap and trade” schemes that cap the total amount of greenhouse gases to be emitted by certain vessels covered by the system.  Over time, this cap is reduced as an incentive to reduce greenhouse gas emissions through increased efficiency and the use of alternative fuels.

In the context of the world’s largest Emission Scheme - the European Union Emissions Trading System (EU ETS) – the cap is expressed in emission allowances, where one allowance gives the right to emit one tonne of carbon dioxide (CO₂) equivalent.  For each year, shipping companies must surrender enough emission allowances to fully account for their emissions. In the absence of a uniform global Emission Scheme, other countries and/or groups of countries may develop their own unique Emission Scheme in the future and this clause is designed to be broad enough to cater for not only the EU ETS but for any other similar Emission Schemes that are imposed.

Explanatory Notes

These explanatory notes are intended to provide an insight into the thinking behind the BIMCO ETS – Emission Scheme Transfer of Allowances Clause for Voyage Charter Parties 2023. They also explain how the clause is intended to operate and the allocation of responsibilities and costs between the parties.

Key Features of the Clause

Definitions

For ease of reading, the clause sets out three definitions – “Emission Allowances”, “Emission Scheme” and “Voyage(s)”.

“Emission Allowances” are the emission allowances issued by an authority under a “cap and trade” regulatory scheme that give the holder the right to emit an agreed volume of greenhouse gases. Under the EU ETS, each allowance entitles the holder to emit one tonne of CO₂equivalent.

“Emission Scheme” refers to the applicable emissions trading scheme for greenhouse gases. This clause is designed to apply to future emissions schemes that may be implemented around the world, not just the EU ETS.

These two definitions are identical to those that appear in the ETS - Emission Trading Scheme Allowances Clause for Time Charter Parties 2022.

The definition of “Voyage(s)” encompasses the laden leg from the load port(s) to the discharge port(s), and the ballast leg from the ballast port or location to the load port(s), which are to be specified by the parties. The objective here is to give the parties the flexibility to define the voyage(s) which can be tailored towards specific business and commercial requirements. For instance, where parties agree to exclude the ballast port or location, "N/A" could be inserted in the corresponding box. Alternatively, the parties may decide that only a portion of the ballast leg should be included. In this case, a suitable location representing such proportion of the journey, such as "passing Gibraltar", can be inserted.

This definition will form the basis for the owners’ calculations referred to in subclause (b) where that subclause is engaged.  Here the owners are to calculate the estimated emission allowances required to cover the emissions expected/estimated to be released during the Voyage(s) (as defined). This definition will also form the basis for the post-voyage calculation of the actual emissions released during the Voyage(s). However, where the details mentioned above are not completed or left blank by the parties, then the default is that Voyage(s) will include any laden leg(s) between the load port(s) and discharge port(s), and any ballast voyage. It is important to note that this definition only applies if the parties choose not to use subclause (a) or a figure is not inserted by the parties in subclause (a)(i).

Subclause (a)(i)

This subclause allows the parties to insert a mutually agreed quantity of Emission Allowances due under the charter party. The figure to be inserted would simply reflect the outcome of a commercial agreement between the parties on the quantity of Emission Allowances to be transferred by the charterers to the owners. At the end of the day, the figure is, for all intents and purposes, an estimate which may not necessarily reflect the actual number of Emission Allowances required for the Voyage(s). 

The agreed quantity of Emission Allowances is not subject to any adjustment with regards to an increase or decrease of the number of Emission Allowances actually corresponding to the performance of the voyage. The reason for this is that subclause (a) is simply a commercial clause and if the parties wish to deal with the actual number of Emission Allowances, then they should leave subclause (a) blank and rely on the provisions in subclause (b) which provides a reconciliation mechanism. The reasoning behind this is that the primary factor impacting the duration of a voyage, and consequently the number of Emission Allowances, is extended port stays. Such unforeseen delays are considered to be compensated by demurrage in the charter party, and the subcommittee was of the view that owners may in any event, provide for any additional exposure relating to Emission Schemes through an adjusted laytime regime and demurrage rate in the charter party. It should also be noted that if charterers were to issue alternative voyage orders leading to an extension of the voyage duration, this could be subject to agreement on a revised freight rate and a corresponding revised quantity of Emission Allowances to be inserted into subclause (a), depending on the parties' relationship and the terms of the relevant charter party.

It is the view of the subcommittee that this aligns with the prevailing principle of voyage chartering, whereby owners bear the risk for any delay resulting from, for example, adverse weather conditions on the sea passage, whilst compensation for delays in ports are provided for by demurrage.

Subclause (a)(ii) 

This subclause deals with the timing of the transfer of the agreed quantity of Emission Allowances to the owners.  The transfer must either be made on: (1 the date of the initial freight payment if freight is due in instalments; or (2) the date freight is due if freight is not payable in instalments; or (3) within a specified number of days after the vessel's departure from the load port. Note in relation to (3) above that if the parties fail to insert a specific number of days in this subclause, then the default shall be 14 (fourteen) days. The subcommittee was of the view that the transfer of Emission Allowances under this clause shall generally not be subject to any address or brokerage commission.

Subclause (b)

This subclause will be applicable in situations where the parties leave subclause (a)(i) blank and do not specify a quantity of Emission Allowances to be transferred. In light of this, subclause (b)(i) stipulates that the owners are to (no later than the first day of the laycan) provide the charterers with an estimate of the Emission Allowances relating to the vessel’s expected/estimated emissions for the Voyage(s) (as defined). 

Subclause (b)(ii)

This subclause deals with the timing of the transfer of the estimated quantity of Emission Allowances, and mirrors the wording of subclause (a)(ii). The transfer must either be made on: (1) the date of the initial freight payment if freight is due in instalments; or (2) the date freight is due if freight is not payable in instalments; or (3 within a specified number of days after the vessel's departure from the load port. Note in relation to (3) above that if the parties fail to insert a specific number of days in this subclause, then the default shall be 14 (fourteen) days.

Subclause (b)(iii)

This subclause requires the owners to inform the charterers about the actual amount of Emission Allowances for the completed Voyage(s) (as defined) together with relevant calculations and data which has been used to calculate the figure. The parties can choose to insert a specific number of days into this subclause and if the parties fail to insert a specific number of days in this subclause, then the default shall be 14 (fourteen) days.

Subclause (b)(iv)

This subclause contains the reconciliation mechanism where, in the event of a discrepancy between the estimated and the actual quantities of Emission Allowances, the owners are to return any excess to the charterers, or the charterers are to transfer the difference to the owners within a specified number of days after the owners provide the written notification under subclause (b)(iii). Note that if the parties fail to insert a specific number of days in this subclause, then the default shall be 14 (fourteen) days.

Subclause (c) 

This subclause underlines the fact that once the owners receive the full quantity of Emission Allowances set out in subclause (a) or (b) – whichever applies, this releases the charterers from any responsibility for costs arising from the surrender of Emission Allowances for the voyage(s) performed under the charter party. However, this is always subject to subclause (d).

Subclause (d)

This subclause addresses a scenario where the vessel may release more emissions than anticipated due solely to the charterers’ breach of the charter party. For example, the vessel may be detained solely due to the charterers being in breach of the charter party. In this case, this subclause allows the owners to recover any costs arising from the surrender of Emission Allowances for the emissions released during such period of detention. 

Subclause (e) 

This subclause makes it clear that if the charterers fail to transfer the Emission Allowances as required under the clause, this will be treated in the same way as non-payment of freight, meaning that the owners are entitled to take the same actions against the charterers in circumstances where the charterers have failed to pay freight under the charter party.

Subclause (f)

This subclause stipulates that the obligation for compliance with the applicable Emission Scheme rests solely with the owners. This is intended to clarify that charterers shall not be responsible for compliance with the relevant Emission Scheme.

Additional element(s) to consider:

Ship-to-ship Transfers

A “port of call” as defined under the EU ETS is a location where a vessel halts to load or unload goods, embark or disembark passengers, or where an offshore vessel stops to change its crew. However, there are a number of exceptions including:

• Stops solely for refuelling
• Stops to acquire supplies
• Crew changes (except for offshore vessels)
• Stops for dry-dock visits or ship and/or equipment repairs
• Stops in ports due to the ship requiring aid or being in distress
• Ship-to-ship transfers executed outside of ports
• Stops solely for sheltering from poor weather or those necessitated by search and rescue activities and
• Stops of containerships in neighbouring container transhipment ports, as listed in the implementing act to be adopted by the end of 2023.

Given that ship-to-ship transfers outside ports are excluded, it is vital for parties to consider the impact of this in their commercial negotiations.

Get the BIMCO clause ETS – EMISSION SCHEME TRANSFER OF ALLOWANCES CLAUSE FOR VOYAGE CHARTER PARTIES 2023:

4. ETS – SHIPMAN EMISSION TRADING SCHEME ALLOWANCES CLAUSE 2023

The purpose of this clause is to allocate the costs and responsibilities for obtaining, transferring and surrendering emission allowances for ships operating under an emission scheme, such as the EU Emissions Trading System (ETS), in a ship management context.

The clause has been developed for use with any applicable emission scheme. It caters, on the one hand, for circumstances where the owners are the responsible entity for compliance and, on the other, for circumstances where the managers are the responsible entity either because the applicable emission scheme makes them the responsible entity or, as permitted by the EU ETS, the managers have assumed this responsibility by agreement between the parties.

BACKGROUND

Emission trading systems (ETS) are “cap and trade” schemes that permit the emission of greenhouse gases in exchange for allowances. Over time the quantity of allowances available to industry are reduced as an incentive to reduce emissions through increased efficiency and the use of alternative fuels.

In the context of the world’s largest emission scheme – the European Union Emissions Trading System (EU ETS) – the cap is expressed in emission allowances, where one emission allowance gives the right to emit one tonne of carbon dioxide (CO₂) equivalent. For each year, shipping companies must surrender enough emission allowances to fully account for their emissions. In the absence of a uniform global emission scheme, other countries and/or groups of countries may develop their own unique emission schemes in the future, and this clause is designed to be broad enough to cater for not only the EU ETS but for any other similar emission schemes that are imposed.

Explanatory Notes

It is strongly recommended that the parties read these explanatory notes before incorporating the SHIPMAN Emission Trading Scheme Allowances Clause 2023 into their ship management agreement and, in particular, carefully consider the consequences of entering into a separate formalised agreement whereby the managers assume responsibility for compliance with applicable emission schemes under subclause (b). A health warning has been included at the top of the clause to highlight this.

These explanatory notes are intended to provide the background to and basis of the clause. They also explain how the clause is intended to operate and the allocation of obligations, rights and responsibilities between the parties. If you have any questions about the clause, please contact us at contracts@bimco.org and we will be happy to assist.

Key features of the Clause

This SHIPMAN Emission Trading Scheme Allowances Clause 2023 has been developed for use with any applicable emission scheme, including but not limited to the European Union Emissions Trading System (ETS), taking into account that the party responsible for compliance may vary according to the jurisdiction the vessel is trading in.

For uniformity, the clause adopts definitions used in the BIMCO Emission Trading Scheme Allowances Clause for Time Charter Parties 2022 where logical, with the addition of new definitions for “Emission Data” (meaning data and records of the vessel’s emissions in the form and manner necessary to calculate the emission allowances for the vessel) and “Responsible Entity” (meaning the party responsible for compliance under any applicable emission scheme by law and/or regulation).

The clause is published in a standalone, bolt-on, version for use with SHIPMAN 2009, and it will be incorporated within the 2024 edition of SHIPMAN.

For clarity, the clause is divided in two subclauses with their headings clearly stating the responsible entity: Subclause (a) where the owners are the responsible entity and subclause (b) where the managers are the responsible entity either because the applicable emission scheme makes the managers the responsible entity or, as permitted by the EU ETS, the managers have assumed this responsibility by agreement between the parties.

Under subclause (b), before mandating the managers to be the responsible entity, owners should carefully consider their contractual structure and ensure that they are in a position to open an account from where they will be able to transfer allowances to the managers or enter into an agreement with a consultancy firm/service provider which is able to assist in this respect; and, before assuming a mandate to be the responsible entity, managers should carefully consider and satisfy themselves that they are fully aware of the liabilities they shall bear as the responsible entity.

(a) Owners as Responsible Entity

Subclause (a)(i) imposes an obligation on the owners to comply with or procure compliance with any applicable emission schemes at their expense.

Subclause (a)(ii) imposes an obligation on the managers to provide the owners with relevant data and documentation. Such data and documentation should be provided “in a timely manner to enable compliance with subclause (i) above, and/or at regular intervals to be agreed between the Parties”. The wording is such that managers will provide data and documentation in time for owners’ compliance with the applicable emission schemes as well as at time intervals reflecting when the data and documentation are needed by owners in relation to their commercial contracts for the employment of the vessel, such time intervals to be agreed between the parties. The subclause further sets out that the emission data provided by the managers shall be “verified by an accredited verifier” where this is required by the applicable emission scheme, and “audited by an independent third party” approved by owners if required by the owners for their commercial purposes.

Subclause (a)(iii) is optional and applies only if the parties expressly agree to it in the box provided. This subclause enables the parties, where the owners are the responsible entity, to agree that the management services will include the performance of services necessary for owners’ compliance with emission schemes applicable to the vessel, including (1) providing the owners with emission data and calculations of the allowances to be surrendered, (2) arranging the monitoring and reporting of data to the administering authorities, and (3) arranging the surrender of the allowances. The performance of the management services listed under this subclause are subject to the managers not being prevented from carrying them out under the applicable emission schemes.

The comments to subclause (a)(ii) above equally apply to the data to be provided under (1). The reference under (2) to “monitoring and reporting” is intended to cover the development of a monitoring plan, emissions reports, implementation, etc. The surrender of allowances under (3) will in practice take place from the account of the owners who are responsible for compliance. Under the EU ETS, owners are responsible for surrendering allowances on fleet basis. Considering that owners may have two or more managers, or only have some of their vessels under third party management, the owner may wish to surrender all allowances at the same time for the entire fleet. Owners should be aware that this clause will address only the vessel(s) under the subject SHIPMAN contract, hence coordination will be necessary between owners and managers for surrender of allowances at the owners’ fleet level.

(b) Managers as Responsible Entity

Subclause (b) caters for emission schemes which impose that the managers or their nominee, as the Company (with reference to the ISM/ISPS Code) shall be the responsible entity, or where the managers assume being the responsible entity by agreement with the owners as prescribed by an emission scheme.

Commission Implementing Regulation (EU) 2023/2599 of 22 November 2023 laying down rules for the application of Directive 2003/87/EC of the European Parliament and of the Council as regards the administration of shipping companies by administering authorities in respect of a shipping company prescribes the manner in which an organisation or person, such as the ‘shipping company’, assuming responsibility for the operation of the vessel from the ‘shipowner’ shall provide the administering authority with a document that it has been duly mandated by the ‘shipowner’ to comply with the EU ETS obligations. The mandating document shall be signed by both the shipowner and the organisation or person assuming responsibility. If such mandating document is not provided to the administering authority, the ‘shipowner’ shall be considered as the entity responsible for EU ETS obligations. An asterisk and the corresponding reference are included to highlight this to the parties.

Subclauses (b)(i) and (ii) mirror subclauses (a)(iii)(1) and (2) on the requirements for the managers to provide emission data to the owners, and to monitor and report the data to the authorities.

Subclauses (b)(iii)-(v) regulate the manner in which the managers will inform the owners about the allowances in respect of the vessel and the process for transfer of allowances from the owners to the managers.

The time allowed in subclauses (b)(iii)-(v) for the transfer and the final settlement of allowances is left to the managers and owners to agree between themselves according to their commercial relationship. The owners’ underlying arrangements with their charterers may be relevant to take account of when agreeing to the time for transfer of allowances in the SHIPMAN Emission Trading Scheme Allowances Clause 2023 to correspond with the time owners may have agreed with their charterers for transfer of allowances under an ETS clause in their time charter party.

From an owners’ perspective, owners may wish to consider a timeframe that enables a flow-through of allowances – that is, time to collect/receive the allowances from charterers before these have to be transferred by the owners to the managers. For example, if the BIMCO Emission Trading Scheme Allowances Clause for Time Charter Parties 2022 has been incorporated in the charter party, then the time for transfer of allowances in subclause (b)(iii) would need to be at least 45 days after receipt of the managers’ request – to illustrate:

If, on the first day of January, managers request owners for the estimated allowances for the ensuing month of January, then the 45 days’ time allowed to owners for transferring these allowances to managers means that the due date for transferring these estimated allowances will be 15 February. This will give owners time to receive from their time charterers the allowances due based on the actual emissions in January before having to transfer the estimated allowances for January to the managers. Any difference between the estimated allowances and those actually due for January would then be reconciled by managers together with their request for estimated allowances for February, and so on month by month.

From a managers’ perspective, managers may wish to consider a short timeframe for the transfer of allowances to limit their exposure. If agreeing to a longer timeframe, the managers should be prepared that they will in effect receive the allowances due from owners retrospectively.

Subclause (b)(iii) provides that the managers shall each month inform the owners about the estimated allowances for the vessel for the ensuing month. This approach has been developed independent of the BIMCO Emission Trading Scheme Allowances Clause for Time Charter Parties 2022, which is based on actual emissions for the previous month. It follows the same principle as for the working capital required for the management of the vessel in SHIPMAN, which the managers estimate and request the owners to remit at the beginning of each month. Furthermore, this approach takes into account the exposure of managers and the risk of their entire managed fleet being affected in case of non-compliance. The clause also provides for the adjustment of any excess or shortfall in the managers’ previous estimations.

Subclause (b)(iv) sets out the procedure to be followed in respect of allowances to be provided by owners to managers for the final period leading up to the termination of the ship management agreement.

Subclause (b)(v) provides for reconciliation and settlement of any shortfall or excess of allowances transferred by owners to managers between the estimated allowances and those actually due at the time of termination of the ship management agreement.

Subclause (b)(vi) has been included to highlight that the parties may, alternatively, prefer to agree financial security in respect of the owners’ obligations to provide the allowances. The financial security would be instead of transferring allowances in accordance with subclause (b)(iii)-(v). The parties will have to agree upon any such financial security arrangement separately, depending on the form and nature of the financial security the owners will provide to the managers. However, the owners will ultimately have to provide the managers with the necessary allowances when they are due to be surrendered to the administering authority in accordance with the emission scheme(s).

Subclause (b)(vii) imposes an obligation on the managers to surrender the allowances, but the owners will always be/remain responsible for providing the allowances to the managers.

Subclause (b)(viii) stipulates that the allowances or financial security shall be held by the managers to the credit of the owners (following the same principle as for monies received by managers from owners under SHIPMAN). This subclause is specific to subclause (b) as the owners will be responsible for the surrender of allowances to the administering authority under subclause (a).

Subclause (c) enables the parties to state a services fee payable by the owners to the managers for their services under the clause for each port call in an area subject to an emission scheme. The parties may adapt the fee to be payable on a per voyage or per month basis or as otherwise appropriate to the vessel’s trading and operation. If no amount is entered, the fee is assumed to be included in the annual management fee.

Subclause (d) gives either party the right to terminate the agreement if the other party does not comply with any of its obligations under the clause. This is considered justified in view of the serious ramifications of a breach by either party, although a party entitled to terminate may decide not to do so in the event of a breach which can be remedied in reasonable time without causing any material damage.

There is no indemnity provision included in the clause because there is already an overarching indemnity clause contained in SHIPMAN.

Get the BIMCO clause: ETS – SHIPMAN EMISSION TRADING SCHEME ALLOWANCES CLAUSE 2023:

Bimco’s new ETS clauses have been developed for use with any applicable emission scheme, including, but not limited to, the EU ETS. This is done to ensure that the clause can be used with other schemes that may come into force in the future.

Source: BIMCO