The EU’s FuelEU Maritime regulation, set to take effect in January 2025, looks set to further shake up the industry, as it continues on its path to net zero. As part of the EU’s Fit to 55 package, FuelEU aims to accelerate the decarbonisation of maritime operations through increasingly stringent emission targets and penalties.
A briefing note from Norton Rose Fulbright partner Philip Roche and client knowledge director Kelli Bodal Hansen states that there is “much for shipowners and operators to consider” on FuelEU. “There is a misconception that the EU ETS is a charterers’ problem and FuelEU is an owners’ problem,” they say. “But the position is more complex than this and FuelEU compliance is an issue which owners, charterers, ship managers and others will all have to face in the coming months.”
The regulation clearly states that the Document of Compliance (DOC) holder is solely responsible for FuelEU compliance. This places a significant burden on ship managers, who may have limited control over operational decisions affecting emissions.
Shipowners, charterers, and ship managers must carefully review their contracts to address FuelEU compliance.
This includes determining who will bear the cost of compliance measures, how surplus emissions credits will be allocated, and how penalties for non-compliance will be shared.
By the end of August 2024, shipping companies must have submitted a FuelEU monitoring plan, and after January 1, 2025 the data must be recorded for the calendar year for verification after January 31, 2026. In June 2026, vessels will either receive a FuelEU DOC or will be fined. “Parties must urgently consider the issues FuelEU raises and in particular look to their contracts to ensure that they are adequately protected in this respect,” the authors state. Co-operation and the exchange of reliable data will be key to successfully navigating the new challenges FuelEU presents to the industry, they add.
Time charter questions
Time charters require parties to negotiate operational decisions that can impact emissions. This includes determining who is responsible for the costs of compliance measures and how surplus emissions credits or deficits will be allocated.
“An escalation of the conflict in the Middle East could have negative consequences for global and regional trade flows, particularly for any countries directly involved. The effects would also be felt in other regions, including through further disruptions to shipping and rising energy prices due to higher risk premiums,” said the report.
“We would expect that time charters would explicitly deal with the requirement to comply with FuelEU requirements, but how far will these provisions go?
If a vessel has used more expensive, lower emission fuel to comply with FuelEU and has generated a compliance surplus, will the charterer expect to receive the value of this? This raises additional questions about how this surplus is valued and how frequently compliance is assessed: is it annually or more frequently? The reverse is also relevant: how are the costs and process for dealing with a FuelEU compliance deficit to be allocated?”
FuelEU allows for pooling compliance balances between multiple ships. This can be beneficial for ship owners and operators, but requires careful negotiation of terms and conditions, including how surplus or deficit emissions will be accounted for.
“Consideration will need to be given to ensuring how the expected compliance contributions for vessels are maintained and what steps will need to be taken if there are changes to vessel emissions which negatively impact the performance of the pool,” say the authors. “For instance, if one modern, efficient ship permits older less efficient ships to be operated compliantly for the purposes of FuelEU, how does the benefit – which would be the avoidance of fines – for the owners of the less efficient ships flow through to the owner of the more efficient ship?”
Ownership challenges
Additionally, mid-period changes in ownership or DOC holders can create complexities in FuelEU compliance, whether through sale of the ship, a change in bareboat chartering arrangements for the ship or a change in manager. Parties must have clear contractual agreements in place to address these situations. Purchasers of vessels and sale & purchase brokers need to consider FuelEU issues during the sale process, including any existing compliance obligations or surplus emissions credits.
“It is difficult to see how existing DOC holders will be willing to be responsible for another entity’s compliance, or that any incoming DOC holders are going to want to rely on a third party submitting data or possibly paying any deficit penalties that the outgoing entity has incurred.
“However, absent any change from the EU on this, parties are going to have to try to assess what contractual agreements, indemnities and guarantees they will need to be comfortable with this. If the vessel is pooled, or has banked or borrowed emissions surpluses, then this will add another layer of complexity,” they say.
Norton Rose Fulbright gives the example of when the current DOC Holder has ‘borrowed’ against future compliance, asking how the purchaser will determine this, and once it is aware, what price could be attributed to this borrowing?
As FuelEU approaches implementation, Norton Rose Fulbright urges shipping companies to take proactive steps to understand the regulation’s requirements and prepare for compliance.
This includes reviewing contracts, developing monitoring plans, and considering strategies for reducing emissions. Co-operation and the exchange of reliable data will be essential for navigating the challenges posed by FuelEU.
Additionally, shipping companies and brokers must stay informed about the latest developments in FuelEU regulations and industry best practices to ensure ongoing compliance and competitiveness.
Source: Baltic Exchange
