As a first step towards reducing the marine transport industry’s greenhouse gas emissions, on 28 June 2013 the European Commission (the “Commission”) tabled a draft Regulation to introduce a system of monitoring and publication of individual vessels’ annual CO2 emissions.
This alert explains why the Commission has taken this step, exactly what it is proposing, who will be affected and what steps operators may wish to take in response.
Background
According to a recent European Commission publication,1 the global shipping industry is responsible for around 1 billion tonnes of greenhouse gas (GHG) emissions annually, and around 4% of the EU’s total emissions.
Tackling shipping emissions has been on the Commission’s agenda for many years. This draft legislation was promised in a communication from the Commission in October 2012 and had been the subject of consultation earlier in 2012.
Despite efforts by the International Maritime Organisation (IMO) and the United Nations Framework Convention on Climate Change in recent years (including, for instance, the IMO’s Energy Efficiency Design Index, which sets compulsory energy efficiency standards for new vessels2), the same publication anticipates that global maritime emissions will have more than doubled by 2050. This would be contrary to the internationally agreed objective of halving worldwide emissions from their 1990 levels by 2050, and the EU’s more immediate commitment to reducing its GHG emissions to 20% of 1990 levels by 2020.3
Originally, it was intended that the EU would participate in a global solution for cutting marine transport emissions. Until now, the shipping sector has been the only form of transport not included in the EU’s strategy for reducing GHG emissions. However, in the absence of an internationally agreed solution, the Commission has decided to implement its own strategy, in the hope that an EU scheme will pave the way for a unified global approach.
The EU has recently (from 2012), and very controversially, extended its flagship EU Emissions Trading Scheme (ETS) to cover the aviation sector. As has been widely publicised, attempts to apply that scheme to flights outside EU airspace ran aground in spectacular fashion, sparking litigation between the EU and U.S. airlines, a trade war with China and other nations and, eventually in late 2012, a dramatic climb-down by the EU as a result of which the non-EU aspects of the aviation ETS have for the time being had to be put on ice.4
Whilst the Commission is undoubtedly proceeding with a degree of caution in relation to shipping emissions against that recent background, it is proceeding nonetheless. Certain aspects of these latest proposals are reminiscent of some of the more controversial features of the aviation ETS scheme, as discussed further below.
Draft Regulation (EU) 525/2013
On 28 June 2013 the Commission published draft Regulation EU 525/2013 for “the monitoring, reporting and verification of carbon dioxide emissions from maritime transport” (the “Draft Regulation”).
The Draft Regulation would, if approved by the EU Parliament and Council, be of direct effect in Member States (i.e., without the need for implementing measures) and introduce a compulsory programme of monitoring, reporting and verification of individual vessels’ CO2 emissions as a first step towards later introducing a market-based mechanism (MBM) to limit shipping GHG emissions or efficiency standards.
For the time being it does not propose that other GHGs or pollutants such as SOx and NOx should be monitored as it is believed that existing vessels’ equipment and documentary procedures would not permit this without additional investment, and because the Commission is wary of imposing too great an administrative burden on ship owners and operators in the first instance.
In very general terms, the Draft Regulation envisages that vessels will be required to calculate and report their annual CO2 emissions over 12-month reporting periods, based principally on fuel type and fuel consumption data recorded in their log books, noon reports and delivery bunker notes.
The emissions calculations would need to be verified by an independent and accredited third party and made publicly available.
It is hoped by the Commission that this will of itself incentivise ship owners and operators to invest in energy efficiency solutions, as it will be the first time that comprehensive transparent industry-wide data about vessels’ fuel consumption and efficiency will be widely available to the market.
Further, a document of compliance would need to be kept on board and available for inspection at EU ports. In fact, the European Commission memorandum accompanying the Draft Regulation suggests that the document confirming compliance with the monitoring and reporting obligations should be added to the list of certificates and documents required to be kept on board by Article 13(1) of Directive 2009/16/EC. This is significant because in certain cases, Directive 2009/16/EC permits the detention of ships that are not carrying mandatory certificates and documents.
The Draft Regulation contains the usual requirement that Member States impose “proportionate, effective and dissuasive” penalties for failure to comply with the various provisions of the legislation. It is specifically envisaged in the Draft Regulation that if a vessel fails to comply with monitoring and reporting requirements for more than one reporting period the national state port authority may issue an expulsion order prohibiting that vessel entering any other Member State port until the vessel has complied with its unfulfilled obligations.
Who will be affected and when?
It is proposed that the Regulation would enter into force as soon as 1 July 2015. The first reporting period would begin on 1 January 2018 so as to give Member States and industry operators time to prepare for compliance.
The scheme will only apply to “large” vessels, defined as those of 5,000 gross tons or more; so most vessels engaged in international trade.
The compliance obligation rests with “companies” which are defined as “the owner of [a covered ship] or any other person such as the manager or the bareboat charterer, who has assumed the responsibility from the ship-owner for its operations”. Thus this would presumably include third party ship management companies who have taken over the technical management of a vessel. In echoes of the EU aviation ETS, two features that may prove to be controversial are:
- That the legislation will apply regardless of a vessel’s flag state
- That the MRV requirements will apply not only to all CO2 emissions generated during voyages between EU ports and at EU ports (for instance at berth or manoeuvring within port) but also, importantly, to emissions from:
- Incoming voyages, i.e., from the last non-EU port of call to the first EU port of call
- Outgoing voyages, i.e., from the last EU port of call to the first non-EU port of call
As such it will capture emissions generated outside Member State territorial waters and will require compliance by entities that would otherwise be outside Member States' jurisdiction.
What Next?
The Draft Regulation is not yet law. For a quick guide to the journey from European Commission proposal to legislative instrument, readers are referred to Reed Smith Client Alert No. 13-115 (The Making of Emissions Trading Laws- Understanding the EU legislative process).
However, it can now reasonably be expected that the Commission’s proposal will be approved in one form or another and so now is undoubtedly the time to take steps to lobby for any changes that industry as a whole or individual companies would like to see to these proposals.
Furthermore, the Draft Regulation is only the first step in a three stage plan for reducing GHG emissions. The memorandum that accompanies the Draft Regulation explains that once a system for monitoring, reporting and verifying CO2 emissions has been established, the data that is accumulated will potentially inform a programme of GHG reduction targets for the maritime transport industry and a system of market-based measures which the Commission presently believes might include a contribution or target-based compensation fund, or an emissions trading system.
Reed Smith’s environmental and climate change lawyers have extensive experience of the European Emissions Trading Scheme and were intimately involved in the extension of that scheme to the aviation sector, as well as advising our shipping clients on various global responses to climate change as they affect the shipping sector. If you would like any further information regarding any of the matters highlighted above, please contact Nicholas Rock, Richard Gunn, Frances Callanan or your regular Reed Smith relationship lawyer.
1. COM(2013) 479 final - Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of Regions
2. Energy Efficiency Design Index, MARPOL Annex VI
3. See the Europe 2020 Strategy COM (2010) 2020
4. Up in the air – the suspension of the aviation EU ETS for non-EU airlines / Up in the air – the suspension of the aviation EU ETS for non-EU airlines: UPDATE
Client Alert 2013-188