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As of 1. January 2024 the Directive (EU) 2023/959 of the European Parliament and of the Council of 10. May 2023 came into effect, thereby extending the EU Emissions Trading System (EU ETS) to the maritime sector. While EU law dictates that a Directive such as this needs to be implemented by the Member States in order to be legally binding, Germany has so far failed to do so, leaving affected companies in an equilibrium of uncertainty.
This article aims to provide a brief introduction to the EU ETS extension, while comprehensively placing it in the context of the Regulation (EU) 2015/757 of the European Parliament and of the Council of 29 April 2015 (MRV – “Monitoring – Reporting – Verification”) as those legislative instruments can neither be viewed nor applied independently. The MRV-emission reports are the basis of calculation for the allowances granted and submitted under the EU ETS for each Shipping Company.
Consequently, the MRV has simultaneously undergone a reform of its scope and reporting obligations to align with the EU ETS. The amended MRV has equally entered into force on 1. January 2024. Gaining an understanding about the interactive regulatory relationship between the two is crucial, since the MRV is a Regulation which does not require national implementation to be binding. Therefore, consider this your reminder that MRV reporting and submission deadlines under the new requirements since January 2024 are quickly approaching:
On 1. April 2024 every Shipping Company falling under the MRV scope must have submitted to their attributed Administering Authority a monitoring plan that has been assessed by a Verifier and includes all relevant greenhouse gas emission, CO2, N2O and CH4.
EXCEPT: This shall not alarm ships newly obligated under the MRV since the 1. January 2024 as the submission of their monitoring plan is only due no later than three months after each ship’s first call in a port under the jurisdiction of an EEA Member State.
1. MRV
Due to its urgency and strong overlap, we shall start with a quick introduction to the MRV reform. Generally, the MRV Regulation lays down the rules for the monitoring, reporting and verification of greenhouse gas emissions. The amended regulation has seen an extension of its scope from the inclusion of only CO2 to the inclusion of the two other relevant greenhouse gases, namely nitrous oxide (N2O) and methane (CH4). Meaning, ships of 5000 gross tonnage and above transporting cargo or passengers for commercial purposes, are now required to develop and submit a monitoring plan, and two types of emission reports covering all three greenhouse gases if they fall within the geographical scope of the MRV. Geographically the obligations under the MRV are applicable for voyages who begin or end at a port of call under the jurisdiction of an EEA Member State and ships within a port of call under the jurisdiction of an EEA Member State.
The MRV identifies three key players: (1) The Shipping Companies as the responsible entity for the preparation and submission of both monitoring plans and emission reports, (2) the Administering Authorities of each Member State responsible for receipt, approval and overall compliance of MRV obligations and finally (3) the Verifiers who must assess each monitoring plan and emissions report before submission to the national Administering Authorities.
Who is who?
“Shipping Companies”
is to be understood as a legal term. They play a role as the responsible entity for both MRV and EU ETS obligations. Art. 3 (w) Directive (EU) 2023/959 contains its legal definition and identifies the ship owner as the primary responsible entity. However, a “Shipping Company” can also be any entity that has assumed responsibility under the International Management Code for the Safe Operation of Ships and for Pollution Prevention (ISM) and is mandated to carry MRV and EU ETS responsibility by the ship owner. Regarding the latter, two aspects are worth noting: Firstly, the responsible Shipping Company carries responsibility for both EU ETS and MRV obligations, the obligations cannot be split up between ship owner and ISM manager. Secondly, the mandate necessary to delegate responsibility from the ship owner to the ISM manager underlies strict requirements and should be carefully considered.
“Administering Authorities”
Each Member State has an Administering Authority responsible for receipt, approval and ensuring overall compliance of both MRV and EU ETS obligations. Each Shipping Company is attributed to one Administering Authority according to three general rules set out in Article 3 gf, para. 1 Directive (EU) 2023/959. To facilitate the identification of the responsible Administering Authority for each Shipping Company the EU has in the Commission Implementing Decision (EU) 2024/411 published a list comprising all the Shipping Companies previously bound by MRV obligations and allocated the responsible Administering Authority. Within Germany, the task of the Administering Authority will be carried out by the German Emissions Trading Authority (DEHSt). Those Shipping Companies falling within the scope of the EU ETS and MRV who can’t find themselves on the list, are obliged to apply the three general rules mentioned above to identify their responsible Administering Authority, register in THETIS MRV, assign their ships and request attribution.
“Verifier”
The compulsory assessment of the monitoring plans and emission reports before submission must be done by a Verifier compatible with the amended Regulation EU 2016/2072 and accredited by the National Accreditation Body pursuant to Regulation EC No 765/2008.
“THETIS MRV”
For facilitated compliance with monitoring and reporting obligations the platform THETIS MRV which has been available since the first entering into force of the MRV has been updated. It is important to note that following the amended regulation the use of THETIS MRV for the registration of the ships and submission of the monitoring plan and emission reports is compulsory. Keep that in mind regarding the upcoming submission deadline 1. April 2024.
What’s new?
Lastly, I will point out a few key obligations that will be face by Shipping Companies and must be carefully considered both legally and operationally under the amended MRV.
- “Shipping company” meaning ship owner or mandated ISM manager is the responsible entity for MRV obligations.
- Obligation to use the THETIS MRV platform for submissions.
- Obligation to have the monitoring plan and emission reports assessed by Verifiers before submission to the Administering Authority.
- Introduction of two more greenhouse gases to be monitored and reported: CH4 and N2O
- Introduction of partial emission reports whenever there is a change of ship owner.
- Introduction of a new form of emission report next to the emission reports for the individual ships: the aggregated emission reports on company level covering the emissions of the entire fleet.
- Some substantive amendments and additions in the monitoring plan.
2. EU ETS
The EU ETS subjects Shipping Companies within the scope of the Directive (EU) 2023/959 to the EU Emissions Trading System. Meaning that according to their CO2 emissions they will be obliged to purchase and at the 30. September of every year to surrender emission allowances for each tonne of greenhouse gases to be reported under the EU ETS of the preceding year. The number of allowances available to be bought and surrendered is calculated based on the emissions reports under the MRV on both ship level and company level.
Materially ships with a gross tonnage of 5000, transporting passengers or cargo commercially, fall within its scope, geographically its applicability depends on whether a port of call is within the jurisdiction of a EEA Member State, irrespective of the ships’ flag (principle of flag neutrality): 50% of the emissions of voyages of ships only departing from or ending at a port of call within the jurisdiction of an EEA Member State will be subject to allocation and surrendering of allowances within the EU ETS, 100% of emissions if both the start and end port of call are within an EEA Member State and also 100% of emissions of ships within ports under the jurisdiction of EEA Member States. In order to exclude any possibility of circumvention of the emissions trading system neighbouring container transhipment ports as listed in Commission implementing Regulation (EU) 2023/2297 also fall within the scope of the Directive.
The surrendering obligations faced by the ship owners will be gradually phased-in: For the year 2024 only 40% of the reported emissions must be surrendered, for 2025 the ratio increases to 70%. and 100% of the verified emissions of 2026 must be surrendered. Only from January 2026 will greenhouse gases other than CO2 be included in the EU ETS obligations, which presents an important difference from MRV obligations. The surrender of allowances will take place through the Union Registry while the Administrative Authority will be responsible for verification and accreditation of the reporting of emissions data. As the Union Registry is the key platform to fulfill EU ETS obligations, the Directive foresees a term for the opening of a Maritime Operator Holding Account (MOHA) in the Union Registry in Art. 15 a of the Commission Delegated Regulation (EU) 2019/1122 of 12 March 2019 supplementing Directive 2003/87/EC of the European Parliament and of the Council as regards the functioning of the Union Registry. A Shipping Company which is included in the list attributing each Shipping Company to Administering Authority, must request the opening of a MOHA in the Union Registry within 40 days of the publication of that list. The beginning of the term was the 1. February 2024, the end of the term for those included in the list was accordingly the 12. March 2024. An exception is made for Shipping Companies not on the list but falling within the scope of the EU ETS. In that case the request to open a MOHA must be submitted within 65 days of the first port of call.
The key players and stakeholders identified above remain the same for the EU ETS obligations, -so do the legal challenges of responsibility and possible complete delegation of the ship owner’s responsibility to the ISM manager. However, the EU ETS Directive adds another layer of challenges and legal and economical structuring: Art. 3 gc of the EU ETS Directive instructs the Member States to adopt legal measures to ensure the possibility of cost allocation for the costs created by the surrendering of allowances. The Directive leaves room for the responsible Shipping Companies to create contractual arrangements with different parties regarding the distribution of the economic impact of the EU ETS. It is important to keep in mind that these contractual arrangements do not shift responsibility but only distribute financial burdens. It remains for legal practitioners and maritime experts to create contractual arrangements suitable for each individual business model and situation. While the BIMCO has already published helpful clauses in that regard, we encourage you to seek legal and professional help for their application and customisation.
This introduction represents the start of a miniseries regarding EU ETS and MRV in the maritime sector that seeks to keep you up to date and to give you a comprehensive glimpse into the legal challenges and opportunities you will face along the way. All inputs will be summarised in a booklet and made available in due time.
Additionally, we invite you to contact us regarding individual inquiries and ideas.