Uncertain times: Emissions regs for workboats

We are no longer surprised when developers are not well versed in the issues, thus leaving owners to drive the point in commercial negotiations whilst also struggling at times to put the issues squarely on the table.

The situation leaves owners open to several risks, including compliance costs and penalties landing heavily on owners as a result of gaps in charterparty regimes, but these can be mitigated by knowing what to focus on when and what terms to introduce to the charterparty.

This article, which was first published in the Workboat Association Newsletter, by Maritime Decarbonisation Counsel Rachel Hoyland of Stephenson Harwood LLP is intended to help owners navigate their way through contracting for emissions regulations.

Key emissions legislation

With three different legislators, the EU, the UK and the International Maritime Organisation (IMO), simultaneously developing emissions legislation for shipping, anyone could be forgiven for feeling confused about which rules apply when and what is applicable to their vessels and operations.

To give a quick overview, the legislative suite includes:

• EU Monitoring, reporting and verification regulation (EU MRV) – in force, deals with the monitoring, reporting and verification of emissions of vessels sailing to, from and within the EU.
• EU Emission Trading Scheme (EU ETS) – in force, deals with putting a cost on emissions of vessels sailing to, from and within the EU.
• FuelEU Maritime (FuelEU) – in force, deals with reducing the greenhouse gas intensity of energy used by vessels sailing to, from and within the EU.
• UK Emissions Trading Scheme (UK ETS) – under development, deals with putting a cost on emissions of vessels sailing between UK ports and on in-port emissions. 
• IMO Carbon Intensity Indicator (CII) – in force, governs the operational efficiency of vessels worldwide.
• IMO Net Zero Framework (IMO NZF) – under development, adoption currently postponed, deals with reducing the greenhouse gas intensity of energy used by vessels worldwide.

With regard to offshore vessels, this legislation can be divided into three categories:

1. Applicable now or in the future and in force – the EU MRV and EU ETS

2. Proposed to apply in the future but under development – UK ETS and IMO NZF

3. No clear proposals for future application – FuelEU (except vessels carrying cargo and passengers for commercial purposes, which are within scope) and CII

The remainder of this article focuses on category 1, legislation.

When charterparty clauses are most important

In respect of EU MRV and EU ETS, there is an important nuance owners need to be aware of in relation to size.

The smaller end of the workboat market will be out of scope of this legislation altogether, as emissions from offshore vessels of and over 400GT only (let’s call these medium vessels) fall within EU MRV from 1 January 2025. For those offshore vessels of and over 5,000 GT (let’s call these larger vessels) the EU ETS will also apply to their emissions from 1 January 2027.

This means that whilst concerns in relation to accurate data capture and reporting are common to owners of both medium and larger vessels, owners of larger vessels will additionally be obliged from 2027 onwards (either directly by statute or contractually via registered owners or ship managers) to pay costs in respect of vessel emissions.

This will be a new cost on business and charterparty clauses enabling recovery of the cost from charterers will be critical, if owners are to be protected from bearing the cost themselves.

Top negotiating priorities for owners

1. Costs under the EU ETS are ‘paid’ by way of EU allowances (EUAs) being purchased and then surrendered to an administering EU member state. Special accounts are needed to purchase, transfer and surrender EUAs. Owners will need accounts and to purchase some EUAs in any case (for instance to cover emissions when the vessel of off hire).

However, as emissions are a direct reflection of fuel consumption and as charterers pay for the fuel, parties typically agree that charterers should in principle be responsible for emissions produced while the vessel is on hire.

A key issue for owners is therefore to ensure charterers agree in the charterparty either to provide EUAs to owners to cover such emissions, or pay owners for EUAs which owners acquire.

2. Although EUAs are surrendered to the administering EU members state only once annually, liability to surrender allowances accrues throughout the calendar year.

Owners will need to assess how comfortable they are with the credit exposure represented by accruing liability and decide how frequently they will collect EUAs, or payment for EUAs, from charterers and ensure that decision is reflected in charterparty obligations.

For instance, monthly collection will give owners better protection against credit risk but will create an additional administrative burden for both parties, whereas an annual collection reduces administration but leaves owners exposed to the risk of paying costs that may not ultimately be recovered from charterers, for instance if developers enter insolvency.

3. A further key consideration for owners is what remedies will be available to them if charterers do not provide or pay for EUAs as agreed.

Indemnities for losses may not be entirely effective where fines and financial penalties are incurred and will be of limited value in insolvency situations. More effective remedies might include rights to suspension of performance (especially if utilised alongside monthly collection of EUAs or payment) or the provision of security.

These options may not be popular with charterers, especially where charterers do not have a good understanding of the EU ETS regime and the way in which it will impact owners.

Summary

As the application of emissions legislation to offshore vessels is now a reality, with EU MRV being applicable this year onwards, it is imperative that owners do not overlook the costs which will soon fall on them.

For vessels of 5,000GT and above operating in the EU and entering into charterparties that will, or could, extend into 2027, owners should act now to include EU ETS clauses in charterparties, or prepare to bear the financial burdens of meeting those costs themselves.

For owners of vessels trading outside the EU it will be prudent to anticipate the possibility of similar ETS regimes being introduced in other jurisdictions in the future, and to ensure charterparties provide that the risk of such changes in law will not fall exclusively upon them.

Stephenson Harwood LLP is an international law firm with market-leading offshore and maritime decarbonisation practises.