International Shipping and the EU Emissions Trading Scheme. Evasion and ‘pass-through’.

On 30 December 2022 we recorded the provisional agreement reached by the Council and the Parliament on 18 December 2022 regarding amendments to the Commission’s proposed Directive amending the  2003 ETS Directive. The full text of the agreement was released on 8 February 2023. Two additional amendments are notable.

First, as regards possible evasion of the ETS by transhipping containers outside EU countries. Article 3(g) (1) (a) provides.

“The Commission shall by 31 December 2023 by means of implementing acts establish a list of the neighbouring container transhipment ports and update this list before 31 December every two years thereafter.

Those implementing acts shall list neighbouring container transhipment ports where the share of transhipment of containers, measured in twenty-foot equivalent unit, exceeds 65 % of the total container traffic of that port during the most recent twelve-month period for which relevant data are available located outside the Union but less than 300 nautical miles of a port under the jurisdiction of a Member State. For the purpose of this paragraph containers shall be considered as transhipped when they are unloaded from a ship to the port for the sole purpose of loading them on another ship. The list shall not include ports located in a third country that effectively apply measures equivalent to this Directive.”

Article 3 wa defines port of call to exclude various activities including “stops of containerships in a neighbouring container transhipment port listed in the implementing act adopted pursuant to Article 3g(1a).”

Second, Article 3 gaa provides for a mandatory pass-through of ETS costs borne by the shipowner or demise charterer “when the ultimate responsibility for the purchase of the fuel and/or the operation of the ship is assumed by a different entity than the shipping company pursuant to a contractual arrangement.”

Operation of the ship means “determining the cargo carried and/or the route and the speed of the ship” and so clearly encompasses time charterers. Member States are required to “take the necessary measures to ensure that when the ultimate responsibility for the purchase of the fuel and/or the operation of the ship is assumed by a different entity than the shipping company pursuant to a contractual arrangement, the shipping company is entitled to reimbursement from that entity for the costs arising from the surrender of allowances.”

The Preamble states “While such a mechanism of reimbursement could be subject to a contractual arrangement, Member States should, to reduce administrative costs, not be obliged to ensure or control the existence of such contracts but should instead provide, in national law, a statutory entitlement for the shipping company to be reimbursed and the corresponding access to justice to enforce that entitlement.” 

The pass-through provision states that “Member States shall ensure that shipping companies under their responsibility comply with their obligations to surrender allowances, notwithstanding their entitlement to be reimbursed by the commercial operators for the costs arising from the surrender.”

One can foresee interesting situations where a shipowner under a time charter which does not provide for the pass through of such costs, obtains an order from the courts of a Member State that the time charterer should reimburse it for those costs, and the time charterer declines to do so.

The amendments to the 2003 ETS Directive need to be adopted, and then transposed by Member States by the end of 2023 if they are to become operative as of 1 January 2024 as envisaged. Adoption was expected to occur in the first quarter of 2023. We have now entered the second quarter of 2023.

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Professor Simon Baughen

Professor Simon Baughen was appointed as Professor of Shipping Law in September 2013 (previously Reader at the University of Bristol Law School). Simon Baughen studied law at Oxford and practised in maritime law for several years before joining academia. His research interests lie mainly in the field of shipping law, but also include the law of trusts and the environmental law implications of the activities of multinational corporations in the developing world. Simon's book on Shipping Law, has run to seven editions (soon to be eight) and is already well-known to academics and students alike as by far the most learned and approachable work on the subject. Furthermore, he is now the author of the very well-established practitioner's work Summerskill on Laytime. He has an extensive list of publications to his name, including International Trade and the Protection of the Environment, and Human Rights and Corporate Wrongs - Closing the Governance Gap. He has also written and taught extensively on commercial law, trusts and environmental law. Simon is a member of the Institute of International Shipping and Trade Law, a University Research Centre within the School of Law, and he currently teaches at Swansea on the LLM in:Carriage of Goods by Sea, Land and Air; Charterparties Law and Practice; International Corporate Governance.

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