EU ETS: New Standard Template from BIMCO and Key Considerations

May 16, 2024
administrator

Following the inclusion of shipping in the EU’s emissions trading system on 1 January 2024, the focus is now shifting to the practical aspects of compliance with the regulations, including monitoring, reporting, and surrendering of allowances.

As we have previously outlined in our article regarding who the responsible entity is under EU ETS, the starting point is that the registered owner is the “shipping company”, and thereby also responsible for monitoring, reporting and surrendering allowances. 

However, and as outlined in our previous article, the registered owner and the ISM-company may agree that the ISM-company should be responsible instead of the registered owner. In practical terms, this means that responsibility may be transferred to the disponent owner in a bareboat charter party or to the technical manager of the vessel (depending on which entity that is the ISM-company).

BIMCO ETS Mandate Letter

Further rules regarding transfer of responsibility are outlined in Implementing Regulation (EU) 2023/2599. One of the key requirements, is that the registered owner and the ISM-company which is to take over responsibility, have to sign a “mandate letter”. The EU has not published its own standard form mandate letter, and up until recently we have seen several different versions of the mandate letter being used. 

The lack of a standard template has led to increased discussions and work in order to formalise a change of the responsible entity. It was therefore a pleasant surprise to see BIMCO launching its own standard ETS template mandate letter on 8 May 2024. Instead of drafting bespoke mandate letters, as has been the case up until now, industry players may now simplify the process by filling out the standard form and submitting it to the relevant administering authority. 

The BIMCO Standard ETS Mandate 2024 may be accessed here.

Key considerations

While the standard template simplifies the practical handling associated with allocating responsibility, it remains crucial for the parties to conduct thorough assessments of whether responsibility should be transferred and the consequences thereof. Parties are well advised to review the accompanying contracts to ensure that all consequences relating to EU ETS and the (potential) transfer or responsibility are in order and that the allocation of responsibility is carefully considered and adequately addressed. 

Some of the key items to consider are:

  • Distinction between public law and contractual private law: Ensure alignment in legal obligations towards the authorities on one hand and contractual agreements between private parties on the other hand in order to avoid discrepancies in accountability. 
  • Optimal division of responsibility: Is the responsibility delegated to the party best suited for monitoring, reporting, trading, and surrendering allowances?
  • Comprehensive contractual provisions: Contracts should include provisions on “what, how and when”, including what needs to be surrendered (allowances, derivatives, or cash compensation), price, and timing of delivery.
  • Cost allocation and the “polluter pays”-principle: Parties should consider incorporating reimbursement mechanisms to mitigate financial risks and ensure compliance. In line with the EU’s statements in the EU ETS-rules, the ultimate responsibility should lay with the charterer – in line with the “polluter pays”-principle 
  • The need for security / guarantees: The parties should consider whether security is necessary, especially if the responsible entity only receives allowances one a year / with a low frequency. 
  • Termination and consequences of termination: The parties need to take into account that there currently is little guidance on termination of a mandate. Specific principles and guidelines on this should therefore be included. This is also outlined by BIMCO in its explanatory notes.  

Wikborg Rein has recently assisted industry players across the maritime value chain in a broad range of questions relating to the EU ETS. From drafting mandate letters for seamless delegation of responsibility to the administering authorities to setting up Maritime Operator Holding Accounts, liaising with regulatory bodies and implementing contractual arrangements in management agreements and charter parties. We remain available to assist clients and contacts in every aspect of the ETS-journey.

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