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EU climate actions

Time charterers could be held accountable for shipping emissions

Gry Sørås
April 15, 2021

The EU process to decarbonize the shipping industry is picking up steam, and proposed legislation has the potential to impact several players along the shipping value chain, including the charterers. It implies that time charterers will be held accountable for emissions from their hired ships—both monitoring, reporting and verifying emissions as well as achieving proposed reduction requirements and paying penalties for not complying with the requirements. We take a glance at some of the proposals that might impact time charterers the most.  

The EU is working to enshrine its climate-targets into law. Aiming to reach both the 2050 climate-neutrality target and the proposed net greenhouse gas emissions reduction target of at least 55% by 2030 are causing the EU to speed up actions to make sure the maritime sector contributes its fair share of reductions necessary to reach the targets. 

We sum up some of the initiatives that might impact ship charterers the most. Both the revision of the Monitoring, Reporting and Verification (MRV) Regulation and the EU Emissions Trading System (ETS) Directive, the initiation of the EU taxonomy and the FuelEU initiative are EU actions that address maritime emissions and could impact companies with ships on time charters (TC).  

EU Monitoring, Reporting & Verification (MRV) Regulation

The shipping MRV Regulation is the EU’s primary instrument for monitoring, reporting and verifying CO2 emissions from maritime transport. It ensures that a tonne emitted is a tonne reported and makes sure that emissions numbers are comparable. The MRV dataset constitutes a basis for further decarbonizing action in the European maritime sector.  

The revision of the EU system for monitoring, reporting and verification of CO2 emissions from maritime transport started in February 2019 with the aim to align it with the International Maritime Organisation’s (IMO) global data collection system (DCS) for the fuel oil consumption of ships. For different reasons the process has grown to encompass a much larger revision, including different amendments that would speed up the decarbonization of the maritime sector.

According to suggested amendments in the shipping MRV regulation, both ship owners and time charterers will have to comply with the requirements related to monitoring, reporting and verifying CO2 emissions from maritime transport.

One of the amendments suggested by the EU Parliament is to define the regulated “company” as “the shipowner or any other organisation or person such as the manager; the time charterer or the bareboat charterer, which has assumed the responsibility for the commercial operation of the ship from the shipowner and is responsible for paying for fuel consumed by the ship;”.  

By suggesting this change, the Parliament pushes for a slide of responsibility from ship owners towards charterers who function as commercial operators and are responsible for paying the ship fuel. Up until now, charterers have only been considered shipping costumers, without legal responsibility for shipping emissions. For time charterers this could imply that they are held accountable for shipping emissions under the revised legislation.

The proposed definition of company, together with other suggested amendments in the MRV Regulation, would impose several responsibilities on time charterers.

  • Complying with the MRV regulation

Charterers would have to comply with the requirements related to monitoring, reporting and verifying CO2 emissions from the ships they hire on time charter, in line with ship owners.

Furthermore, additional suggested amendments could impose new requirements on the time charter.

  • Reducing annual CO2 emissions by 40% 

The parliament's suggested amendments could make the time charterer responsible for a 40% reduction of the CO2 emissions per transport work by 2030, compared to the average performance of ships of the same size and type. The categories will be the same as reported under the MRV Regulation. To obtain data on transport work, the reporting of 'cargo carried' per voyage would remain mandatory. 

  • Paying penalties for non-compliance

Time charterers would be held responsible for paying the penalties for not complying with reduction requirements. 

  • Addressing methane (CH4) and other greenhouse gases besides CO2

The scope of the MRV Regulation is suggested to be extended to embrace methane, and the Commission is asked to specify the methods for determining methane emissions by the end of 2021. In addition, the impact of GHG emissions, other than CO2 and CH4, is to be reported and, where appropriate, accompanied by a legislative proposal to address the question of how to deal with those emissions.

  • Responsible for zero-emissions at berth

Emissions from ships at berth or anchored in port amount to around 6% of the total CO2 emissions reported under the MRV. Responsible companies shall ensure that, by 2030, no ships under their responsibility emit GHG emissions when at berth.

The revised text of the MRV Regulation is expected to be finalised shortly and adopted amendments are expected to take effect from 1 January 2022.

EU proposals add further responsibilities on TC charterers

A vessel at sea
  • Complying with the MRV regulation
  • Reducing annual CO2 emissions by 40%
  • Paying penalties for non-compliance
  • Addressing methane (CH4) emissions
A user utilizing Siglar Carbon product on a laptop
  • Responsible for zero-emissions at berth
  • Obtaining emissions allowances under the ETS
  • Disclosing value chain emissions under the EU taxonomy
  • Using low emissions fuels in EU ports
A ship slipstream
EU Emissions Trading System (ETS)

The EU ETS was the world’s first major carbon market and is still the largest one. It is an important instrument for the EU to combat climate change and reduce greenhouse gas emissions cost-efficiently. It has already proven its efficiency in reducing emissions from land industry.

Aiming to reach the proposed EU-wide, economy-wide 55% target, the Commission is currently revising key climate legislation, including EU ETS Directive. An important part of the revision is the extension of the EU ETS to the maritime sector - a sector that up until now does not have any legal obligations to contribute to the EU climate targets. While international shipping is being monitored, reported and verified under the MRV System, it is not yet covered by EU climate legislation, contrary to the commitment to economy-wide action under the Paris agreement.

In line with the Parliament’s suggestion to make the commercial operator responsible for emissions reporting, the ETS public consultation questionnaire also addresses the subject of who is responsible for the shipping emissions. A vast majority of the respondents answered that “the ship commercial operator” is the appropriate regulated entity under a EU carbon pricing policy.  

If the ship commercial operator becomes the regulated party under the ETS, new requirements will be added to the time charter.

  • Obtaining emissions allowances 

Charterers regulated under the EU ETS could be responsible for the full annual compliance cycle, including obtaining emissions allowances, with all its additional responsibilities and opportunities.  

If responsible for obtaining emissions allowances the time charter would also be affected by other important ETS design elements discussed in the consultation.

The geographical scope of the scheme concerns whether to include emissions only from intra-EU voyages or to include intra and extra-EU voyages. Intra voyages are voyages from an EU port to another EU port whereas the extra voyages are departing and incoming between an EU port and a port outside the EU.  

Another point of discussion is type of emissions covered by the scheme. Currently only CO2 emissions are included in the MRV system, as they are responsible for 98% of all greenhouse gas (GHG) emissions from maritime transport. However, the consultation suggests that not only emissions of CO2, but also of methane, nitrous oxide and black carbon should be accounted for in view of their important increase over the 2012-2018 period.  

The scheme does not cover all ships, and the alternative exemptions in the consultation are to exclude all ships below 5 000 GT or all ship below 400 GT. The EU MRV system for shipping excludes ships below 5000 GT, as they are only responsible for about 10% of emissions. The International Maritime Organisation (IMO) has energy efficiency measures in place for ships of 400GT and above.  

The Commission adoption is planned for second quarter 2021. 

a maritime port at night
EU Taxonomy for sustainable activities

The EU taxonomy is a classification tool aimed to help investors, companies and financial institutions understand whether economic activities across a wide range of industries are environmentally sustainable. The taxonomy sets requirements that corporate activities must meet to be considered sustainable. The sustainability level of an activity will impact its possibility to raise funding and its access to different environmental programmes and schemes. The EU taxonomy will incentivise the transparency and flow of emissions data.

For charterers, the major impact of the EU taxonomy framework will come into effect as the scope 3, or value chain emissions are included into the framework.

  • Disclosing value chain emissions in the EU taxonomy framework

Due to the state of available scope 3 data, they are currently not included, but they are likely to be within a few years. Including scope 3 emissions in the threshold requirements will hold companies accountable for their full value chain emissions and incentivise collaboration throughout the value chain. 

Transporting around 90% of world trade, shipping represents a major value chain emissions factor for many industries. Reporting on value chain emissions will lead to increased demand for transparency of shipping emissions data from both ship owners and cargo owners who operate as charterers. As producers and cargo owners strive to meet threshold requirements of the EU Taxonomy, ship owners and charterers will be required to report and reduce emissions from maritime transport. 

The main taxonomy regulation entered into force in July 2020, and important criteria for determining whether economic activities can be considered sustainable are expected to be adopted in second quarter 2021 and ready to be applied by Jan 2022.

FuelEU Martime

The FuelEU Maritime is an initiative that aims to increase the use of sustainable alternative fuels in European shipping and ports. The initiative road map states that two of the key areas of intervention in the maritime sector concern regulating access of the most polluting ships to EU ports and obliging docked ships to use shore-side electricity. If time charterers are held accountable for emissions from the ships they hire, new requirements would also affect them.

  • Using low emissions fuels and shore-side electricity in EU ports

Policy options that are assessed involve differentiation of port fees; definition of the share of sustainable alternative fuels and/or shoreside electricity to be used by ships in operation and at berth; and goal-based performance requirements on the carbon-intensity of energy used in marine operations and at berth.

The road map describes a likely effect to be increased operating cost for ship owners and ship operators. For time charterers and other operators accelerating the uptake of sustainable alternative fuels in maritime transport will lead to additional costs primarily from the use of more expensive energy sources. However, it can also be expected to better prepare the sector to meet the upcoming climate and environmental challenges and thus enhance the competitiveness of the entire European maritime cluster.

The FuelEU Maritime proposals are expected to be presented by the European Commission in the second quarter of 2020 as the EU moves forward with its policies for the European Green Deal.

The different EU proposals do not impact spot or COA (Contract of Affreightment) charterers, but as most big charterers operate with a mix of TC, COA and spot charters the proposed legislation is likely to affect most charterers.

Spot chartering represents great opportunities for forward-looking charterers

Increased access to data can reduce emissions and create opportunities

All above mentioned policy amendments are pulling in the direction of increased transparency and cooperation in the shipping industry. Responsibility is also placed closer to the decision makers with time charterers playing an increasingly important role in reducing emissions.  

EU politicians are aiming to make the EU a front-runner in the green transition, so that European businesses can take advantage of economical opportunities within. Incentivising increased transparency and cooperation will help attentive businesses discover efficient ways of reducing emissions and gaining competitive edges.

Understanding your emissions is the best way to prepare and embrace any regulatory changes and it is the only way to be a front-runner in the green transition of shipping.

Access to detailed data provides insight and in turn business opportunities for forward-looking charterers. As carbon pricing is introduced, knowledge of the carbon intensity of a ship will be crucial before hiring a ship on time charter. Commercial and operational chartering are already starting to include emission insight to reduce emissions and cost. Applying what we at Siglar call carbon efficient chartering in the spot market could represent further opportunities. Monitoring emissions from all chartering activities, regardless of chartering strategy, makes it easier to spot the largest emissions drivers and cut emissions where it is most efficient. Siglar Carbon Efficiency Platform provides an overview of all emissions from completed voyages and estimates of emissions from future voyages in a way that makes it possible to understand and compare emissions. Understanding your emissions is the best way to prepare and embrace any regulatory changes that might come, and it is the only way to be a front-runner in the green transition of shipping, taking advantage of all the opportunities that lie within.

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