The Carbon Time-Bomb
UK ETS Expansion and the Hidden Limits of the BIMCO ETS Clause

The UK Government has confirmed the expansion of the UK ETS to maritime transport from 1 July 2026. This adds a second layer of liability to the existing EU ETS regime, yet many charterparties remain dangerously silent on carbon allocation. This article examines why reliance on unamended forms is commercially unsafe and analyses the hidden limitations of the market-standard BIMCO ETS Allowances Clause 2022—specifically regarding wrongful suspension, title warranties, and performance claims. It provides a strategic checklist for Owners and Charterers to “future-proof” their drafting before the new dual-regime reality bites.

Introduction: The New Split-Incentive Reality

From 1 January 2024, shipping’s inclusion in the EU Emissions Trading System (EU ETS) fundamentally reshaped the risk profile of time chartering. The regulatory architecture creates a “split incentive”: the obligation to surrender allowances (EUAs) sits with the shipowner (or ISM holder), yet the operational decisions that generate those emissions—speed, routing, waiting and fuel procurement—lie with the charterer.

Carbon costs are “caused” by the charterer but “owned” by the shipowner. Despite this structural disconnect, many vessels continue to trade on unamended NYPE forms or rely on standard clauses without addressing their operational and contractual pitfalls.

This article explains why reliance on unamended time charters is commercially unsafe, and why the market‑standard BIMCO ETS – Emission Trading Scheme Allowances Clause for Time Charter Parties 2022 (BIMCO ETS Clause 2022), while essential architecture, is not a plug‑and‑play solution without careful supplementation—particularly to avoid wrongful suspension and allowances title/encumbrance disputes.

UK ETS Expansion Confirmed

While the immediate focus is the EU, the regulatory net is widening. The UK Government has confirmed that the UK ETS will expand to the maritime sector from 1 July 2026, applying to vessels of 5,000 GT and above. The first compliance year will run from 1 July to 31 December 2026, then align with the calendar year. While coverage will initially apply to domestic voyages, the contractual principle remains identical to the EU regime: without express allocation, parties face unassigned compliance responsibility, uncertain calculation and transfer mechanics, and unhedged price and credit exposure. UK Allowances (UKAs) are not interchangeable with EU Allowances (EUAs), so charterparty drafting should clearly identify the applicable scheme(s) and the surrender vintage.

The “Unamended” Trap: Why Owners Cannot Rely on Implied Rights

When a charterparty is silent on carbon, Owners often attempt to recover ETS costs through three existing legal routes. All three are legally fragile.

1. The “Tax” Argument: Owners argue EUAs are a “tax” or “usual expense” falling on Charterers. However, an EUA is not a tax or port levy; it is a tradable compliance instrument surrendered on an aggregated annual basis.

2. The “Implied Indemnity” Argument: Relying on The Island Archon [1995] 1 All ER 595 (CA), Owners argue that emissions flow from Charterers’ employment orders. But Charterers have a defence: where trading to EU ports lies within the contemplated trading range, regulatory compliance is a foreseeable risk assumed by the Owners.

3. The “Seaworthiness” Argument: Conversely, Charterers may argue that providing a vessel with sufficient allowances is part of the Owners’ non-delegable duty of seaworthiness (or legal fitness to trade).

The result of silence is not a clear win for either side; it is an unpredictable arbitration risk.

The “Standard Clause” Trap: The Hidden Limits of the BIMCO ETS Clause 2022

The market’s instinctive response has been to adopt the BIMCO ETS Allowances Clause 2022. While it provides essential architecture—adopting a transfer model rather than reimbursement—it is not a “plug and play” solution. Indeed, without careful supplementation, it can introduce its own sophisticated dispute vectors.

1. The “Wrongful Suspension” Trap: The BIMCO clause grants Owners the right to suspend performance if Charterers fail to transfer allowances. This is a powerful lever, but legally dangerous.

Suspension rights must be exercised on a correct factual footing. If Owners suspend the vessel based on a miscalculation of emissions—for example, by misapplying the complex 50/100% scope rules for extra-EU voyages or failing to account for reconciliation surpluses—the suspension may be wrongful.

As illustrated in The Nanfri [1979] AC 757 (HL), in the context of disputed hire deductions, utilising a contractual remedy, such as suspension, on an incorrect basis can amount to a repudiatory breach. Owners utilising the BIMCO clause without an agreed, rigid calculation protocol risk turning a carbon debt into a damages claim for wrongfully suspending the charter.

2. The “Bad Title” Risk: The BIMCO clause requires the transfer of “Emission Allowances”, but unamended, it does not explicitly warrant that these allowances are free from encumbrances.

The carbon market has a history of fraud and cyber-incidents. Unlike a cash transfer, allowances are dematerialised registry instruments. Without a specific title warranty, Owners risk receiving allowances that are “tainted” or subsequently frozen by the registry, leaving the Owners without available allowances to meet the compliance requirement.

3. The Performance Claim Collision: Once carbon is priced, speed and consumption claims acquire a new dimension. If a vessel underperforms (e.g., warranted 14 knots, achieves 12), the voyage takes longer, and the ETS bill increases.

Standard off-hire clauses deduct “time” and “bunkers,” but traditionally ignore the third variable: allowances. Unless the charterparty explicitly addresses “off-hire emissions” and provides a netting-off mechanism, parties will face complex disputes attempting to isolate which emissions were caused by the breach and which were inevitable.

Conclusion: Drafting for the Future

Reliance on unamended forms is effectively a gamble on carbon regulation compliance, its price volatility and judicial interpretation. However, simply adding a standard ETS clause is only the first step.

To be commercially safe, the drafting must address the granular reality of the system:

• Identify the applicable scheme (EU ETS and/or UK ETS) and the surrender vintage (EUA/UKA instruments are not interchangeable);

• Anchor calculations to an agreed data source and methodology (MRV/verified data, 50% extra‑EU / 100% intra‑EU scope rules);

• Define “valid” allowances to exclude encumbered or wrong-vintage assets;

• Protect against wrongful suspension via clear “query windows” and calculation protocols;

• Provide security and credit protection (e.g., rolling buffer of EUAs/UKAs, escrow or cash equivalent) to manage price volatility and counterparty credit risk;

• Provide for registry failure events (KYC/technical) with a short cure period; and

• Integrate carbon into off-hire and performance warranties (including a redelivery true‑up).

These are abridged drafting priorities, and not an exhaustive list; parties should adapt language and contents to their trade and data systems.

As the industry moves toward FuelEU Maritime and CII enforcement, the complexity of these “split incentive” disputes will only grow. The time to allocate these risks is now—before the arbitration notice is served.