SShipowners and ship managers who foot the bill for emissions under the European Union Emissions Trading System (EU ETS) may not be able to recover those costs from the party who mostly pays for those emissions through the operation of the ship, according to a new academic study from the Erasmus School of Law at Erasmus University Rotterdam. The EU directive states that shipping companies must have a legal right to payment from anyone who controls the purchase of fuel or the operation of ships – usually a time charterer. The study, “EU Crossfire Rights Swap Payments in Shipping: Parties’ Responsibilities to Authorities and Within the Trade Chain,” finds that in practice this right is close to a “paper tiger”: it rarely holds up once contractual realities and shipping jurisdiction are taken into account. What actually determines who pays is the lease contract, management agreement, or bill of lading – not the legal mechanism the EU has created to ensure this.
Why is the legal right shortened?
From 2024, shipping companies operating inside and outside the EU must purchase and deliver emission allowances under the EU ETS system. The Directive places this obligation on the “shipping company” – usually the registered owner or entity holding the ISM – although this party often has little say in the choice of fuel, routing or speed. To compensate, EU law requires member states to give the shipping company a legal right to reimbursement from whichever party controls those decisions.
The study found three practical obstacles that undermine this right. First, in multi-tier charter chains, the Directive does not provide a clear rule for determining which party must pay when responsibility for cargo, route, speed and fuel is divided across multiple charterers. Second, most freight contracts are governed by English law, and it remains uncertain whether a national right of payment is able to override choice of law under EU private international law rules (Rome I and Rome II). Third, disputes are usually referred to arbitration in London or Singapore, outside the jurisdiction of the EU court – and English law does not provide a repayment mechanism, while English courts can, in practice, block EU actions or refuse to recognize EU judgments. Taken together, these gaps leave the legal pass-through mechanism of little practical value to the vast majority of the market, the researchers concluded.
“The EU crossfire gives the impression that shipowners and managers who pay the carbon bill can automatically recover it from the party actually responsible for operating the ship or purchasing the fuel,” said Hannah Mosmans, co-author and PhD researcher at the Department of Law and Markets, Erasmus Law School, and Erasmus UPT, Erasmus University Rotterdam. “Our research shows that this is largely an illusion once you look at how freight contracts actually work. For most of the market, effective cost recovery still depends entirely on what is negotiated in the charter agreement, and not on the legal right at all.”
What does this mean for cross-chain contracts?
This paper examines the contractual response that has emerged to fill this gap, in particular the standard clauses developed by BIMCO for time charters, voyage charters, contracts of freight, ship management agreements and bareboat charters. She sees these provisions as a useful starting point but incomplete in and of themselves – a limitation that BIMCO itself acknowledges. They work in pairs, so each contract in the chain needs its own consistent clause; They leave gaps around issues such as price volatility, credit risk, non-hire, and late penalties; Because their use is optional, whether they are included at all depends largely on the relative bargaining power of owners and tenants. Shipping lines have separately begun passing on additional ETS charges to shipping interests through bill of lading and sea waybill terms. The result, the study found, is uneven protection across the market, with better-resourced parties securing stronger terms than smaller operators.
“This is not just an academic point,” said Julian Cruyt, co-author of the study, professor of “The Future of Maritime Law” at Erasmus Law School and partner at Van Tra Advocaten. “If a legal right to payment cannot be relied upon, parties throughout the shipping chain must ensure that their own contracts are watertight regarding carbon cost allocation. Expecting that the legal mechanism will be sufficient is a risky strategy.”
For owners, managers and tenants, the practical implications are clear and straightforward: carbon cost allocation will need to be examined and negotiated at each link in the rental chain – it is not supposed to follow automatically from the Directive – and existing BIMCO clauses may need to be supplemented by ad hoc language on volatility, leasing and dispute settlement.
“By including the right to reimbursement, the EU ETS Directive assumes that all emissions are the responsibility of the charterer,” said Nishatbas Rahmatullah, co-author, lead research fellow and co-director of the Shipping and Oceans Research Group. “However, previous work shows that while most of a ship’s emissions depend on its operational energy efficiency and are mostly driven by the charterer, some emissions are also related to the technical energy of the ship. Efficiency, where investments are mostly by the shipowner. This suggests why there may be differences in private charters and legal rights where not all can be attributed emissions to the charterer, especially when charterers pay market premiums to compensate for more technically efficient vessels.
Proposal to amend the European Commission’s ETS agreement
In its recent proposal to amend the EU emissions trading system, the European Commission did not show awareness of the shortcomings of the legal payment mechanism. The European Commission considers the legal mechanism an appropriate tool for making corrections to the allowance reserve. Given the difficulties of implementation, the question is whether this will have the intended effect. Since the Commission has indicated that these aspects are more regulated in the delegated procedures, it may be an appropriate time to reconsider the reimbursement mechanism itself.
A test case for regulation outside the EU
The authors argue that the findings hold lessons beyond the EU’s borders. The UK’s domestic freight emissions trading system, which came into effect on 1 July 2026, does not include a statutory right of payment at all, leaving the entire cost allocation to the drafting of the lease. The IMO is separately working on a global net-zero framework which may include more complex carbon cost allocations due to different levels of compliance and reward mechanisms. The study concludes that any future market-based measure for shipping – EU, UK, national or global – must be designed with the realities of private international law and the structure of the maritime supply chain in mind from the outset. Otherwise, such systems risk replicating the same implementation gap on a larger scale, giving the impression that contractual text may not be necessary.
Link to SSRN pre-print: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=7078178
Source: UCL Energy Institute
