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"the shipping industry has been and will continue to be influenced by cases such as Verein KlimaSeniorinnen and decisions of international governing bodies such as the International Maritime Organisation."
What is this likely to mean for shipping companies?
When compared with the mining or oil and gas industries, shipping companies have, to date, been subject to little direct climate change-related litigation, with the main actions arising from alleged contravention of the European Waste Shipment Regulation, or otherwise failing to safely dispose of ships at the end of their serviceable lifetime. However, the shipping industry has been and will continue to be influenced by cases such as Verein KlimaSeniorinnen and decisions of international governing bodies such as the International Maritime Organisation (“IMO”) and the International Tribunal for the Law of the Sea (“ITLOS”), which impose obligations on regulators and legislators to enforce action on climate change.
The shipping industry (including financiers, owners, operators, customers and suppliers) has already taken a number of steps to measure and manage emissions, including through the landmark Poseidon Principles, for which WFW provided legal oversight and drafting input. As a transnational industry, shipping has relied upon oversight from the IMO, including in relation to the prevention of pollution from ships. In 2023, the IMO published a new climate strategy to reduce GHG emissions from ships, designed to act as a framework for member state action. The updated climate strategy released by the IMO in 2023 ultimately aims to reduce carbon emissions by 80% of 2008 levels by 2040. By 2050, the goal is to reach net-zero emissions. This approach has a significant impact on the financing, design and construction of new cargo ships and it requires cargo shipping companies to measure and report an Annual Efficiency Ratio (“AER”) to the IMO. Vessels that receive a low AER grade will either have a one-year or three-year period to become compliant.
In May 2024, this oversight was supplemented by a unanimous advisory opinion from ITLOS which expanded and clarified the obligations of states under the United Nations Convention on the Law of the Sea (“UNCLOS”) in protecting and preserving the world’s oceans from pollution brought about by the impacts of anthropogenic climate change.
Below we discuss the details of the ITLOS opinion as well as some recent and pending actions that appear to hint that greater scrutiny of shipping emissions as part of the overall value chain may be on the horizon.
ITLOS Advisory Opinion
Part XII, Article 194 of UNCLOS requires parties to put in place regulatory measures to “prevent, reduce and control pollution of the marine environment from any source“. The advisory opinion sought to clarify states’ obligations under this article. ITLOS held, among other things, the following key points:
- the definition of “pollution of the marine environment” includes anthropogenic GHG emissions;
- states must put in place all necessary measures to prevent, reduce and control pollution of the maritime environment from land, air and ocean-based vessel emissions. This is an obligation of “due diligence” rather than an absolute obligation and may be satisfied by, for example, instituting appropriate regulations and enforcement protocols;
- conformity to current climate change commitments such as the Paris Agreement will not necessarily discharge states’ climate change obligations;
- states must take all necessary measures in order to ensure that GHG emissions under their jurisdiction do not cause ‘transboundary harm’, being damage to other states and their environments; and
- states are under specific monitoring, assessment and publication obligations in relation to activities which may cause substantial marine pollution due to significant GHG emissions.
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"Companies are increasingly being required to report and mitigate scope 3 emissions for instance, by the EU's Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive."
Notably, this decision arguably goes further than the decision in Verein KlimaSeniorinnen and other recent cases against states, by making states responsible for taking actions to mitigate transboundary harm.
Whilst the advisory opinion is not legally binding, for the 169 states signatory to UNCLOS, it will likely influence how they interpret their obligations to implement adequate legislation and effective enforcement mechanisms to protect marine ecosystems and may lead to the introduction of more stringent regulations for the shipping industry.
Shipping emissions in the value chain
Companies are increasingly being required to report and mitigate scope 3 emissions (which include GHG emissions produced by suppliers, transportation and distribution, capturing substantial elements of companies’ supply chain emissions) for instance, by the EU’s Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive.
Shipping companies are therefore likely to be obliged to accurately measure and report their own emissions as well as to reduce them, in order to decrease the overall carbon footprint of the goods they carry. Some claims against companies in the wider shipping value chain have already shone a light on this issue.
Last year a claim was brought against Etsy, an e-commerce platform for independent vendors, in California. The claimants argued that Etsy’s statements about carbon offsetting its shipping emissions amounted to greenwashing, claiming that the voluntary carbon offset market had “endemic methodological errors and fraudulent accounting” resulting in lower carbon offset than promised. The court ultimately found that the claimants did not have standing to bring the claim as they had not paid a premium for the carbon offset and therefore had not suffered an economic loss. The court therefore did not make a finding as to whether this in fact constituted greenwashing. However, the bringing of the claim in the first place is indicative of arguments which we are likely to see developed further in the future.
In Sierra Club Canada Foundation et al v Minister of Environment and Climate Change Canada et al in 2022, the applicants argued that, in approving the development of an offshore oil project, the Minister failed to consider GHG emissions from, amongst other things, shipping oil from the project. The court found that, because oil from the project could be used all over the world, it was impossible to determine whether downstream GHG emissions were within parliamentary authority. Whilst the Sierra Club claim was unsuccessful, in a different case before the District of Columbia Circuit Court, the court vacated the authorisation and the reauthorisation of two LNG export terminals due to the Federal Energy Regulatory Authority’s failure to consider certain legislated environmental factors in granting the authorisation.
"Shipping will continue to face challenges in the selection of future fuels and ensuring the infrastructure needed to deliver these fuels to key ports is available."
The shipping industry more broadly has also been in the spotlight recently as a group of NGOs are bringing a case in the European Court of Justice against the EU Commission to compel it to review its decision to include new shipping technical screening criteria in the EU’s recent sustainable finance legislation, the EU Taxonomy Regulation. The shipping criteria allows ships running on LNG to be deemed ‘green’ if certain criteria are met. The NGOs argue that this runs contrary to the EU Taxonomy Regulation itself, as well as EU climate regulation and risks disincentivising the decarbonisation of the shipping industry. This case, if successful, could significantly impact many shipping companies’ access to green finance.
What does the future hold for shipping companies?
Shipping companies have perhaps traditionally been less directly affected by national legislation, given the transnational nature of their business. However, that is likely to change, both as the industry faces pressure to reduce emissions in order to reduce the overall carbon footprint of the goods they transport and as states are increasingly encouraged to regulate transboundary emissions. This may be most keenly felt in cases where ships are transporting goods for industries most sensitive to climate-focussed litigation, such as consumer goods. Whilst shipping companies, have, to date, been subject to relatively little direct regulation (perhaps excepting EU regulations on emissions and carbon trading – see further our articles on FEMREG and ETS), they will not be able to escape the demands made of them by other companies in their value chain needing to deal with their own compliance burdens.
In an industry where there is significant consensus about what needs to be done, but as yet no clear path is apparent, shipping will continue to face challenges in the selection of future fuels and ensuring the infrastructure needed to deliver these fuels to key ports is available, as well as ensuring that transitional fuels, including LNG – both as fuel and as a cargo – continue to receive sufficient public support to enable shore-side delivery.
The ruling in Verein KlimaSeniorinnen, whilst not apparently applying to the shipping industry directly, adds to the ever increasing list of areas stakeholders and sector participants need to factor into their strategic decision making and day-to-day operations.
London Trainee Zac Goodwill also contributed to this article.
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