Shipping and the Environment
Climate change and its effect on the environment from greenhouse gas (GHG) emissions has become a focal point for many, and there has been a growing recognition of the need to curb human’s impact on the planet. Following a majority United Nations member implementation of the 2015 Paris Agreement which set challenges and goals to reduce carbon dioxide (CO2) and GHG emissions, there have been a number of developments from authorities, unions, organisations and other bodies within the Shipping sector which impact the way in which companies will need to carry out business.
According to the EU, in 2018 global shipping emissions represented
1076 million tonnes of CO2 and were responsible for around 2.9% of global emissions caused by humanity's activities. With the risk of an increase in these, the EU adopted their ‘Fit for 55’ package which is a set of proposals to revise and update EU legislation and introduce new initiatives to cut emissions by at least 55% compared with 1990 emissions by 2030 and to reach climate neutrality by 2050. It includes EU ETS, FuelEU and CII ratings, amongst other decarbonisation initiatives.
In January 2024 the EU’s Emissions Trading System (EU ETS) was extended to cover CO2 emissions from all large ships entering EU ports, regardless of the flag they fly. EU ETS operates as a ‘cap and trade’ system: companies have a cap on the total amount of GHG that the entity can emit and this cap will be reduced over time to reduce emissions. Within that cap, allowances can be bought or sold but they must be surrendered at the end of each year to cover vessels’ emissions. Shipping companies will need to ensure that their fleet complies with the obligations of EU ETS and ensure they surrender the required allowances.
FuelEU, potentially, has more of a significant impact on the shipping industry. It applies to commercial vessels with a gross tonnage of more than 5,000 used for transport of cargo or passengers, regardless of flag, from 1 January 2025 (although note that there were requirements to submit ship specific monitoring plans by August 2024). This scheme aims to promote the use of renewable and low-carbon fuels in shipping with the intention that it will reduce the GHG energy used on board. FuelEU provides common principles which require companies to monitor and report the amount, type and emission factor of the energy used on board their ships during calls at EU ports. There are penalties for non-compliance under the regulation which increase if non-compliance incurs for more than one year, therefore it is imperative that shipping companies are aware of their responsibilities under FuelEU.
The IMO has also introduced two regulatory initiatives: EEXI and CII which came into force 1 January 2023 and are mandatory measures under MARPOL Annex VI. The new regulations focus on a ship’s vessel efficiency and measures CO2 “per unit of transport work”, with the aim of assessing, measuring and reducing the CO2 emissions of existing ships. EEXI, or Energy Efficiency Existing Ship Index, is a framework for assessing the technical energy efficiency of vessels. The Carbon Intensity Indicator (CII) is a rating system for ships which determines the annual reduction needed to improve the ship’s operation carbon intensity within a specific rating level and requires ship owners to report their operations annually.
Each of the schemes impose additional obligations and responsibilities on various shipping companies and therefore it is important Members are aware of what they are and keep up-to-date. Further information on each of the topics can be found in the relevant sections below and for any additional queries please contact our Shipping and the Environment team below.
Relevant links
FuelEU FAQ's
b. Alternatively, companies can:
i. Pool with other vessels. Any two ships which are subject to FuelEU Maritime can be pooled, meaning the vessels ‘share’ the total compliance balance to achieve compliance for each individual ship. However note that vessels can only be included in one pool per year and can only be pooled if the total compliance balance is positive.
ii. Bank some surplus it had in the current year. This is a means of storing any surplus for use in the next reporting period.
iii. Borrow some surplus it expects to have in the following year. Please note, however, that this does come with an “interest” and there are certain limits under Article 20 of the EU Regulations.
iv. Pay the penalty imposed as a result of exceeding the GHG intensity threshold. It is important to note the increase in penalties, as further discussed in question 3.
b. Unless the charterparty specifically states so by way of an express clause it is unlikely that English law would imply a term or a right to claim an indemnity from charterers. It is therefore important that the parties include a clause covering responsibility if they intend to place the liability for fines/penalties with charterers.
c. If a vessel is already on a long term charter when the Regulations come into effect and it cannot burn alternative fuels, then one of the compliance options above will be required. It is important to note that the charterparty may not provide for responsibility or liability for this if it was drafted prior to introduction of the Regulations therefore unless an addendum is prepared, there may not be a way to pass liability for fines/penalties on to charterers.
d. If the vessel has the ability to burn an alternative fuel but the charterers are unable to procure that fuel, or the vessel can connect to shore power but that is not available at the port/berth to which she is ordered, the liability and responsibility may still rest with owners. Unfortunately this will depend on the specific clauses within the charterparty and whether or not there is a mechanism which allows for this to be passed to charterers.
b. We understand that the penalty will increase by 10% every consecutive reporting period until the vessel obtains a surplus that resets the increase factor.
b. A DoC holder can create more than one pooling group and assign different vessels to each one of them.
c. The numbers for the pool can be calculated using the post-voyage validated emissions statements and using them as a basis for bilateral contractual agreements.
d. Pool configurations are not submitted until 30th April the following reporting year and therefore until that time companies are free to enter into and exit from any pooling arrangements in accordance with their own commercial practice and contractual arrangements.
Prepared with the kind assistance of Hugo Wilson from HECLA Emissions Management.
