Where Does the “Polluter Pays” Principle Sit in Time Charters?

The general principle in environmental law is that “Polluter Pays”. The shipping industry understands this to mean that the time charterer, who in fact pollutes–i.e., who issues the employment orders causing the emissions, must pay for the emission allowances, while the legal obligation to surrender them is with the shipowner. But this does not occur automatically without contractual intervention, which this article explains and shows why the need is sharpening–and why parties should also think beyond the EU.

“Polluter Pays” Principle (PPP) in time charter context

The general principle in environmental law is that “Polluter Pays”. However, this does not sit comfortably in the case of the contractual relationship between a shipowner and the time charterer under the EU ETS regime.

The EU ETS framework renders the “shipping company” responsible for the monitoring, reporting, verification (MRV) and surrender of allowances. “Shipping company”, by default, points to the registered owner. However, where the ISM manager (DoC holder) or a bareboat charterer has assumed the responsibility for the operation of the ship including the obligation to surrender EU allowances (EUAs), and the registered owner has lodged a mandate in respect of that with the administering authority, then the manager or bareboat charterer becomes the “shipping company” responsible for the MRV and surrender of EUAs. This is a statutory obligation regardless of who indeed pollutes, that is, who issues the employment orders causing the emission.

In practice, it is the time charterer’s order, such as the speed, route, waiting, and bunkering, that determines the emissions, but the statutory responsibility in respect of the emissions lies with the shipping company. The result is a structural split. To balance the split and bring the “polluter pays” principle into the commercial equation, the EU ETS framework requires the national law to allow the shipping company “to claim reimbursement for the costs arising from the surrender of allowances from the entity that is directly responsible for the decisions affecting the greenhouse gas emissions”. That is, the owners may claim reimbursement for allowances from the time charterer.

However, that alone does not solve the problem in reality. Many time charterparties are subject to English law, under which there is no statutory requirement for the time charterer to compensate the owner for EUAs surrendered by the owner. Owners should not assume that a tribunal will readily imply a reimbursement obligation. Hence, the “reimbursement” should be addressed explicitly in the charterparty. This is where the necessity for suitable contractual allocation of regulatory costs arising from emissions arises to incorporate the “polluter pays” principle into the time charters.

Even in cases where the charterparty is governed by a national law that automatically requires the “reimbursement”, that does not solve the problem. This is because an owner will not want to wait until they incur the EUA liability or surrender to claim reimbursement. Such a “wait and claim” approach exposes the owner not only to credit risk but also to price volatility of the allowances.

This is illustrated by the industry standard The BIMCO ETS – Emission Trading Scheme Allowances Clause for Time Charter Parties 2022 (BIMCO ETS Clause 2022). The Clause adopts, in effect, a “transfer” model: the owner calculates and issues a monthly claim; the charterer procures and transfers allowances to the owner’s nominated registry account; the owner then surrenders allowances annually to the administering authority. This design deliberately places the risk of price volatility on the charterer, and caps the owner’s credit exposure to a minimum.

Yet another possible model is a hybrid of the cash and transfer models, where parties may agree to a “Collar” (or “Cap and Floor”) mechanism to share extreme price movements, particularly in long-term time charters, while keeping the standard transfer logic for “normal” market conditions.

They are not the only reasons for contractually dealing with emission allowance costs. Often, a vessel trades on a chain of multiple charters. Ideally, all the bareboat/time charters should provide the same model for meeting allowances, that is top-to-down consistency. Otherwise, there may arise practical problems and the risk of default by a charterer in the chain, such as where the payment made by the sub-charterer to the head charterer is insufficient for the head charterer to procure the allowances. An allowance leakage in the chain can occur in many other ways. For example, the end charterer may transfer allowances, but they may be encumbered or of wrong vintage, and the contract to which they are party may treat these issues differently from the head charter. Likewise, the method of computations in the charterparties in the chain might differ from one to another.

The questions of whether an unamended time charter form, or even the BIMCO ETS Clause alone, will bring in the “polluter pays” principle and sufficiently meet the commercial realities have been addressed in a previous article and are not repeated here.

In summary, to effectively and safely bring in the “polluter pays” principle, sufficient contractual provisions are needed.

The Sharpening Need–and Beyond the EU

The need is sharpened by the EU ETS scope and phase‑in: 100% of emissions from intra‑EU voyages and within EU ports, and 50% from extra‑EU legs; a three‑year surrender ramp-up—40% (2024), 70% (2025), then 100% from 2026—with the first surrender for 2024 emissions due 30 September 2025.

The UK’s decision to extend the UK ETS to the domestic maritime sector with effect from 1 July 2026 adds a further dimension, requiring parties, where applicable, to address allowances beyond the EU and to include future‑proof change‑of‑law and cooperation clauses.