Chartering under EU ETS demands full emissions visibility

The maritime industry enters uncharted waters in 2024, as a carbon price on shipping is instituted for the first time in the form of the European Union’s Emissions Trading System (ETS).

For shipowners — or ship managers, if owners mandate responsibility — that will mean surrendering EU Allowances (EUAs) covering emissions, initially for carbon dioxide but expanding to methane and nitrous oxide in 2026, on eligible voyages once they are reported each year. We are moving towards a system where annualised emissions reporting on both a ship and fleet level will be required.

But while the question of how methane and nitrous oxide are to be measured onboard is far from settled, neither that, nor the new carbon trading requirements, are the biggest challenge under the new rules. The real challenge before us is the clause recognising the ‘polluter pays’ principle, which was inserted into the EU ETS text at a fairly late stage. The clause asks EU Member States to ensure that shipowners or managers can be reimbursed for voyage emissions ‘when the ultimate responsibility for the purchase of the fuel and/ or the operation of the ship is assumed by a different entity than the shipping company pursuant to a contractual arrangement’.

Essentially, when reduced to brass tacks, this suggests that a time charter or bareboat charter will need to cover the cost of emissions — although the legal mechanisms enforcing this in each country are not yet clear.

Combined with the International Maritime Organization’s (IMO) Carbon Intensity Indicator (CII), the exposure of charterers under EU ETS represents a redefinition of the traditional responsibilities of the charterer. Under CII, the prerogative is on shipowners to ensure that companies hiring a vessel operate it in a way that ensures that the targeted rating is achieved. This relationship needs to be put into a charterparty clause for the charterer to share responsibility. However, under the EU ETS, qualifying charterers are by law responsible for the emissions of their voyage. While CII has an indirect impact on charterers, EU ETS will have a direct one.

Shifting currents

This is a dramatic change in the relationship between ship owner and charterer. Previously, shared visibility into emissions performance was a ‘nice to have’ rather than a high level or key priority in the relationship. As long as the price of a voyage was settled, charterers could remain relatively unconcerned about the emissions produced along the way. Any interest in emissions on the part of a charterer tended to be realized through initial vessel selection.

But now, with the emissions responsibility to charterers under CII clauses and the EU ETS, visibility into real-time and voyage emissions is a necessity. Without full visibility, charterers could find themselves overpaying for emissions.

This is not simply a question of holding the operator’s feet to the fire and ensuring honesty — there are many legitimate reasons why voyage emissions may be overestimated, not least because the allocation of emission on a voyage basis is not part of the EU MRV or ETS regimes, which require only annual reporting. Owners that need buy EUAs in advance of emitting would be better off over-estimating voyage emissions than having to buy extra EUAs, potentially at higher cost, to cover excess emission — and it is unlikely that charterers will be eager to pay for an owner’s abundance of caution.

While recognizing the flaws and limitations of the current iteration of the CII, we have previously acknowledged its role as a ‘collaborative investment incentive’ bringing together shipowners and charterers. This is even more evident now as, if charterers are to take contractual responsibility for maintaining emissions within a required band for the vessel, it is only right that they should have a greater say in the technologies deployed to manage emissions. Their exposure to EU ETS reinforces this idea.

Ensuring that vessels are equipped with the collaborative tools needed not only to comply with EU ETS but to understand the allocation of true voyage emissions will be crucial to creating win-win scenarios between owners and charterers. The business case for this approach has only gained more evidence over time.

All hands on deck

At the same time, balancing the demands of charterers and operators, and new technology in general, should not place an undue burden on crew, who are ultimately the enactors of efficient voyages. Any elements of efficient sailing that can be automated in a way that alleviates workload will be useful in achieving this goal. When assessing the outcomes of our Via Kaizen project, carried out in collaboration with multiple academic institutions and shipowners, Yara Marine Technologies found that ֫— alongside needing to display a positive impact on workload — trust in digital systems’ recommendations is key in ensuring that crew use that system.

Whichever efficiency investments owners and charterers agree on for a vessel, it must start with visibility into real-time emissions. The next step is to enhance value from that visibility to support crew in operating the vessel as efficiently as possible. Within the Yara Marine Technology portfolio, these two steps can be achieved effectively through the integrated use of our automated fuel propulsion optimisation technology, FuelOpt, alongside an associated Fleet Analytics tool.

Both offerings can be utilised onboard regardless of vessel or fuel type. As bolt-on solutions, their benefits can also be transferred from one vessel to another if necessary — benefitting shipowners keen to initially sustainably retrofit existing vessels and then later, utilise the same solutions on a newbuild as they update their fleet. Charterers can also benefit from investing in green technology solutions that are easily installed onboard and simple to operate — potentially widening the range of compliant vessels available for operation.

The process is straightforward: with Fleet Analytics, data gathering and analysis is applied on a ship-wide scale and can be sent to the cloud and compiled as reports. The performance of that vessel can be analyzed during a voyage or period and even compared against other vessels in a fleet, yielding valuable insights. Fleet Analytics also includes a powerful reporting feature that is designed to drastically facilitate tracking emissions and provide frequent updates on CII ratings and EU ETS allocated emissions. This results in a much-improved visibility of up to date emissions parameters that the different stakeholders so desperately need.

Based on Fleet Analytics data and the requirements of the vessel, FuelOpt can be utilised to automate fuel use for maximised savings and efficiency — negating the necessity of crew having to make constant minute adjustments to vessel propulsion. The system software receives information from the ship’s instruments and makes real-time adjustments to the propulsion line based on defined setpoints, including fuel consumption, speed and power. By providing a direct interface between machinery and the bridge, FuelOpt allows the captain and crew to maintain full control of key vessel efficiency parameters.

A clearer outlook

The combination of vessel performance management and propulsion automation means that vessels are always operating at peak performance for their surroundings, reducing emissions and saving money — allowing shipowners and operators greater resilience in a market significantly impacted by fuel availability and rising prices.

Discussions on decarbonisation investments and the allocation of emissions responsibility between owners and charterers will always be lively in a commercial context. But as EU ETS and CII bring the true cost of emissions into greater focus, the need for the tools to measure and optimise emissions in real-time and on a voyage basis should be beyond debate. Charterers have the right and the responsibility to ensure that the vessels they hire are capable of enabling these collaborative practices, ensuring our supply chains remain robust while en route to net zero.

Note: Information provided in this article is per Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a system for greenhouse gas emission allowance trading within the Union and amending Council Directive 96/61/EC.

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