Hard Brexit to end London Marine insurers EU passporting rights

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1^st January 2024.

The EU ETS is limited by a 'cap' on the number of emission allowances. Within the cap, companies receive or buy emission allowances, which they can trade as needed. The cap decreases every year, ensuring that total emissions fall.

Each allowance gives the holder the right to emit:

One tonne of carbon dioxide (CO2), or;
The equivalent amount of other powerful greenhouse gases, nitrous oxide (N2O) and perfluorocarbons (PFCs).
The price of one ton of CO2 allowance under the EU ETS has fluctuated between EUR 60 and almost EUR 100 in the past two years. The total cost of emissions will vary based on the cost of the allowance at the time of purchase, the vessel’s emissions profile and the total volume of voyages performed within the EU ETS area. The below is for illustration purposes:
~A 30.000 GT passenger ship has total emissions of 20.000 tonnes in a reporting year, of which 9.000 are within the EU, 7.000 at berth within the EU and 4.000 are between the EU and an outside port. The average price of the allowance is EUR 75 per tonne. The total cost would be as follows:
~~9.000 * EUR 75 = EUR 675.000
~~7.000 * EUR 75 = EUR 525.000
~~4.000 * EUR 75 * 50% = EUR 150.000
~~Total = EUR 1.350.000 (of which 40% is payable in 2024)
For 2024, a 60% rebate is admitted to the vessels involved. However, this is reduced to 30% in 2025, before payment is due for 100% with effect from 2026.
Emissions reporting is done for each individual ship, where the ship submits their data to a verifier (such as a class society) which in turns allows the shipowner to issue a verified company emissions report. This report is then submitted to the administering authority, and it is this data that informs what emission allowances need to be surrendered to the authority.
The sanctions for non- compliance are severe, and in the case of a ship that has failed to comply with the monitoring and reporting obligations for two or more consecutive reporting periods, and where other enforcement measures have failed to ensure compliance, the competent authority of an EEA port of entry may issue an expulsion order. Where such a ship flies the flag of an EEA country and enters or is found in one of its ports, the country concerned will, after giving the opportunity to the company concerned to submit its observations, detain the ship until the company fulfils its monitoring and reporting obligations.
Per the EU’s Implementing Regulation, it is the Shipowner who remains ultimately responsible for complying with the EU ETS system.

There are a number of great resources on the regulatory and practical aspects of the system – none better than the EU’s own:

‍https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02003L0087-20230605

‍https://climate.ec.europa.eu/eu-action/transport/reducing-emissions-shipping-sector_en

‍https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/what-eu-ets_en‍

HIS Fairplay has published the below report indicating that London Marine insurers look to European bases after a hard Brexit outcome appears likely after Theresa May’s speech on 17 January;

UK prime minister Theresa May’s speech on the country’s strategy for its departure from the European Union is set to prompt a move by marine insurers to establish new operations outside of London.

May said on Tuesday 17 January that while the UK will seek a trade deal it will not remain part of the single market and the EU customs union. The passporting rights that allow London marine insurers access to write business across the EU member states will end as a consequence.

The London market had fought to put those passporting rights at the heart of any Brexit deal, but the news that they are to end has allowed underwriters to prepare for the UK’s departure in 2019.

The Lloyd’s market has said it will announce the preferred site for a new European subsidiary next month with Paris and Frankfurt seen as the two leading options.

Protection and indemnity clubs have already been working with advisers to identify the most suitable jurisdictions for European operations and the expectation is that those plans will now be intensified following May’s speech.

However, market analysts believe that the plans laid out in Tuesday’s speech will also have a benefit for the market.

Ivor Edwards, corporate insurance Partner at law firm Clyde & Co, said, “Her specific focus on maintaining freedom to provide financial services across borders and talk of a phased approach will be welcomed by insurers and other financial services firms, all of whom crave clarity, stability and a sense that their interests are being represented. On that basis, many will simply be relieved that the phoney war is nearly over.”

He added, “The insurance industry in the UK is large and robust and will survive Brexit. But it won’t be unaffected or remain unchanged. Whatever the precise outcome of negotiations, insurers won’t wait and see. Planning for Britain’s exit from the EU is well under way as insurance carriers believe they need to take concrete steps for all eventualities by setting up carrier companies in EU27 countries.

“It’s not only UK-based companies that are affected and who are making plans. There are over 500 general insurance companies headquartered in continental Europe who passport into the UK that need to take steps too.”

Sian Hill, head of Brexit for Insurance, KPMG UK, said, “Theresa May has made her intentions quite clear. Through the past months of uncertainty, UK insurers have been preparing for this outcome and putting plans in place for life after a ‘hard Brexit’. It will throw up challenges but opportunities could also arise from increased competition and a need for new products.”

One Lloyd’s underwriter told IHS Fairplay, “The speech was watched by those in the market yesterday and the view is one of relief that we now know what we are facing. The challenge now is to get everything into place for the day the UK leaves the EU. However, we are pleased that there was mention of a transitional phase rather than a single big bang cut-off date.”

SOURCES: HIS FAIRPLAY / JON GUY | IMAGE: AP

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Hard Brexit to end London Marine insurers EU passporting rights

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1st January 2024.

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1^st January 2024.