Navigating the EU ETS Regulation in Denmark

Through the adoption of Regulation 2021/11191 (the “ETS Regulation”), the EU has set an objective of economy-wide climate neutrality by 2050 as well as a set target for achieving negative emissions. All economic sectors must contribute to achieving emission reductions, which has resulted in maritime transport activities most recently being included in the EU ETS regulation as set out in Directive 2003/87/EC through the adoption of Directive 2023/959.

Ships covered by the EU ETS regulation are:

The EU ETS provides a total amount (a “cap”) of greenhouse gases which can be emitted. Under the cap, companies acquire allowances through the EU carbon market. Free allowances, which are typical within other sectors covered by the EU ETS, will not be issued for the shipping sector. The EU ETS rules will apply to 50% of emissions from journeys commencing or concluding outside the EU, and it fully includes emissions during travel between two EU ports and when ships are within EU ports. Companies have the option to exchange allowances (a “trade”). If emissions are lowered compared to the acquired cap, the excess emission allowance can either be retained and used for future emissions or sold.

The EU ETS operates based on the monitoring, reporting and verification (MRV) system set out under EU Regulation 2018/2066 (MRV).

The party accountable for ensuring compliance with emissions regulations for a specific ship may be either the ship owner or the ISM company associated with that ship. It is the joint responsibility of the registered owner and the ISM company to determine who is to undertake obligations under the EU ETS and EU MRV regulations. In the absence of an explicit agreement, the registered owner will be responsible for fulfilling ETS and MRV obligations.

Shipping companies are required to provide their administering authority with information concerning the ships for which they are responsible. In Denmark, the responsible authority for this is the Danish Business Authority. Shipping companies must request the opening of a Maritime Operator Holding Account (MOHA) through the relevant national administrator within 40 working days from the EU publication of a list of shipping companies; this list was published on 31 January 2024. Other shipping companies not included on the list must open a MOHA within 65 working days from the first port of call within the scope of the EU ETS regulation. The consequences of failing to adhere to the EU ETS Regulation include fines, being expelled from port and even having vessels detained by authorities until compliance is ensured.

The EU ETS regulation was adopted into Danish law by the CO₂ Quotas Act No 1767 of 28 December 2023 and is administered by the Danish Energy Agency and the Danish Business Authority.

To administer the EU ETS Regulation, the European Commission has established a Union Registry, under which member states each administer their section of the registry. Danish companies or persons with residency in Denmark registered with a VAT number are eligible for the creation of a trading account within the Danish ETS Registry subject to fees set out by the Danish Business Authority. Transfer of allowances in Denmark is exclusively done through the Danish ETS Registry. Acquiring and selling emission allowances occur outside the registry and are not subject to notification to the Danish Business Authority.

With the EU ETS Regulation, the Kyoto Protocol is being phased out. This also applies for the Danish Kyoto Registry. International credits obtained under the Kyoto Protocol are not eligible for use under the EU ETS Regulation. 

Shipping companies are obligated to acquire and surrender emission allowances equivalent to their vessels’ emissions during voyages within the European Economic Area (EEA). This imposes a cost on emissions, which provides grounds for the optimisation of the operational performance of ships.

If a ship has been chartered, this does not in itself absolve the shipping company from its responsibilities under the EU ETS and the MRV. However, if an entity other than the shipping company has undertaken responsibility for the purchase of the fuel or the operation of the ship, the shipping company may require reimbursement for costs arising from the surrendering of the allowances. The involved entities are expected to do so on their terms.

To meet this end under time charterparties, the Baltic and International Maritime Council (BIMCO) has released an Emission Trading Scheme Allowances Clause for Time Charter Parties 2022 (the “ETS Clause”). The clause is based on the expectations set out by the EU, on the principle that the party furnishing and covering the cost of fuel in the time charter arrangement is also accountable for supplying and covering the expenses of emissions trading allowances. It also mandates that the ship owners oversee the emissions from the ship and have responsibility for communicating emissions data and the calculation methodology to the charterers.

On this basis, the charterers will be responsible for monthly transfers of appropriate allowances to the owners. The clause specifically addresses the adjustment of allowances in the event of off-hire incidents and outlines the consequences if the charterers neglect to make timely transfers of allowances.

The ETS Clause can therefore be introduced in current and future charterparties to align the responsibilities of the ship owner and charterer under the EU ETS regulations.