Author: Chiara Raggi | 5 September 2024

BACKGROUND INFORMATION

As we have outlined in our Zero Carbon Desk Alert n. 4  (see the link), on 25^th July 2023 the EU Council adopted the FuelEU Maritime regulations to support the decarbonization of the shipping industry and  to reduce the greenhouse gas intensity of energy used by ships by driving the take up of renewable fuels of non-biological origin such as ammonia and e-methanol.

FuelEU Maritime regulations will enter into force from 1 January 2025 except for Articles 8 and 9 on monitoring plans deadline which has just passed on last 31 August 2024.

Regulation EU 2023/1805 (FuelEU Maritime Regulation) establishes two core obligations for vessels calling at EU ports:

1. Greenhouse Gas (GHG) Intensity reduction: There are specific targets for reduction of the yearly average GHG intensity of the energy used on board by ships, set in 5-year steps, ranging from 2% in 2025 to 80% in 2050. (Article 4)
2. Mandatory Use of Alternative Power Sources in Ports: Ships must use either on-shore power supply (OPS) or zero-emission technologies while at berth. (Article 6)

Specifically, for ships falling under the scope of this regulation for the first time after 31 August 2024, companies shall submit a monitoring plan to the verifier without undue delay and no later than two months after each ship’s first call at a port under the jurisdiction of a Member State.

COMPLIANCE

As clarified by the EU Commission (see the link to Questions and Answers on Regulation (EU) 2023/1805), compliance steps for shipping companies include:

• “Monitoring Plan Submission: By 31 August 2024, companies have been required to submit a monitoring plan for each ship in their fleet. (Article 8);
• Monitoring Requirements: From 1 January 2025, companies are required to record data for each of their ships’ arrivals and departures at EU ports, in particular (Article 15):
• Ports of departure and arrival, with dates and times, including duration of stay at berth;
• Connection to on-shore power supply (OPS) or the application of relevant exceptions, detailing fuel consumption at berth and at sea;
• The amount of electricity received through OPS;
• For each fuel type used, report well-to-tank and tank-to-wake emission factors for combusted and slipped fuels, encompassing all relevant greenhouse gases;
• The amount of each type of substitute source of energy consumed both at berth and at sea;
• If applicable, the ship’s ice class and information about voyages undertaken in ice conditions.
• Annual Reporting: By 31 January of each verification period, a ship-specific ‘FuelEU report’ must be provided to the verifier. (Article 15(3))
• Additional Requirements for Zero emissions at Berth for Containerships and Passenger Ships above 5,000GT (Article 6):
• From 1 January 2030 for EU ports covered by the Alternative Fuels Infrastructure Regulation (AFIR).
• From 1 January 2035 for all EU ports equipped with OPS facilities”.

THE RESPONSIBLE ENTITY

Unlike the EU ETS, the company responsible for ensuring compliance with FuelEU Maritime as per its Article 3 (13) is always the ISM company. This is the company assuming responsibility for the operation of the ship and taking on all the duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention, transposed in Union by virtue of Regulation (EC) No 336/2006 on the implementation of the International Safety Management Code within the Community and repealing Council Regulation (EC) No 3051/95.

Article 3(13) of the Regulation states: “company” means the shipowner or any other organisation or person such as the manager or the bareboat charterer, which has assumed the responsibility for the operation of the ship from the shipowner and has agreed to take over all the duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention.

Where a shipowner is responsible for the compliance of its ship with the ISM Code, there is no “ISM company” distinct from the shipowner. In this case the shipowner is also the “ISM company” and it is also the entity responsible for compliance with the FuelEU.

In cases when the shipowner has delegated the responsibilities to comply with the ISM Code to any other organisation or person, then that organisation or person will become the “ISM company” and it is also the entity responsible for compliance with the FuelEU.

To help operators comply with the requirements stated in the regulation, the FuelEU Maritime offers flexibility through banking, borrowing and pooling mechanisms.

According to the FuelEu Maritime regulations, shipping companies are therefore allowed to bank or borrow compliance surpluses between reporting periods; the mechanism is not applicable for two consecutive reporting periods.

Moreover, companies can pool the performances of different ships, thus using the over-performance of one ship to compensate the under-performance of others, provided that the total pooled compliance is positive and even if they are controlled by different companies.

Through the banking and borrowing mechanisms in the FuelEU Maritime regulation, shipping companies can bank compliance surplus for, or borrow from the subsequent period, to offset deficits.

What this means is, that if a ship has a compliance surplus on its GHG intensity in a reporting period, the company may bank it to the same ship’s compliance balance for the following reporting period.

On the other hand, if a ship has a compliance deficit on its GHG intensity in a reporting period, the company can borrow an advance compliance surplus of the corresponding amount from the following period.

However, the advance compliance surplus cannot not be borrowed for an amount exceeding more than 2% of the limit multiplied by the ship’s energy consumption. In addition, the advance compliance surplus may not be borrowed for two consecutive periods.

The operator of the ship will have to pay a penalty if a ship that has borrowed an advance compliance surplus is not compliant in the following reporting period.

PENALTIES

If companies do not comply with the yearly target set out in the FuelEU Maritime (i.e. the yearly average GHG intensity of the energy used on board), they will have to pay a penalty under the Regulation.

This essentially means that the Regulation allows a pay-to-comply mechanism. However, the penalty factor grows by 10 percentage points if a shipping company does not comply for two years in a row.

This can be distinguished from a shipping company being in breach of requirements set out under the Regulation. In this regard, the Regulation requires EU Member States to lay down rules on sanctions applicable to infringements of the Regulation pursuant to Article 25. 

IMPLIED ISSUE: ALLOCATION OF RISK IN C/P

The FuelEU Regulations could lead to a range of complex challenges for charterparties, particularly regarding how to assign responsibilities between the parties in both time and voyage charters.

BIMCO is in the process of developing a FuelEU clause for time charters, which is anticipated to be released in the latter half of 2024. A BIMCO clause is expected in the coming months.

Creating a comprehensive FuelEU clause for time charters that addresses all potential scenarios will be difficult due to the different approaches to managing credits and penalties, such as banking, borrowing, and pooling, each of which may introduce unique and complex contractual issues.

Although there is no “standard clause” at the moment, we recommend that owners and charterers carefully consider how to address FuelEU in any charterparties currently under negotiation.

For example, in a voyage charter (shorter-term C/P), charterers might choose to avoid a FuelEU penalty by borrowing from the following year, which would then require them to manage the shortfall in the next year.

In the case of time charters (longer-term), the complications could be even greater. For instance, if a vessel is chartered to three different charterers within a single calendar year, all trading within the EU, allowing one charterer to pool the vessel to address FuelEU penalties (or credits) would prevent the other charterers from using the same option.

We anticipate that some market practices may emerge to help address these issues, but during the initial months, there will likely be considerable discussion as the implications of the various options are explored.