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Feb 7, 2024
Lockton P.L. Ferrari

EU Emissions Trading System (ETS): insurance consequences

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1st January 2024.

The EU ETS is limited by a 'cap' on the number of emission allowances. Within the cap, companies receive or buy emission allowances, which they can trade as needed. The cap decreases every year, ensuring that total emissions fall.

Each allowance gives the holder the right to emit:

  • One tonne of carbon dioxide (CO2), or;
  • The equivalent amount of other powerful greenhouse gases, nitrous oxide (N2O) and perfluorocarbons (PFCs).
  • The price of one ton of CO2 allowance under the EU ETS has fluctuated between EUR 60 and almost EUR 100 in the past two years. The total cost of emissions will vary based on the cost of the allowance at the time of purchase, the vessel’s emissions profile and the total volume of voyages performed within the EU ETS area. The below is for illustration purposes:
  • ~A 30.000 GT passenger ship has total emissions of 20.000 tonnes in a reporting year, of which 9.000 are within the EU, 7.000 at berth within the EU and 4.000 are between the EU and an outside port. The average price of the allowance is EUR 75 per tonne. The total cost would be as follows:
  • ~~9.000 * EUR 75 = EUR 675.000
  • ~~7.000 * EUR 75 = EUR 525.000
  • ~~4.000 * EUR 75 * 50% = EUR 150.000
  • ~~Total = EUR 1.350.000 (of which 40% is payable in 2024)
  • For 2024, a 60% rebate is admitted to the vessels involved. However, this is reduced to 30% in 2025, before payment is due for 100% with effect from 2026.
  • Emissions reporting is done for each individual ship, where the ship submits their data to a verifier (such as a class society) which in turns allows the shipowner to issue a verified company emissions report. This report is then submitted to the administering authority, and it is this data that informs what emission allowances need to be surrendered to the authority.
  • The sanctions for non- compliance are severe, and in the case of a ship that has failed to comply with the monitoring and reporting obligations for two or more consecutive reporting periods, and where other enforcement measures have failed to ensure compliance, the competent authority of an EEA port of entry may issue an expulsion order. Where such a ship flies the flag of an EEA country and enters or is found in one of its ports, the country concerned will, after giving the opportunity to the company concerned to submit its observations, detain the ship until the company fulfils its monitoring and reporting obligations.
  • Per the EU’s Implementing Regulation, it is the Shipowner who remains ultimately responsible for complying with the EU ETS system.

There are a number of great resources on the regulatory and practical aspects of the system – none better than the EU’s own:

Insurance Impacts

Little has been written on the insurance aspects, including potential loss scenarios and coverage issues. In this article, we wish to reflect on some likely coverage issues and discuss the need for new, additional products.

Loss scenario 1:
Physical Loss to a vessel, requiring removal to repair yard and repairs within the EU ETS area

A vessel suffers a loss insurable under its Hull & Machinery policy. The loss requires the vessel to make a port call as a matter of emergency or for repairs (or both). As a consequence, the vessel emits more greenhouse gas than it was scheduled to. Would the increased emissions have a consequence under the EU ETS, and would this entail extraordinary costs? How are such costs insured?

Whilst this seems the most relevant loss scenario, this situation is actually exempt from the system. Per Article 3 (z) of the Directive, stops for the sole purposes of refuelling, obtaining supplies,relieving the crew of a ship other than an offshore ship, going into dry-dock or making repairs to the ship, its equipment, or both, stops in port because the ship is in need of assistance or in distress, ship-to-ship transfers carried out outside ports, stops for the sole purpose of taking shelter from adverse weather or rendered necessary by search and rescue activities, and stops of containerships in a neighbouring container transhipment port listed in the implementing act adopted pursuant to Article 3ga(2) are excluded.

Put simply, a port call within the EU for the purpose of repairs or in distress do not count towards a vessel’s emissions report and do not attract any extra costs. As such, there is no need for separate products or tailoring of existing products to deal with this scenario.

Loss Scenario 2:
Physical Loss to a vessel during a scheduled port call or repairs following a physical loss carried out during a scheduled port call within the EU ETS area

A vessel suffers an insurable loss under its Hull & Machinery policy during a scheduled port call or has a scheduled port call prolonged in order to effect repairs.

The exclusion under Article 3 (z) specifically requires the mentioned port calls to be for the ‘sole purpose’ of e.g. ‘going into dry-dock or making repairs to the ship’. In other words, if the repairs happen during a port call that has another purpose (such as loading or discharging), or if the loss occurs during a scheduled port call, the port call is not excluded from the system. Should the loss or the repairs cause excess emissions, there is need for product development to manage this risk. Alternatively, bespoke wordings should be designed to have Hull & Machinery and Loss of Hire policies respond as desired.

Loss Scenario 3:
Physical Loss to a vessel, causing increased emissions on a voyage within the EU ETS area

A vessel is fitted with equipment specifically designed to reduce emissions or with dual fuel engines. A physical loss occurs to such equipment – and whilst the vessel remains fully operational – it is unable to maintain its emissions profile.

As shipowners see the commercial benefit of reducing emissions and the cost of EU ETS compliance, they are likely to make investments in emissions reducing technology. This would be a development that increases the relevance of this loss scenario. A breakdown of any equipment or machinery is likely to be covered by the vessel’s standard insurances. The question is then, what about the extraordinary, enhanced operating cost originating with such a loss, if the vessel is still fully able to trade and perform under its charter party or COA? Are these to be considered costs of measures to avert or minimise loss (sue & labour), and if so, under which policy? We consider the likelihood of having full coverage for extraordinary emissions under such a loss scenario to be small, and that there is need for product development to manage this risk. Alternatively, bespoke wordings should be designed to have Hull & Machinery and Loss of Hire policies respond as desired.

Loss Scenario 4:
Diversion for the purpose of lifesaving or disembarking sick, injured or diseased crew member(s) or stowaways

A vessel must make a diversion from its scheduled route for the purpose of lifesaving to disembark a sick, injured or diseased crew member or stowaway. As a consequence, the vessel has to make an unscheduled port call within the EU ETS area.

It is unclear whether this scenario is covered under the ‘relieving the crew’ exclusion under the port definition of the regulation. If not, clarity should be sought from the vessel’s P&I club on the coverage of extraordinary emissions related to this loss scenario. P&I typically covers extra costs of fuel under these circumstances, and clarity should be sought if the cost of fuel extends to the cost of emissions. If there is no clarity, or no coverage available from P&I, there is need for product development to manage the risk.

Loss Scenario 5:
Detention of the vessel within the EU ETS area not caused by a physical loss

A vessel is detained within a port in the EU ETS area. The detention could be due to closure / blockage of a port, either by authorities or a physical obstruction, quarantine orders, actual or alleged pollution, obtaining acceptable security for a claim, or similar events. Whilst under detention emissions are likely to be reduced, but still greater than if the detention never took place.

The above-mentioned perils are typically covered by P&I, extended loss of hire or trade disruption insurances. Such policies are normally designed to cover loss of revenue and are rarely extended to handle extraordinary costs. For a shipowner already purchasing policies of this nature, it seems that the most cost-efficient solution would be to extend coverage to deal with excess emissions as an extension of the revenue protection.

Beyond this, if the detention originates with a P&I claim, clarity should be sought under P&I to what extend excess emissions are recoverable.

Contact your Lockton Marine representative for a review of your existing coverage, and to discuss insurance requirements.

EU Emissions Trading System (ETS): insurance consequences
Anders Langeland Johannessen
Anders Langeland Johannessen
Global Head of Project Risk