The shipping industry, a sector that has traditionally not earned a reputation for being very environmentally friendly, is heavily investing into a greener future. Whether building more efficient vessels, upgrading existing ones to meet higher standards, or improving ship recycling and dismantling – more sustainable ways of doing business by water are continually rolled out.

‘Not only is this fact driven by unanimous understanding of why decarbonisation is necessary in the current climate but also by the wave of environmental regulatory change – national, European, and international’, says HFW partner Alessio Sbraga.

One of these regulatory changes is the ‘Fit for 55 package’ that was proposed by the European Commission in July 2021 in order to help achieve the EU’s target of reducing greenhouse gas emissions by 55% by 2030. The package includes several initiatives and legislative changes that would directly impact the maritime sector, such as changes to the taxation of heavy oil fuel. However, the biggest change would be the revision of the EU emissions trading system (ETS) and its extension to shipping, an industry which had previously been exempt of the scheme.

More recently, at the beginning of 2022, rapporteur of the EU Parliament Peter Liese published a draft report to revise the ETS Directive which includes several amendments to the proposal. Were those to come into effect, reporting on emissions would be gradually phased in from 2023, with 100% of emissions needing to be accounted for by 2025 – a year earlier than in the original proposal. It would also give the EU commission the power to extend the ETS to include all incoming and outgoing global EU voyages, as opposed to the 50% suggested in the Fit for 55 package.

The biggest uncertainty, however, remains the question of who will be held accountable for trading and reporting emission allowances. As it stands, commercial operators seem to be the responsible party, a decision that continues to be heavily debated in the industry.

Watson Farley & Williams senior associate Valentina Keys and partner Nick Walker speak of this scepticism: ‘Whilst ship owners are naturally supportive of this direction of travel, charterers, ship managers and operators are concerned that the ETS Maritime does not capture all the commercial realities of maritime structures and operations and that a one size fits all approach may be too artificial.’

New rules, more questions

Establishing a system that is both enforceable and effective is no easy feat, and opinions on how beneficial the proposed measures will be in practice are manifold. The European Sea Ports Organisation criticises the limited scope of the proposal, arguing that ‘evasive port calls at neighbouring non-EU ports could seriously jeopardise the effectiveness of the maritime ETS’ and even ‘increase overall emissions, in particular when evasion leads to longer voyages’. Contrarily, the World Shipping council claims the changes should remain on an intra-EU geographic level to avoid market behaviour such as carbon leakage and distortion.

According to Sbraga, the biggest challenge for the maritime industry will be to ‘understand how this regulatory jigsaw puzzle will fit together so that responsibility can be allocated accordingly in everyday commercial shipping contracts.’

This puzzle is only made more complicated through recent turbulence in Europe: Because it is no longer a member of the EU, the UK will not be participating in the scheme. However, that does not mean the nation will be free of its consequences, as the proposed amendments suggest all ships calling at EU ports will be held accountable regardless of which flag they fly.

In addition, the UK has already established its own emissions trading scheme (UK ETS), which currently applies to the aviation and power sectors. With an extension to the maritime industry rumoured to be in the works, law firms and businesses could have even more on their plate trying to conciliate the two, should this come into effect.

The impact that a maritime ETS will have on the shipping sector is difficult to scope. Demanding regulations and an added carbon cost could potentially heavily influence freight rates, meaning the landscape of maritime players might face significant change. Keys and Walker predict that smaller companies will be hit the hardest and face being swallowed by larger ones in light of unmanageable costs and a continuous rise in carbon allowance pricing.

Rough seas ahead?

The ESG agenda has been making its way through sectors and nations alike, a changed sensibility of which Sbraga says: ‘Gone are the days when these were considered merely aspirational or, at best, pigeonholed as being a simple tick box exercise for measuring corporate responsibility – they are now quickly becoming a key driver of decision making and policy decisions of companies and countries alike.’

Law firms are no strangers to dealing with questions of sustainability and ecological impact, and maritime practices have been increasingly involved in such issues. At Watson Farley & Williams, Walker and Keys attest to this observation, noting how ‘advising maritime clients on ESG issues and helping them map their ESG journeys now forms one of our main focus areas.’

Both HWF and Watson Farley & Williams already report an influx in inquiries relating to the ETS. Maritime practices could be tasked with guiding clients operating globally through a kaleidoscopic mix of legislation, a challenge which could see firms with comprehensive international expertise be favoured by those clients.

According to Keys and Walker, litigation and disputes relating to liabilities and enforcement are to be expected should the package and amendments come into legislation. To what extent these might increase is impossible to predict, however, as it remains unclear just how strictly the regulations will be enforced.

Sbraga similarly speaks of an ‘uneasy transition’ in light of the challenges that come with ‘adapting and complying with carbon emission regulations implemented by international, regional and national bodies serving diverse objectives, even as the industry grapples with alternative fuel solutions.’

Voting on the final amendments is currently expected to happen in summer 2022. Until then, it will be unclear to what extent the proposed changes will be included in the final draft. Regardless of the outcome, opinions will surely continue to diverge on the system and its role in making the shipping industry a greener sector.

‘There is no one uniform approach, and, quite possibly, no one right solution’, says Sbraga. As it stands, the only certain thing seems to be the industry’s agreement that, however the rules might be adapted, the maritime ETS will prove to be anything but smooth sailing.