A decisive decade-EU climate neutrality policies

Regulations are consistently prevalent in the shipping industry. However, in the coming decade, the shipping industry will experience waves of regulatory changes, as de-carbonisation and climate neutrality will be at the forefront of regulatory bodies, especially the EU.

Shipping industry still getting used to the EU-ETS (Emissions Trading Scheme), the most recent major piece of EU legislation. However, In less than one year, FuelEU maritime will come into effect, requiring vessels in EU calls to operate with less carbon intensive energy in order to comply with the intricate regulations of Fit for 55. Decarbonisation regulations are about to become more complex in the EU region, with the introduction of FuelEU legislation. Despite the EU ETS being a Cap and Trade system for reducing GHG gases, the FuelEU is intended to address the demand for renewable and low carbon fuels by implementing progressively stringent regulations to encourage their adoption.

The regulation focuses solely on two key objectives: mandating a reduction in the greenhouse gas intensity of energy used by ships arriving, departing, or staying in the ports of member states, and requiring the use of On-Shore Power Supply (OPS) in these ports.

The targets encompass not only carbon dioxide CO2 emissions, but also methane (CH4) and nitrous oxide (N2o) emissions over the entire lifecycle of the fuels, taking into account the Well to Wake principle.

The initial objective is to reduce GHG intensity by 2% by 1 January 2025, progressively increasing to an 80% reduction by 1 January 2050, based on a reference value of 91.16 gCO2eq/MJ. The explicit emphasis on emissions makes this regulation technology neutral, thereby giving shipowners considerable leeway with regards to choosing fuel technologies.

Similar to the EU ETS, FuelEU applies to ships exceeding 5000GT. Exceptions may apply to ice-class ships, subject to a distinct calculation mechanism. Furthermore, voyages between outlying regions are exempt from this regulation.

The scope of the Fuel EU Maritime Regulation encompasses vessels exceeding 5 000 gross tonnage that call EEA ports, irrespective of their flag (EU or non-EU), and encompasses:

100% of the energy used by ships calling at an EU/EEA port is used for voyages within the EU/EEA.

50% of the energy used from voyages to or from EU ports to or from non-EU ports (extra-EU/EEA)

100% of the energy used when ships are at berth in EU/EEA ports.

Similar to EU ETS, Compliance with this framework follows as below

Companies must submit a monitoring plan to verifiers to begin the compliance process on 31 August 2024. Monitoring activities will begin on 1 January 2025, The initial monitoring period ends on 31 December 2025, and ship operators are mandated to submit their FuelEU reports to verifiers by 31 January 2026. Verifiers assess conformity by 31 March 2026, and issue the ‘FuelEU Document of Compliance’ by 30 June 2026. Following the issuance of this document, all ships calling at European ports must possess this document. If the ship is not complying with the targets set out in this legislation, a penalty will be imposed on companies. For ships using VLSFO, the penalty will be calculated as follows. Companies can also pool their performances, allowing the surplus performance of one ship to offset any under performance within the fleet.

Under this scheme, vessels will be permitted to pool their compliance balance with one or more other vessels. It will be the pool as a whole that will have to meet the greenhouse gas intensity limits on average. The pooling approach is supposedly the best available option to minimize non-compliance under this scheme.

The extension of the EU ETS and FuelEU to maritime will impose a new cost on shipping that takes place in the EU. The additional cost is one that will lead to discussions concerning charterparty arrangements so that the costs can be passed down/shared between the parties engaged in shipping into/ between ports in the EU.

Against that background, a number of clauses are available to consider for inclusion in charterparties, including the BIMCO’s ETS Emissions Trading Scheme Allowances Clause for Time Charter-parties.

Conclusion: The European Union’s FuelEU Maritime proposals may help usher in low carbon fuels over the next decade but they could also put brakes on new building orders for bulk carriers and tankers in near future due to prevailing uncertainty.