EU ETS & Ship Purchase – Beware before you buy in 2024

The European Union’s Emission Trading System (EU ETS) will include shipping from 1 January 2024. The North Standard has spoken to Verifavia to better understand the implications the EU ETS could have in ship purchase.

Concept

The European Union’s Emission Trading System (EU ETS) will include shipping from 1 January 2024. The North Standard has spoken to Verifavia to better understand the implications the EU ETS could have in ship purchase.

The new amendments to the EU ETS entered into force on 5 June 2023, but for shipping, the requirements will start from 1 January 2024, with the deadline for surrendering allowances (EUA) extended to 30 September.

One area of concern raised by a number of the club’s members in regards to the impact of the EU ETS on the sale and ship purchase. The North Standard has spoken to Verifavia, an approved verifier for the EU MRV Regulation, to better understand these potential implications. It is the verified emissions reported under the EU MRV Regulation that are used to ascertain the shipping company’s liability for surrendering allowances under the EU ETS.

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Q&A – EU ETS during Ship Purchase

Q: The responsibility for compliance with the EU ETS lies with the ‘shipping company’; with the European Commission publishing a list of these shipping companies by no later than 1 February 2024. Do you understand this to be the vessel’s Document of Compliance holder under the ISM Code, which is most likely to be the ship manager?

VERIFAVIA: Yes, the shipping company can be the shipowner, manager, or bareboat charterer who is responsible for the operation of the ship. On assuming such responsibility, they agree to take over all the duties and responsibilities imposed by the ISM Code. The European Commission’s list of administering authorities will include the companies who have called EU/EEA ports at least once in the last four years.

Q: If a ship, which is subject to the EU ETS having traded within the EU during 2024 and the first part of 2025, is sold on 30 April 2025, which ‘shipping company’ is responsible for the monitoring, reporting, and verification of the emissions and for the surrendering of the EU Allowances (EUAs) during 2025?

VERIFAVIA: The shipping company responsible at the end of the reporting year must ensure submission of the EU MRV emissions report on THETIS for the entire reporting period, even if the ship was previously operated by a different entity. Therefore, the new ship operator should promptly seek an ‘interim verified emission report’ from the former operator.

However, the responsibility for the surrendering of EU Allowances corresponding to the emissions within the ‘interim period’ remains with the shipping company that operated the ship during that period.

So, take the example of a vessel sold on 30 April 2025:

Shipping Company “A” would be responsible for surrendering the allowances for the period of 2024 and from 1 January 2025 up to the time of the sale on 30 April 2025.
Shipping Company “B” would be responsible for surrendering the allowances for the period from the time of the sale (30 April 2025) till the end of the reporting year.

Q: Using the hypothetical ship purchase above, if Shipping Company “A” failed to surrender the required allowances for the 2024 period and for the period in 2025 up to 30 April 2025, it would be a failure for two consecutive periods. This may not be discovered until September 2026 after the ship had been sold. Could this ship then be penalized and face expulsion from an EU port?

VERIFAVIA: Shipping companies that fail to surrender their allowances will be liable to pay a penalty of €100 per tonne CO2 equivalent, in addition to the mandatory surrendering of these allowances. If the shipping company fails to comply with the obligations of surrendering allowances for two consecutive years, the administering EU member state may deny entry to the ships operated by the company.

The EU Commission will not take any action until 2026 on the failure to surrender. But we consider it unlikely that the ship will be expelled, as the expulsion order will apply to the previous shipping company. As such we hope the new operator will not have to pay if the former shipping company did not comply with their surrendering obligations.

Q: In the above scenario, Shipping Company “B” may consider trying to rectify any past failures of Shipping Company “A” in order to prevent negative consequences, such as expulsion from an EU port. Would Shipping Company “B” be allowed to do this, or would the liability to surrender allowances for 2024 and up to 30 April 2025 remain with Shipping Company “A”?

VERIFAVIA: The liability for surrendering the allowances will remain with the former shipping company.

Q: Given the concerns for the potential action against a ship due to a previous shipping company’s failure, we would imagine that the buyer of a ship should carry out due diligence in respect of EU ETS compliance.

VERIFAVIA: Yes, due diligence will be very important, and it is not just limited to EU ETS but also to other emissions-related regulations such as the IMO Carbon Intensity Indicator (CII). We believe these should be clearly included in the terms and conditions of the ship purchase. The new owner should request an “interim verified emissions report”, proof of submission of the emissions report to the administering authority, and if possible, proof of submission of allowances.

Q: How does a shipping company buy and transfer allowances?

VERIFAVIA: A Union Registry account will be used to keep track of the allowances in electronic format. It is like a bank account which keeps record of debits, credits, and balances.

By 1 February 2024, a list of the Administering Authorities where shipping companies are registered will be published by the European Commission. Based on that list, the shipping company should apply to the registry and submit the required documents and applicable fees.

Q: Will it be clear what number of allowances need to be surrendered by a shipping company by 30 September each year?

VERIFAVIA: Yes, the number of allowances will be clear at the end of the verification process by 31 March from 2025 onwards.

Companies can also take advantage of the continuous verification process that we offer to buy the allowances, with no need to wait until the end of the year. The continuous verification and verified ‘Voyage Statements’ offered at the end of every voyage could be very helpful as owners could claim the allowances from the charterer rather than seek reimbursements, however, a suitable clause may need inserting in the charterparty.

Source: North Standard

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