EU ETS reimbursement right faces legal hurdles – study
Key reimbursement mechanisms in the EU Emissions Trading System (EU ETS) may not work as intended, leaving shipowners and ship managers unable to reliably recover carbon costs, a study finds.
IMAGE: Getty Images
A new academic study from Erasmus University Rotterdam concludes that the statutory reimbursement right built into the EU ETS is close to a "paper tiger.”
This means that once shipping's actual contractual and jurisdictional arrangements are factored in, the right rarely functions as intended.
A shipping company is responsible for surrendering European Union Allowances (EUAs) for its emissions covered by the EU ETS. But in practice it often has limited control over operational decisions such as fuel choice, routing and speed. To address this, the EU ETS Directive requires EU member states to give shipping companies a statutory right to recover those costs from the party exercising that control, typically a time charterer.
“By including the reimbursement right, the EU ETS Directive assumes that all emissions are the responsibility of the charterer,” said Nishatabbas Rehmatulla, commenting on the study. He is a co-director of the UCL Shipping and Oceans Research Group.
“However, previous work shows that whilst most of the vessel’s emissions are based on its operational energy efficiency and mostly driven by the charterer, some portion of the emissions also relate to the vessel’s technical energy efficiency, where the investments are mostly by the shipowner,” he added.
Three practical obstacles undermine that right, according to the study.
The first stems from complex charter arrangements. In many cases, vessels operate under multiple charter agreements, with responsibility for cargo, routing, speed and fuel purchasing divided among different parties.
The EU ETS Directive is not clear about which party should ultimately reimburse carbon costs in these multi-layered contractual chains, the study found.
The second issue relates to governing law. Most shipping contracts are governed by English law rather than EU law.
It remains uncertain whether the statutory reimbursement right created under national implementations of the EU ETS can override the governing law chosen in commercial contracts under existing private international law rules.
The third challenge concerns dispute resolution. Most shipping disputes are resolved through arbitration in London or Singapore rather than before EU courts.
English law has no equivalent statutory reimbursement mechanism. The study also notes that English courts can order a party not to pursue a case in an EU court, and may refuse to recognise EU court rulings. That makes the EU ETS Directive hard to rely on once a dispute falls outside the EU.
These factors make the statutory reimbursement mechanism less effective, leaving cost allocation to be determined primarily by charterparties, management agreements and other commercial contracts.
The study authors note that the industry has responded with contractual solutions, including BIMCO's standard EU ETS clauses, but argue these may need to be supplemented with bespoke drafting. They recommend that owners, managers and charterers negotiate carbon cost allocations throughout the contractual chain rather than relying on the EU ETS Directive.
The authors also question the European Commission's recent proposal to amend the EU ETS Directive, saying it shows no awareness of the mechanism's shortcomings and treats it as a proper instrument for correcting the allowance reserve. They suggest the Commission's plan to set out further detail in delegated acts is an opportunity to reconsider it.
Looking beyond the EU, the study authors say the findings carry lessons for the UK's domestic shipping ETS (UK ETS), which took effect on 1 July 2026 without any statutory reimbursement right, and for the IMO's Net Zero Framework, where carbon cost allocation would be more complex still.
By Konica Bhatt
Please get in touch with comments or additional info to news@engine.online
