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REGULATORY OVERVIEW OF EUROPEAN UNION EMISSIONS TRADING SYSTEM – EU ETS

Published: 1 May 2025

This page is part of our comprehensive Maritime Fuel Regulations section written in consultation with the law firm HFW.

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1. Since 2018, ships calling at European Economic Area (EEA) ports have monitored, reported and verified their Greenhouse Gas (GHG) emissions according to the Monitoring, Reporting and Verification (Regulation (EU) No 2015/757) (MRV Regulation), which has applied to CO2 emissions from 2018 and N2O and CH4 from 2024.

1.1 MRV obligations are complemented by a market-based emissions regulation – the EU mandatory cap and trade system (EU ETS) (Directive 2003/87/EC), which is supplemented by various Implementing Acts and Regulation (EU) No 389/2013 (Registry Regulation). The EU ETS came into operation in 2005 but has only applied to maritime sector emissions verified in accordance with the MRV since 1 January 2024.

1.2 In short, under EU ETS, each compliance entity (shipping company) must surrender EU emission allowances (EUAs) corresponding to the verified emissions for ships in its fleet on an annual basis.

Key Obligations

1.3 A Shipping Company must monitor a ship’s emissions for a full calendar year (Reporting Period) in accordance with a monitoring plan (assessed by an accredited verifier) which has been submitted to the applicable EU Member State Authority.

1.4 In the calendar year following a Reporting Period, emissions are verified (Verification Period). A shipping company is obliged to prepare an emissions report (corresponding to the emissions generated by ships under its responsibility during the previous Reporting Period) by 31 January and this is verified by an accredited verifier by 31 March. A shipping company must surrender EUAs corresponding to verified emissions by 30 September. This process repeats on an annual basis.

Scope of the Application

1.5 EU ETS applies to emissions from ships over 5,000 gt that transport cargo or passengers, on voyages with a touchpoint in the EEA, and the obligation to surrender EUAs covers:

    1. 100% of emissions on voyages between EEA ‘ports of call’;
    2. 50% of emissions on voyages between an EEA ‘port of call’ and a third country port; and
    3. 100% of emissions during EEA ‘ports of call’.

1.6 There are a few concepts to clarify here:

  1. Voyages are movements of a ship between ports of call. Certain kinds of voyages are exempt voyages (e.g. voyages to an outermost region from the same member state).
  2. ‘Port of call’ is defined as a port where the ship undertakes cargo operations or embarks/disembarks passengers. The definition excludes certain stops – such as for refuelling/obtaining suppliers, distress calls, and ship-to-ship transfers outside ports.
  3. Linked to this, containership port calls at designated ‘neighbouring container transhipment ports’[1] are also excluded. This means such ‘intermediate’ calls will not break up voyages to / from EEA ports of call for the purpose of counting qualifying emissions.
  4. With regard to ’emissions’, the surrender obligation only applies to verified CO2 during 2024 and 2025. However, from 2026, the surrender obligation also applies to verified N2O and CH4 emissions, which are already in scope of the MRV.
  5. There will also be a phase-in period where only a limited portion of verified emissions have a corresponding surrender obligation (in 2024, 40% of emissions will be covered; in 2025, 70% of emissions; by 2026, 100% of emissions).

1.7 From 1 January 2025, cargo and offshore ships above 400 GT are required to undertake monitoring, reporting and verification under the MRV, and these ships’ emissions may also fall within scope of EU ETS in future. At present, emissions from offshore ships do not fall within scope of EU ETS. However, offshore ships[2] over 5,000 GT fall under scope of EU ETS from 1 January 2027, while ships of 400 GT and up to 5,000 GT will be reviewed by 31 December 2026 for inclusion at a later stage.

Administering Authorities

1.8 Each shipping company is allocated a Member State administering authority (Administering Authority). A list was published which recorded the Administering Authorities for various shipping companies[3]. Shipping companies not listed are required to identify their Administering Authority based on location/frequency of EEA ports of call and apply to open a Maritime Operator Holding Account (MOHA) in accordance with the EU ETS legislation and the Registry Regulation. The allocation of an Administering Authority is a notable outcome, because law of property is a Member State competency and therefore EUAs held in one Member State may be treated differently as property compared to another Member State.

1.9 The relevant deadlines and formalities for opening and operating accounts are set out in the Registry Regulation. Experience in the sector suggests account opening (including a change of a shipping company) has been a drawn-out exercise and ongoing late into 2024.

1.10 EUAs can also be held in mere ‘trading accounts’. However, EUAs are financial instruments under MiFID II. This may impose obligations on entities seeking to trade in the EU carbon markets, so it is important to be properly authorised or exempt to trade EUAs and open trading accounts.

Compliance Entity

1.11 The default compliance entity for both EU ETS and MRV, as the Shipping Company, is the registered shipowner[4]. Compliance responsibility can, however, be shifted to the bareboat charterer or manager, where either entity has assumed responsibility for the ship under the ISM Code. As matters stand, this is a role which can only be assumed by an International Safety Management (ISM) Document of Compliance (DOC) Holder (if distinct from the shipowner) provided it expressly agrees to do so in the form of a document mandate filed with its Administering Authority, which must be signed by (at least) both parties, and list the ship, company information, and responsibility transfer date.

Costs of EU ETS Compliance

1.12 EU ETS imposes an obligation on EU Member States to implement necessary measures to enable a Shipping Company to seek reimbursement of the costs arising out of the surrender of EUAs for a ship from a third party who, pursuant to a contractual arrangement, is responsible for purchasing the fuel or ‘operating the ship’ (Article 3gc, EU ETS), i.e. the time charterer and, in some cases, a voyage charterer[5]. Notwithstanding this statutory right, EU ETS is clear that the Shipping Company always remains responsible for surrendering the EUAs.

Non-Compliance

1.13 Penalties of EUR100[6] per EUA will be imposed where a shipping company fails to surrender sufficient EUAs to meet their fleet’s verified emissions. If a shipping company fails to surrender EUAs for two consecutive years, they may receive an expulsion order for their entire fleet from EEA ports. A list of non-compliant shipping companies will be published, and Member States are entitled to set out their own effective, proportionate and dissuasive penalties.

NEGOTIATING CONTRACTUAL CLAUSES

2. EU ETS will impose additional costs on voyages to EEA ports of call and administrative costs complying with the regulations. Having considered the general scope and application of EU ETS, in the following section we consider the contractual issues that arise in both physical transport contracts (time charters and voyage charters) and ship services agreements (ship management agreements) and the key considerations for stakeholders when seeking to agree an EU ETS clause.

3. Time Charterparties

3.1 BIMCO published the Emission Trading Scheme Allowances Clause for Time Charter Parties 2022 (BIMCO ETS). This appears to be an important market standard. Notwithstanding this, the parties may amend the clause on the basis of (1) commercial considerations; and (2) specific practical requirements.

Transfer Frequency

During the charterparty

3.2 The EUA transfer frequency is a key concern. BIMCO ETS provides for charterers to transfer EUAs monthly in arrears based on ship data to address counterparty / credit risk for the owners. However, parties may want longer transfer periods for charterers to reduce their own counterparty risk and for owners to reduce administrative burden.

3.3 If a charterer has transferred EUAs to an owner regularly for an entire Reporting Period, they may be exposed if there is an insolvency.

3.4 The charterers’ transferred EUAs may be co-mingled with EUAs from other charterers, and it is very unlikely the charterer will have any superior claim to co-mingled EUAs, nor would the charterer be able to follow the EUAs to a third-party account or trace proceeds of their sale. The risk would be particularly acute where their counterparty owners fail to surrender the EUAs or transfer them to the actual compliance entity. In these circumstances, the charterers would be out of pocket but could still face a claim under Article 3gc statutory entitlement from a shipping company depending on the circumstances and may even pay twice for time charter emissions. 

3.5 Charterers may prefer for the transfer frequency to be quarterly, biannual or annual. However, this represents a significant credit risk for owners as EUA liability builds up over a year, half year or quarter. Prices of EUAs are volatile and also spike with demand – often in the lead up to the compliance deadline. Therefore, if charterers default on an annual transfer, where the transfer deadline is close to a 30 September surrender deadline, Owners may have to enter the market late and would be exposed to higher prices (unless they had significant EUA reserves). Owners would be left enforcing a larger damages claim, compared to the certainty of having regular transfers of EUAs into their account. EUA hedging strategies may assist in mitigating this risk, but addressing this risk through transfer frequency is likely to be the simpler solution.

3.6 There may also be a preference to transfer EUAs on a voyage by voyage basis, especially where this liability is to be passed down to sub-charterers in a charter chain (perhaps where a ship is sub-chartered out on a voyage charterparty spot basis). However, this may also create difficulties establishing what constitutes a voyage for the purpose of such calculations which does not easily lend itself to a time charterparty.

On Redelivery

3.7 BIMCO ETS provides for advance transfer of EUAs based on forecast emissions for the final 14 days of the charterparty, which is subject to reconciliation against the ship’s recorded emissions after redelivery.

Reconciliation

3.8 BIMCO ETS provides for reconciliation upon redelivery where there is a difference between the forecast emissions and the ship’s recorded emissions. More elaborate reconciliation regimes can be introduced, both on redelivery and during the charterparty, but this may make a clause more industrious.

3.9 There may be a correction factor between on board recorded emissions and the emissions in a verified emission report. This verified data is not available until after 31 March in the year after the Reporting Period. Where parties have to transfer EUAs based on reported, rather than verified, data, it may be sensible to include reconciliation provisions to account for any correction factor. This ensures that the EUAs transferred actually reflect the owners’ EUA surrender liability. It is clearly an additional administrative burden.

3.10 This approach may not be appropriate for ships on short-term time charters, or in redelivery years. Parties may not want to be in a position where they are having to reconcile positions many months after the contract ends. A commercial alternative here could be to rely on validated emissions – emissions that have been reviewed by an accredited third party (e.g. verifier), but not formally verified in accordance with the MRV – for the reconciliation which may be available shortly after the relevant date.

Alternative Performance Mechanism:

3.11 Ultimately, both parties will treat EU ETS liability as a cost imposed on them. It is a question of commercial preference whether that cost is priced in cash or EUAs. While many parties are happy to deal in EUAs, owners or charterers may want the commercial flexibility to elect to deal in cash rather than EUAs. For example, owners may want express rights to buy EUAs and charge the charterer their costs. This can be applied in case of charterers’ default or simply for convenience.

3.12 There is no option under the BIMCO ETS for either party to require cash payments and assumes that owners will want to receive EUAs in order to meet their EU ETS surrender obligation. In consequence, under BIMCO ETS, where there is a charterer default, owners will be exposed to EUA price fluctuations. Without an express regime for pricing the EUAs, owners would have a damages claim and the appropriate time to enter the market may be difficult to ascertain, unless prescribed.  

3.13 If the parties do choose to deal in cash, then certainty is required: (a) when a party can elect to operate in cash, (b) the right for the party receiving payment to invoice for their EUAs costs, and (c) terms as to how the cash equivalent sum is priced – i.e. benchmark and price date, although this may be difficult to agree.

Off-hire Emissions Liabilities:

3.14 BIMCO ETS includes a right for charterers to deduct emissions emitted during off-hire periods from their EUAs liability to owners and require owners to transfer back EUAs where charterers have transferred for off-hire emissions. Owners may want to qualify this right, whereas charterers may wish to expand the operation of this provision.

Protections and Indemnity

3.15 BIMCO ETS provides protection for owners in case of a transfer default. Owners can suspend charterparty obligations / rights. Further protections for owners under alternative performance mechanisms are discussed above. Owners may seek further protection such as indemnities against excess emissions penalties in case of a transfer default, security or anti-technicality type provisions. However, these may be challenging to negotiate where compliance and avoiding the excess emissions penalties are both in the owners’ hands.

No encumbrance warranties:

3.16 The party receiving EUAs under the EU ETS clause may wish to include a no encumbrances obligation. This protection is a market standard in single trade agreements for sale and purchase of EUAs, albeit not in shipping contracts. It requests that the EUAs are transferred with full title and interest without third party encumbrance.

3.17 Conversely, a charterer may wish to restrict the owners’ right to use the transferred EUAs by seeking express warranties that a counterparty (receiving EUAs) cannot speculate with EUAs and can only deal with EUAs when surrendering to the Administering Authority. The objective is to avoid the EUAs being “spent” / used without meeting the compliance entity and the applicable ship’s emissions liability. However, such warranties may not be enforceable.

Additional points

3.18 BIMCO ETS incorporates general phrasing to cover all Emission Schemes, rather than being limited to the EU ETS. This may favour owners, where other international, national or regional emission schemes do not enshrine the polluter pays principle so do not require charterers to pay for ship emissions. Charterers may want to narrow the clause to EU ETS only, especially in long-term time charterparties as further emissions regulations can be expected in future years.

4. Voyage Charterparties

4.1 For voyage charterparties, the nature of EU ETS risk is likely to be lower as the emissions liability will only be related to (a) a designated voyage and (b) a foreseeable period of time, rather than the ongoing use of the ship over possibly multiple Reporting Periods. In consequence, some of the longer-term relationship issues (transfer frequency / counterparty risk) discussed above fall away, unless there is a contract of affreightment or consecutive voyage charter. The key decision for owners will be how to price EU ETS costs and for what period.

4.2 BIMCO published three clauses for voyage charterparties addressing EU ETS, which provide three payment options:

   4.2.1 Transfer of EUAs equivalent to voyage emissions;

   4.2.2 Payment of a cash equivalent sum to the EUAs as a surcharge on top of freight (BIMCO Surcharge); and

   4.2.3 Lumpsum included in freight.

4.3 Deciding between these options is a commercial decision, and it will vary depending on trade type and commercial preferences. For example, in certain trades, transparency on cost may be preferred (or even required), e.g. so that these costs can be accurately passed down to sub-charterers and through sale contract chains.

4.4 BIMCO Surcharge raises some further specific commercial considerations for the parties. BIMCO Surcharge prices the surcharge upfront as an agreed figure with the option of an adjustment based on fluctuations in the EUA price only. However, there are alternative approaches on the market.

4.5 Owners will need to consider whether it is appropriate to retain the right to adjust the surcharge, or build a buffer into the surcharge, to cover “excess” emissions due to unpredictable events – contractual re-routing and voyage adjustments, heavy weather, or demurrage or detention could all adversely impact emissions. One way of achieving this would be for owners to push for a stand-alone adjustment payable with demurrage to reflect these unexpected excess emissions or EUA price fluctuations.

4.6 Finally, owners may want equivalent protections to apply to non-payment of the surcharge as those that apply to non-payment of freight. BIMCO Surcharge builds in further protection. Equally, timing of payment is important, and owners are likely to want any surcharge paid before the ship arrives at the discharge port.

5. Ship Management Agreements

5.1 We discussed above the mechanism under the EU ETS for transferring the EU ETS and MRV compliance responsibility from a registered owner (the default compliance entity) to their in-house or third-party managers. This can be achieved by filing a document mandate with the managers’ Administering Authority. Such an agreement with a third-party ship manager fundamentally changes the risk profile of a ship management agreement and the parties’ traditional relationship. The manager would assume significantly more regulatory and financial responsibility on behalf of the owners.

5.2 Any EU ETS clause drafted for a ship management agreement will need:

      1. to earmark services for risk, security and remuneration;
      2. to address the mechanism for executing and filing the document mandate,
      3. to outline obligations on termination in order to revoke the document mandate and notify the Administering Authority and other applicable parties, so compliance responsibility passes back to the registered owner or another designated entity.

5.3 As with the time charter context, counterparty risk will be key. Managers, as provided in the BIMCO SHIPMAN Emission Trading Scheme Allowances Clause 2023, will want to ensure EUAs are transferred in advance based on forecast emissions and subject to reconciliation based on ship recorded emissions. Owners may seek longer transfer periods, possibly to align with agreements made with charterers and both parties are likely to require reconciliation once verified emissions are known.

5.4 Managers may also require upfront security and ongoing top-up obligations to cover change in circumstances. This could be from a parent company or transfer of EUAs, or a cash equivalent sum derived from forecast emissions over a period of time. This is critical for managers who will be the entity responsible to their Administering Authority to surrender EUAs. If owners default and fail to transfer EUAs, managers cannot avoid their surrender obligations under EU ETS.

5.5 Both managers and owners may want express termination rights. This will be important for managers in case owners fail to transfer EUAs, so managers can limit their exposure as quickly as possible.

5.6 However, it is not just managers who are taking on risk. Owners are also exposed to counter-party risk when transferring EUAs to a third-party manager. The owners’ EUAs are likely to be co-mingled with other owners’ EUAs. If the manager goes insolvent, multiple owners may claim the same small pool of EUAs. To address this, owners may seek to introduce retention of title clauses (although they may not be effective).

DISPUTES

6. It remains early days for the maritime sector and EU ETS. Disputes are likely to arise around the time of key compliance periods so when the ship’s emissions are verified for a Reporting Period, around 31 March, and when the shipping company’s surrender obligation arises, so initially in Q3 of 2025 and up to 30 September 2025 and every year thereafter. 

6.1 The verification period for 2026 is likely to present a real hot spot for EU ETS disputes. The liability for EUAs will be 100% of verified emissions which will include N2O and CH4 and there will be liability for FuelEU costs for the 2025 Reporting Period, so there may be a material increase in cost.

6.2 Initial disputes have concerned transfer defaults where charterers have simply refused to transfer EUAs due to administrative burden of establishing trading accounts or procuring the purchase through a custodian broker. Although the breach is clear, issues can arise with computation of damages. Under English law, an obligation to transfer EUAs is likely to be treated as an obligation to deliver goods, so the Sale of Goods Act 1979 measure of damages – cost of replacement goods after the breach assessed at a reasonable time to enter the market – is likely to apply. Owners who have waited many months after breach before entering the market may be exposed to price fluctuations.

6.3 The forum for disputes may also be an issue of contention. A shipping company will have a statutory right to reimbursement in a Member State and may have a contractual right under English law to damages for a transfer default. If proceedings are commenced in a Member State for statutory reimbursement, charterers may challenge such a claim on jurisdictional grounds: the parties may have agreed a forum for EU ETS transfer disputes under the contract. It is likely the contractual regime for transfer will be different to any statutory reimbursement mechanism, which may be a blunt instrument not accounting for off-hire periods. Further complications may arise depending on the identity and number of parties involved.

FUTURE REGULATORY CHANGES AND CONSIDERATIONS

7. If the IMO adopts a global market-based measure to reduce greenhouse gas emissions, the EU Commission will review the EU ETS for coherence. If such a measure is not adopted by 2028, the EU Commission will consider expanding EU ETS, so that the surrender requirements applicable to voyages between EU and non-EU ports of call apply to more than 50% of emissions.

7.1 Also, the EU Commission continues to monitor evasive behaviour, including any impact on outermost regions, and any market distortions or changes in port traffic across the sectors and, if appropriate, new measures could be introduced. Ships of 400 GT and up to 5,000 GT may be included post 1 January 2026 subject to the EU Commission’s review.

 

[1] East Port Said and Tangiers Med – Implementing Regulation (EU) 2023/2297.

[2] Ship types identified by Delegated Regulation C(2024) 7210 16.10.2024 to the MRV Regulation.

[3] Implementing Decision 2024/411

[4] Implementing Regulation (EU) 2023/259

[5] For example, where it has the ability to control the cargo carried and the route and speed of a ship.

[6] Index Linked.

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DISCLAIMER
This article is published by THE BRITANNIA STEAM SHIP INSURANCE ASSOCIATION EUROPE (the Association). Whilst the information is believed to be correct at the date of publication, the Association cannot, and does not, assume any responsibility for the completeness or accuracy of that information. The content of this publication does not constitute legal advice and Members should always contact the Association for specific advice on a particular matter.

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