IMO Carbon Levy breakthrough exposes critical charter contract gaps

Deputy commissioner of maritime affairs at International Registries Inc, Richard Dias,  detailed how the landmark MEPC 83 meeting advanced the Singapore proposal (J9) as the frontrunner for a global carbon pricing mechanism, representing a significant shift in IMO’s approach to emissions reduction. His presentation highlighted the technical aspects of the proposal, including the increased Carbon Intensity Indicator (CII) reduction target from 20.0% to 21.5%, signalling IMO’s accelerating ambition.

"The outcomes of MEPC 83 provide much-needed clarity on the direction of IMO regulations," Mr Dias noted. "This framework establishes shipping as the first global industry with an economic mechanism directly tied to emissions reduction, creating a more predictable environment for long-term investment decisions."

According to Mr Dias, the J9 proposal’s flexibility mechanisms represent a particularly important innovation, allowing over-compliant vessels to benefit financially from their emissions performance. This approach, he explained, would reward early adopters of cleaner technologies and alternative fuels rather than simply penalising poor performers.

Legal counsel at BW Group, Pamela Michaelis, shifted focus to the practical legal challenges arising from the European Union’s FuelEU Maritime regulation, which will impose new compliance obligations on vessels calling at EU ports beginning January 2025.

"FuelEU Maritime creates different positions for various stakeholders with distinct repercussions for each," Ms Michaelis explained. "Understanding the allocation of risks and legal remedies is essential for both owners and charterers as they negotiate contracts that will operate under this new regulatory regime."

Her analysis centred on the recently developed BIMCO FuelEU Maritime Clause for Time Charter Parties, highlighting how this standardised framework attempts to balance responsibilities between parties while providing flexibility for case-specific modifications.

"The BIMCO clause establishes a baseline allocation of obligations, but careful consideration must be given to how it can be amended for different commercial arrangements," Ms Michaelis advised. "The responsibilities differ significantly in bareboat charters compared with time charters, requiring tailored approaches to compliance obligations."

A key issue identified by Ms Michaelis was the distinction between technical and operational compliance measures. Technical measures, such as engine modifications or equipment installations, typically fall to owners, while operational measures, including fuel selection and voyage optimisation, may be primarily charterers’ responsibility in time charter arrangements.

"The contractual framework must clearly delineate who bears the cost of compliance, who makes decisions about compliance methods, and who bears the risk of non-compliance penalties," she noted. "These questions become particularly complex when vessels trade both within and outside EU waters or when multiple charterers are involved during a compliance period."

Ms Michaelis highlighted several areas requiring special attention in contract negotiations, including the allocation of costs for acquiring and surrendering compliance units, data reporting responsibilities, and remedies for breach of compliance obligations.

"As with any new regulatory regime, early contract negotiations will establish precedents that may shape industry practice for years to come," she cautioned. "Parties should seek balanced arrangements that reflect their operational realities rather than attempting to shift all compliance burdens to the counterparty."

Both speakers emphasised that these regulatory developments, while challenging, provide greater certainty for the industry’s decarbonisation pathway. Mr Dias noted the IMO framework will likely accelerate investment in alternative fuels and technologies by establishing clearer economic signals, while Ms Michaelis suggested well-structured contracts can convert regulatory compliance from a potential conflict point to a collaborative opportunity.

"The industry now has a clearer roadmap for emissions reduction, with both global and regional frameworks providing complementary incentives," Mr Dias concluded. "These developments should help align investment decisions with policy objectives, potentially accelerating the energy transition in shipping."

Ms Michaelis concurred, adding, "Thoughtful contractual arrangements can help parties distribute compliance responsibilities efficiently while creating commercial incentives that support broader decarbonisation goals. The legal framework is catching up with the regulatory reality."

When questioned about potential conflicts between EU and IMO approaches, both speakers acknowledged the challenges of regulatory fragmentation but expressed optimism the frameworks could ultimately converge toward complementary systems that recognise similar compliance efforts.

"The immediate focus should be on developing contractual approaches that address current requirements while building in flexibility to accommodate evolving regulations," Ms Michaelis advised. "This is particularly important for vessels with longer-term charters that will span multiple regulatory phases."