Shipping newsletter - Legalseas

February 2010

Buoy floating in the sea

Contacts

Introduction

Welcome to our February edition of Legalseas. It has been a long and difficult winter, in particular for those in the shipping industry. Six months ago we published our “Transport - the Way Ahead” survey looking at the impact of the global financial crisis on the aviation, rail and shipping sectors and the strategy of each sector for managing the impact of the crisis. The responses from the shipping sector underlined the challenges that those in the shipping industry were facing at the time.

Six months on, the global forecast remains uncertain for shipping with little sign of any real recovery in global shipping trade or in levels of available financing. China is perhaps the one exception in an otherwise depressed market, where investment in shipping continues apace.

On a happier note, in a year of consolidation for the transport sector, the start of 2010 has been an exciting one following our own merger with Deacons, Australia. Norton Rose Group now comprises 30 offices in 22 countries (including offices in Brisbane, Canberra, Melbourne, Perth and Sydney) and over 1800 lawyers world wide. We look forward to working with our new colleagues to grow and strengthen our global transport practice in Asia and Australasia. As a group, we now have over 200 transport specialists worldwide with a longstanding reputation for world-class expertise in the aviation, rail and shipping sectors.

With spring hopefully around the corner in the coming weeks, may I take this opportunity to wish our readers a happier and more prosperous 2010.

Harry Theochari, Partner, Global Head of Transport, Norton Rose LLP , London

In this edition of Legalseas we have once again selected three articles we hope are of topical interest to the shipping industry. In our first article, colleagues from our employment team in London look at proposed changes to the Race Relations Act 1976 regarding seafarers and some of the difficulties that may arise as a result, including the possible loss of tonnage from the UK flag. Our second article gives a detailed overview of the Rotterdam Rules, which could come into force during 2012 and will replace the Hague-Visby and Hamburg Rules in Convention states, and is written by colleagues in our dispute resolution team. This is also available as a separate client briefing upon request. Finally, we present “Post Copenhagen”, an article which has been co-written by colleagues from our climate change team, who were present in Copenhagen (and lucky enough to have access to the main convention hall), and dispute resolution teams, and which considers what progress (if any) has been made on climate change regulation in relation to shipping and what lies in store for the industry over the next few years.

As always, we hope that you will find our articles to be of interest and we would be delighted if readers could provide any comments on the content, or suggestions for future articles of Legalseas by using the comments box which can be accessed through this hyperlink. Likewise please feel free to pass on the details of colleagues who may wish to receive Legalseas.

Richard Howley, (Editor), Partner, Norton Rose LLP , London

Proposed changes to the Race Relations Act 1976 regarding seafarers

Introduction

The Race Relations Act 1976 (RRA) makes it unlawful to discriminate against a person on racial grounds in certain areas including employment. However, section 9 RRA  currently contains an exception for seafarers so that they can be discriminated against on grounds of nationality in relation to pay. In March 2007 the Department for Transport issued for consultation proposed changes to the RRA to ensure the United Kingdom’s compliance with European Community law on the free movement of workers. This article sets out a summary of the options for change, and an indication of the difficulties which may arise.

Legal background

The RRA makes it unlawful to discriminate against a person on racial grounds (i.e. on the grounds of colour, race, nationality or ethnic or national origins) in certain areas including employment. However, as noted above, section 9 RRA currently contains an exception for seafarers so that they can be discriminated against on grounds of nationality in relation to pay. It allows employers to remunerate seafarers, who applied for or were engaged to work outside Great Britain, differently to those inside Great Britain, on the grounds of nationality.

Article 39 of the Treaty of Rome, which provides for the free movement of workers within the European Community, requires the abolition of discrimination based on nationality as regards employment, remuneration and other conditions of work and employment. In August 2006 the European Commission advised the UK  Government that it had received a complaint relating to wage discrimination practised on UK vessels against foreign seafarers. As a result the UK Government was obliged to address the issue and in March 2007 published a consultation document setting out its proposals.

Options for change under consultation

The consultation document issued in March 2007 outlined three possible options:

Option one: make no changes to the RRA.

Option two: amend section 9 so that it only permits pay discrimination in relation to those seafarers who are from neither the European Economic Area (EEA) nor a designated state.

Option three: repeal the whole of section 9 so that no discrimination on grounds of nationality in relation to pay can be allowed in respect of any seafarer.

The consultation suggests that option one (to do nothing) would result in infraction proceedings and in a heavy financial penalty for the UK; option three (to repeal the whole of section 9) would go beyond what is required by the EC  and would result in much higher costs to the shipping industry; leaving option two as the most likely way forward.

Discrimination Law Review

However, since publication of the March 2007 consultation, the issue next appeared in the Green Paper on the Discrimination Law Review in June 2007 (A Framework for Fairness: Proposals for a Single Equality Bill for Great Britain). This Green Paper started a public consultation on a broad range of proposals aimed at three key policy objectives including harmonising and simplifying the law on discrimination. The exception contained in section 9 RRA was listed as one of the specific exceptions which the Government was planning on retaining . Then, in July 2008 in its response to that consultation, the Government stated that it had not reached a final decision on which exceptions should be retained in the forthcoming Equality Bill but would come to a view as the Bill was developed.

The Equality Bill

The long-awaited Equality Bill was published on 27 April 2009 and has now progressed to the House of Lords. The Bill brings together and restates the existing discrimination legislation concerning sex, race, disability, sexual orientation, religion or belief and age, adopting a unified approach where appropriate and also making significant changes in some areas. To this end, as expected, the Bill firstly repeals all existing discrimination legislation including the whole of the RRA along with section 9 and then replaces it with new provisions. However, the Bill is silent on the territorial application of its new employment provisions which, so the Explanatory Notes to the Bill state, is acceptable for most workers, who at any given time are within either the territory of the UK or some other territory. However, seafarers work on board ships which may be constantly moving between waters under the jurisdiction of different states. What is currently Clause 81 of the Bill therefore allows the Government to prescribe in supplementary regulations, which are yet to be published, to which seafarers on which ships, and to which crew on which hovercraft, the new employment provisions apply.

At this stage therefore it is uncertain whether the exception in section 9 will stay, be amended or go entirely, although it is likely that some changes will have to be made. We will have to wait for publication of the supplementary regulations for clarity on the issue.

Implications of proposed amendment

In the meantime, on the assumption that the Government will decide to retain the exception in the amended form suggested in option two above, employers of seafarers on UK vessels should be aware of the implications of the likely change which would include:

- the exception in section 9 would no longer apply to a large group of seafarers recruited abroad including all those from the EEA (which includes all the EU member states together with Liechtenstein, Norway and Iceland) and certain designated states which have association agreements with the EC (these include Algeria, Croatia, Monaco, Morocco, Russia, Switzerland, Tunisia, Turkey, the former Yugoslav Republic of Macedonia, San Marino and the ACPG (the African, Caribbean and Pacific Group of States listed in the Regulatory Impact Assessment annexed to the March 2007 consultation document). Consequently, it would no longer be permissible for these employees to be paid at differential rates to their comparators recruited inside Great Britain but they would be entitled to receive pay (which includes retirement and death benefits) equivalent to that received by those comparators. The ability of employers to pay seafarers recruited abroad at differential rates would therefore be severely restricted.

- the difficulties arising out of changing the terms and conditions of employment of relevant employees in order to comply with the new law. Whilst any increase in pay or benefits is likely to be agreed by the employees without difficulty, there are only two other ways in which the employer can effectively vary the terms relating to a decrease in pay, assuming that the employees will not agree. The employer may:

  • unilaterally impose the change and rely on the employees' conduct to establish implied agreement to the change; or
  • terminate the employees' employment with appropriate notice and offer re-employment under the new terms.

The first option leaves the employer in an uncertain position and facing the risk that the employees may protest against the change, resign and claim constructive wrongful and unfair dismissal (subject to any questions as to territorial scope), whilst the second, although avoiding the risk of a wrongful dismissal claim also brings with it the risk of an unfair dismissal claim (subject to the same proviso). On the assumption that the employees will have the right to claim unfair dismissal, it will not be sufficient for the employer's defence to state that his reason for the change was in order to comply with the new laws on pay discrimination. Equally this argument would not justify the unilateral imposition of the change. The second option may also give rise to collective consultation obligations under the provisions of the Trade Union and Labour Relations (Consolidation) Act 1992 depending on questions of territorial scope and the number of employees involved.

Future developments

This article aims to summarise the implications of the most likely changes to the law in this area. However, as noted above, the Equality Bill remains in draft form and supplementary regulations are required to clarify the Government’s intentions with regard to the current section 9 exception. The Equality Bill is expected to receive Royal Assent this spring with the majority of its provisions coming into force in October this year. We shall of course keep you informed of developments in this area.

Paul Griffin is a partner and Claire Darbourne is a professional support lawyer in the Employment department, Norton Rose LLP , London.

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The Rotterdam Rules

Introduction to the Rotterdam Rules

On 11 December 2008 the General Assembly of the United Nations adopted the UN  Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea and authorised a ceremony to be held on 23 September 2009 in Rotterdam, the Netherlands, for the opening for signature of the Convention. The UN recommended that the rules embodied in the Convention be known as the “Rotterdam Rules”.1

The Convention requires ratification or other mode of adoption by at least 20 states, no reservations are permitted2 and ratifying or adopting states are obliged to denounce earlier conventions on the international carriage of goods by sea to which they may be party, namely the Hague Rules, the amending Protocols (the Hague-Visby Rules) and the Hamburg Rules.3

At the signing ceremony in Rotterdam 16 states signed the Convention, including the United States of America, Norway, Denmark, Greece and the Netherlands (all important trading and maritime nations), along with Congo, France, Gabon, Ghana, Guinea, Nigeria, Poland, Senegal, Spain, Switzerland, and Togo. Together the signatories account for approximately one-third of world trade. The Convention will enter into force on the first day of the month following the expiration of one year after the date of deposit of the twentieth instrument of ratification, acceptance, approval or accession.4 To date, 21 states have signed the Convention, with the land locked African state of Mali being the most recent state to sign.5

Whilst the Convention has received the minimum number of signatories, it remains to be seen how many countries will ratify the Rotterdam Rules. Many states will be required to conduct public consultations into the Rotterdam Rules before ratifying them, the effect being that ratification by individual states may take between one and three years. Given that a number of states (such as Denmark, Holland and the United States) have already consulted widely, ratification by these states could take place by late 2010 or 2011. If a sufficient number of states that do not require consultation similarly ratify the Rotterdam Rules, it is possible that they may come into wider use by 2012. However, the United States, by way of example, has a history of failing to ratify important treaties, which means that even those states that are signatory to the Rotterdam Rules may yet fail to see them ratified for some time.

Development of the Rotterdam Rules

The Rotterdam Rules have undergone a long period of development due to the increasing recognition, in many sectors, of the limitations of the Hague and Hague-Visby Rules’ ability to properly regulate issues connected with the carriage of goods by sea in the 21st century. Subsequent efforts at modernising the rules governing the international carriage of goods by sea have not yielded any material success. The Hamburg Rules failed in the sense that major shipping nations were not prepared to ratify them, and the Multimodal Convention 1980 similarly failed to achieve the necessary support.

The concept that led to the Rotterdam Rules was borne out of an original initiative of the Comité Maritime International (“CMI”) in 1996 to produce a standpoint concerning new rules for the international carriage of goods by sea. The result was the “Draft Instrument for the Carriage of Goods [Wholly or Partly] by Sea” in 2001. The aim of this draft was not to produce an amendment to the existing carriage regimes, but to produce a completely new regime. Following the work of the CMI, the United Nations Commission on International Trade Law (“UNCITRAL”) prepared the “UN Convention for the International Carriage of Goods Wholly or Partly by Sea”, which was approved at the Commission’s 41st session in July 2008, and the Convention was adopted by the General Assembly in December 2008.

The underlying premise of the Convention is that it will replace the existing versions of the Hague Rules and the Hamburg Rules and establish a single uniform international legal regime for the carriage of goods by sea. The Convention is divided into 18 Chapters and contains 96 Articles and is designed to provide a legal framework that takes into account the many technological and commercial developments that have occurred in maritime transport since the adoption of those earlier conventions, including the growth of containerisation, the desire for door-to-door carriage under a single contract and the development of electronic transport documents. The Convention provides shippers and carriers with a binding and balanced universal regime to support the operation of maritime contracts of carriage that may involve other modes of transport.

Operation of the Rotterdam Rules

As expressed in the title of the Convention, it aims to regulate contracts for the carriage of goods "wholly or partly by sea", thereby capturing the more traditional port-to-port transport and multimodal transport with a sea leg. By extending the reach of the Convention beyond that of the earlier carriage conventions, the Convention has become structurally complex - both internally and externally in its relationship with other unimodal transport conventions.

The Convention also contains a number of other significant developments, including the qualified presumption of fault liability regime of carriers and maritime performing parties, the extinction of the nautical fault exclusion, increases in the limits of liability, the reformulation of the duty to provide a seaworthy ship, rules allocating the burden of proof, the emphasis on the duties of shippers and documentary shippers, the extended view taken of transport documents (both traditional and electronic), the transferability of contractual rights, the formulation of detailed rules relating to the delivery of cargo and the special rules for volume contracts, and the extended Himalaya-type protective provisions.

Qualified presumption of fault liability regime of carriers and maritime performing parties

The fault-based liability regime as contained in the Hague-Visby Rules, whereby the shipper must establish fault by the carrier, is maintained in the Convention.6 That is, the starting point for the burden of proof under the Rotterdam Rules is that the carrier is held liable where the claimant can prove that the loss, damage or delay, or the event or circumstance that caused or contributed to it, took place during the period of the carrier’s responsibility.

The carrier will, however, be relieved of all or part of its liability if it can prove that the cause or one of the causes of the loss, damage or delay is not attributable to its fault or the fault of the master or crew of the ship, an employee of the carrier, or a performing party7, or that the loss was caused or contributed to by one of the enumerated events or circumstances detailed in Article 17, including Act of God, fire on the ship, latent defects not discoverable by due diligence and - of particular relevance to today’s mariners - piracy and terrorism.8

If a claimant, however, is able to prove that the fault of the carrier (or any other person referred to in Article 18) caused or contributed to the event or circumstance on which the carrier relies, the carrier is liable for all or part of the loss, damage or delay.9

Extinction of the nautical fault exclusion

As mentioned above, the fault-based liability regime as contained in the Hague-Visby Rules, whereby the shipper must establish fault by the carrier, is maintained in the Convention.10 However, the list of defences available to the carrier in the Rotterdam Rules is significantly reduced with the abolition of the "nautical fault" defence found in the Hague-Visby Rules which relieved the carrier of liability for any “act, neglect, or default of the master, mariner, pilot or the servants of the carrier in the navigation or in the management of the ship”.11

This defence was originally premised on the view that once a ship sailed, the owner could not maintain instant contact with the ship and therefore should not be held responsible for the negligence of an otherwise competent crew. UNCITRAL’s rationale for the removal of this anachronistic provision is that, unlike the 1920’s and 1930’s, when instantaneous communication was unavailable, this defence cannot be justified today in an environment where modern means of instantaneous communications between ship and shore exist.

The reformulation of the duty to provide a seaworthy ship

Under the Hague-Visby Rules the carrier has an obligation before and at the beginning of the voyage to exercise due diligence to make the ship seaworthy.12 Under the Rotterdam Rules, the carrier is bound before, at the beginning of, and during the voyage by sea to exercise due diligence to make and keep the ship seaworthy. It follows that under the Rotterdam Rules the carrier is under a continuing duty to make the ship seaworthy for the full duration of the voyage.

In the opinion of at least one leading P&I  Club, the elimination of the nautical fault exception, together with the extension of the carrier’s continuing duty to exercise due diligence to make and keep the ship seaworthy, will substantially alter the allocation of risk between the carrier and cargo interests in favour of cargo and probably result in an increase in the carrier’s potential liability.

Increases in the limits of liability

Under the existing Hague-Visby Rules, the carrier’s liability for any loss or damage to or in connection with the goods is limited to 666.67 units of account per package or unit, or two units of account per kilogramme of gross weight of the goods lost or damaged, whichever is the higher.13

Under the Rotterdam Rules, the carrier’s liability for breaches of its obligations under the Convention has been increased from 666.67 to 875 units of account per package or other shipping unit, or from two to three SDR ’s per kilogram of the gross weight of the goods that are the subject of the dispute, whichever amount is higher.

Previous doubts as to whether the container is the shipping unit are removed in the Convention which deems that the number of packages enumerated in the contract particulars as packed in the container is the number of packages for the calculation of limits of liability. In the absence of such enumeration, the goods in the container are deemed one shipping unit.

Time for suit

The time for commencing proceedings has been extended from the Hague-Visby Rules’ one year prescription period to two years.14

Volume contracts

Volume contracts are defined in Article 1 as contracts of carriage that provide for the carriage of a specified quantity of goods in a series of shipments during an agreed period of time. Unlike the prohibition on excluding or limiting the obligations of the carrier or a maritime performing party under the Convention, the parties to a volume contract may provide for greater or lesser rights, obligations and liabilities than those provided elsewhere under the Convention, provided that any derogation contains a prominent statement that it derogates from this Convention; is individually negotiated or prominently specifies the sections of the volume contract containing the derogations; and the shipper is given an opportunity to contract on terms and conditions that comply with the Convention and without derogation.15

Despite the greater freedoms afforded the parties to a volume contract, a carrier is not able to contract out of its obligation to exercise due diligence to make and keep the ship seaworthy and to properly crew, equip and supply the ship throughout the voyage. The carrier is also not able to contract out of its unlimited liability for loss that results from a personal act or omission done recklessly and with knowledge that such loss would probably result.

Similarly, the shipper is not able to contract out of its obligation to provide the carrier with information, instructions and documents which relate to the goods and are not otherwise reasonably available to the carrier.

Neither the carrier nor the shipper is able to contract out of the two year time period for the bringing of suit.

Extended Himalaya-type protective provisions

The Convention contains a “Himalaya” provision extending the defences and limits of liability available to the carrier to maritime performing parties.16

Conclusion

To date, the Convention has received a mixed reception, with criticism being levied by the European Shippers’ Council and the European Freight Forwarders Association. Despite being the subject of criticism, the Convention has received strong support from a number of international bodies, including the National Industrial Transport League, the International Chamber of Commerce, the Comité Maritime International and the World Shipping Council. Notwithstanding the differences between supporters and critics of the Convention, with major cargo-oriented states (such as the United States) alongside traditional shipowning states (such as Greece) being signatories to the Convention, it is recommended that all companies involved in the international transport of goods take notice of the Rotterdam Rules and prepare for their operation and effect.

Philip Roche is a partner and Peter Glover is an associate/master mariner in the Shipping Dispute Resolution department, Norton Rose LLP , London.


Footnotes

  1. Sixty-third session. Agenda item 74, Resolution 63/122. United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea.
  2. Article 90.
  3. Article 89.
  4. Article 94.
  5. United Nations Commission on International Trade Law, Status 2008 - United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea - see the "Rotterdam Rules" (2009) 27 November 2009 here.
  6. Article 17.
  7. See Article 18.
  8. Article 17.3.
  9. Article 17.4.
  10. Article 17.
  11. Article IV, Rule 2(a).
  12. Article III, Rule 1(a).
  13. Article IV, Rule 5(a).
  14. Article 62.1.
  15. Article 80.
  16. Article 19.1.
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Post Copenhagen: slow steaming in the fog of climate change conferences - shipping and carbon emissions

George Orwell once said “Progress is not an illusion, it happens, but it is slow and invariably disappointing”. These words might be said of the much anticipated Copenhagen climate change conference of December 2009. The view of the outcome ranged from assertion by some World leaders that progress had been made and new goals set, to the view of the environmentalists that the last best chance to save the planet had been squandered.

For those in the shipping industry, the reaction to Copenhagen may well be: so what? Shipping and other transport was not mentioned in the accord and the debate at the conference seemed confused and fragmented. As a result, are we any further on in reaching agreement on the type of climate change regulation likely to be imposed on shipping and what might be expected over the next few years?

What is clear from listening to the discussions at Copenhagen is that the shipping industry is considered by the international climate change community as a sector which must be regulated urgently and is one which is a potential source of funds for financing climate change adaptation and mitigation in developing countries.

If we are to understand where we are going, it is, as any navigator will affirm, necessary to know where we are now. This article considers these questions and attempts to shed some light on what might be in store for the industry.

Life before Copenhagen

The Copenhagen Conference in December (known as the “Fifteenth Conference of the Parties” or “COP 15”), was attended by representatives from the 194 parties to the United Nations Framework Convention on Climate Change (UNFCCC). That framework convention was agreed in 1992 but it was not until the Kyoto Protocol came into force in 2005 that binding measures were imposed on developed countries which committed them to targets for the reduction of greenhouse gas (GHG) emissions.

Shipping and aviation, being international industries, did not readily fit within the framework of the Kyoto Protocol and so it stated that the responsibility for devising regulations to apply to international shipping (and aviation) industries was to be developed by the International Maritime Organisation (IMO) and the International Civil Aviation Organization (ICAO). It was hoped that at Copenhagen a legally binding international climate change agreement would be agreed and in force when the first commitment period of the Kyoto Protocol expires at the end of 2012.

In response to the Kyoto requirement, the IMO commissioned a number of studies in order to discover the scale of the problem. At the 58th Marine Environment Protection Committee Meeting (MEPC 58) in 2008, the IMO reached agreement on various technical issues, such as the development of an energy efficiency design index for new ships, an energy efficiency operational index and an efficiency management plan suitable for all ships.

The first in-depth discussions concerning market-based instruments for regulating carbon emissions from international shipping took place at MEPC 59. A number of ideas were submitted at this meeting including:

  • Denmark’s proposal that a contribution be paid into an international compensation fund when purchasing bunkers;
  • Norway, Germany and France’s joint proposal for an emissions trading scheme; and
  • the US’s proposal for the introduction of a design index for new and existing ships which would allow for the trading of efficiency credits.

Regulation of shipping emissions - how wide should the net go?

Whilst making good progress on technical issues, political agreement could not be reached on an approach to regulating emissions from shipping. The difficulty that was faced reflected the difference in the view of measures to be taken in the wider global community. A large number of states considered that the “common but differentiated responsibility” (CBDR) principle under the UNFCCC should apply to shipping regulations. The CBDR principle recognises a common global need to fight climate change and aims to take into account historical differences in the contributions of developed and developing states to global warming and disparities in their respective economic and technical ability to address this problem. The principle effectively acknowledges that the developing world must be allowed to develop to eradicate poverty through sustainable development and therefore the burden of fighting climate change must lie with the developed (Annex 1) countries. In their view, any regime to reduce GHG emissions from ships must be applicable only to the countries listed in Annex I to the UNFCCC.

Other delegations believed that as the IMO has a global mandate with regard to the safety of ships and the protection of the marine environment, any regulations to restrict emissions should apply to all ships, irrespective of the flags they fly. It was suggested that if it were made applicable only to Annex I countries, it would be ineffective for the purpose of combating climate change as three quarters of the world's merchant fleet flies the flag of countries not listed in Annex I. In the end, this was the preferred position of the IMO but without a general consensus. The secretary general of the IMO, Mr. Mitropoulos, stated at MEPC 59 that "the time for apportioning blame as to who is responsible for the state of the planet has passed. Now it is time for action. Developed and developing countries, industrialized and emerging economies alike are left with no option other than to get together and, together, work out solutions that will serve well the good cause of reversing the route to planet destruction." There was hope that the Copenhagen conference would reach a global consensus on the wider issues that would permit agreement to be reached at the IMO.

A parallel forum for the debate

Although the IMO is an agency of the United Nations and was charged under the Protocol to the UNFCCC with devising regulations for shipping emissions, it is important to understand that a parallel forum for such issues is also underway through a subsidiary body under the Convention, the Ad Hoc Working Group on Long-term Cooperative Action (AWG LCA). This was a product of discussions under the Bali Action Plan and is part of a process to enable the full, effective and sustained implementation of the Convention through long-term cooperative action, with the aim of reaching an agreed outcome and adopt a decision at Copenhagen.

One of the issues discussed by the AWG LCA was the question of shipping emissions. Just before the Copenhagen conference, the AWG LCA met in Barcelona and produced a document entitled “Non-Paper 49”. The paper set out seven distinct options in relation to reducing the greenhouse gas emissions resulting from fuel used as bunkers, in both shipping and aviation. The options included the strategy of the parties working through ICAO and the IMO and encouraging them to develop policy approaches with mid-term and long-term goals on reducing carbon emissions.

Non-Paper 49 also put forward the idea of the ICAO and IMO being guided by the principle of CBDR. This contrasted with the IMO’s position that all countries should be treated equally. Reconciling these conflicting principles in the context of a global shipping emissions deal proved extremely difficult and no consensus was reached.

Conference of the Parties (COP) 15; Copenhagen

The initial discussions on bunker fuels at COP 15 were effectively a continuation of previous consultations in the AWG LCA. These negotiations centred on Non-Paper 49, with the initial objective being to converge the seven options that had previously been identified into one strategy that could then be taken forward. This process was interrupted during the second week when the bunkers issue was reassigned to representatives of Norway and Singapore to develop a strategy. By the time this was eventually returned to the AWG LCA it proved to be too late to reach a meaningful agreement.

The text prepared by the facilitators to the AWG LCA’s drafting group, which encouraged ICAO and IMO to continue their activities for the development of policies, set out five objectives.

  1. To establish sufficiently ambitious mid-term and long-term global goals to be achieved through policy approaches (with a 10% and 20% reduction below 2005 levels by 2020);
  2. To take the principle of common but differentiated responsibilities into consideration, as well as the special circumstances of countries and the need to avoid arbitrary and unjustifiable discrimination and disguised restrictions on trade;
  3. To ensure that such policy approaches do not lead to competitive distortions or “carbon leakage”;
  4. To ensure that revenue from such measures is used for adaptation and mitigation to climate change; and
  5. To promote cooperation in transfer of technologies, practices, processes, and methodologies in international aviation and maritime transport.

However, the draft conclusions proposed by the Chair of the AWG LCA did not contain these five elements in respect of measures to limit and reduce greenhouse gas emissions from bunker fuels. By contrast, extensive draft text was included in respect of other aspects of the negotiations, emphasising the complexity of the issues concerning bunker fuels. Although the IMO had been heavily criticised for failure to reach an agreement, not least by the European Union, the complexities of the issues defeated the efforts to make progress at COP15.

An unsatisfactory outcome

The outcome of the Conference was a non-binding, vaguely worded and heavily caveated three-page document prepared by the United States in conjunction with Brazil, China, India and South Africa. This “Accord”, which was pushed through in the closing minutes of the Conference, was simply “noted” by the UNFCCC parties, meaning that it has very limited authority. Moreover, it does not provide any suggested measures or targets in respect of transport emissions, leaving it unclear about what policies should be imposed on the shipping industry. At paragraph 1 the Accord did make clear that the parties were to “urgently combat climate change in accordance with the principle of common but differentiated responsibilities and respective capabilities”. The implications of this for discussions in the IMO and the AWG LCA are unclear.

After Copenhagen; what next?

The lack of progress at the conference has left the future even less clear than it was beforehand. International negotiators are now preparing themselves for the next round of discussions in relation to shipping emissions at MEPC 60 in March 2010.

Despite the difficulties and expected resistance from developing states, it is expected that there will be further developments to the proposals for market-based instruments that were discussed at MEPC 59, as well as consideration of the methodology and criteria for feasibility studies and impact assessments on the shipping industry at this meeting.

What was missing from Copenhagen was any guidance as to how the IMO (or the AWG LCA) is to address the conflicting principles of CBDR and the IMO’s favoured principle of equal treatment of all ships. This question has divided both the developing states and the developed states and there was no consensus that could be carried through to assist the IMO’s efforts to obtain a global deal. The group of nations drafting proposals for a bunker levy could not reach agreement on this, with a group insisting that the levy should only apply to ships of developed states. Given the peculiar ownership structure of many ships, which sees beneficial owners in developed countries but registered owners in developing countries such as Panama, such solution would have only a minor effect on global shipping as a whole and lead to a significant distortion of competition which is something the IMO is keen to avoid.

Current proposals: a global emissions trading scheme for international shipping

A paper by the Norwegian delegation has set out in some detail how a global emission trading scheme for international shipping could operate and has made some strong arguments as to how such a scheme would meet the needs of developing countries. This includes exemption for small island developing states, funding of mitigation actions in developing countries through the Clean Development Mechanism (CDM) and the establishment of a substantial fund through auctioning of allowances of several US$ billion annually.

In addition, the proposals made at MEPC 59 still remain on the table and include a proposal from Denmark for shipowners to pay a contribution when buying fuels for ships engaged on international voyages which would be paid to a fund, which proceeds would be used to finance climate change measures in developing countries. In addition a proposal from the United States discussed the introduction of a design index for new and existing ships permitting ships to trade efficiency credits.

However, since Copenhagen there is an increasing interest in the possibilities of generating a large fund that could be used in climate change mitigation in the developing world and there is interest in getting some kind of deal set around the disbursement of such funds although, in turn, ground would have to be given on the CBDR principle. Without doubt, there is much negotiating to be done and many parties’ entrenched positions will need to be shifted if there is any chance of a deal being struck at the IMO in the near future.

The threat of regional schemes

The failure to agree basic principles in respect of shipping emissions at Copenhagen has meant that the IMO is now left to implement a strategy without any useful guidance in respect of timetables, targets or the principles that it must adhere to in devising its policies. Not only is this unlikely to make progress at the IMO any easier, but it would also appear to increase the likelihood of the EU  taking its own steps to regulate shipping emissions. Recital 3 of Directive 2009/29/EC (which implements Phase III of the EU’s Emissions Trading Scheme) states that:

In the event that no international agreement which includes international maritime emissions in its reduction targets through the International Maritime Organisation has been approved by the Member States or no such agreement through the UNFCCC has been approved by the Community by 31 December 2011, the Commission should make a proposal to include international maritime emissions according to harmonised modalities in the Community reduction commitment, with the aim of the proposed act entering into force by 2013.

It is unclear what policy the EU would choose to implement, but the main options appear to be between a bunker fuel levy and an emissions trading scheme. A recent study commissioned by the European Commission from CE Delft has found that such schemes could work on a regional basis, albeit with difficulties. The EU has already pressed ahead with regulating aviation emissions in the absence of any global action by ICAO and practical difficulties will not sway the Commission from a similar approach on shipping if a global deal becomes impossible in the short term.

If the EU puts a regional scheme into effect, then it is possible that other regions will follow - the US, Australia/New Zealand and other regions might consider such a scheme if they see no possibility of a global deal in the short to medium term. It might be that instead of a global solution, a patchwork quilt of regional schemes comes into force and these schemes are eventually stitched together into a global scheme. For the industry, this is the worst possible solution as shipowners will have to deal with different schemes and different administrations, all of which are likely to take a subtly different approach. However, unless the logjam can be cleared at a global level, and cleared soon, then this may be the most likely outcome.

Making way or at anchor?

Although the Copenhagen Conference presented an excellent opportunity to resolve some of the key issues surrounding the regulation of shipping emissions, very little progress was in fact made. No targets have been agreed nor have any appropriate policy responses been identified. Moreover, the reconciliation between the principles of common but differentiated responsibilities and that of non-discrimination remains as elusive as ever. It is also far from clear whether the control of shipping emissions will ultimately be left to the IMO or UNFCCC, and whether other domestic or regional schemes will come to prevail.

Andrew Hedges is a partner and Tim Baines an associate in the Climate Change team, Norton Rose LLP , London. Phil Roche is a partner in the Shipping Dispute Resolution department, Norton Rose LLP , London.

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