Key aspects of FuelEU Maritime proposal

On 14 June 2021 the European Commission presented a package of proposals that are aimed at ensuring that the European Union achieves its goals of cutting greenhouse gas emissions by at least 55% by 2030. The proposals include, among other things, the new FuelEU Maritime initiative and the proposed implementation of the EU Emissions Trading System (the ETS) and the EU Energy Taxation Directive (the ETD) for the shipping sector.

The FuelEU Maritime initiative, the ETS and the ETD all form part of a "basket of measures" designed to address emissions from the shipping sector and specific market failures. The purpose of the FuelEU Maritime initiative is to increase demand for renewable and low-carbon fuels in the shipping sector. The implementation of the ETS and the ETD aims to ensure cost-effective emission reductions and that the price of transport reflects the impact it has on the environment, health and energy security.

The FuelEU Maritime proposal is highly technical in nature. However, at its core, it aims to implement two specific measures for the shipping sector – namely:

  • an obligation to use an onshore power supply or zero-emission technology in ports; and
  • a limitation of the greenhouse gas intensity of energy used on board vessels.

The obligation to use an onshore power supply or zero-emission technology in ports is currently proposed to apply to only containerships and passenger vessels, commencing as of 1 January 2030. The reason for limiting its application is that these are the vessels which, according to data collected by the European Union, produce the highest amount of emissions per vessel at berth. Due to this measure's limited application, this article focuses on the measure to limit the greenhouse gas intensity of energy used on board vessels.

Limiting greenhouse gas intensity of energy used on board vessels

The proposed limitation on greenhouse gas intensity will apply to vessels with a gross tonnage of over 5,000, regardless of the ship's flag. The primary reason for not including vessels with a lower gross tonnage is to limit the administrative burden of this regulation. In order to align with international rules within shipping, the regulation also contains the following exceptions for certain vessels:

  • warships and naval auxiliaries;
  • fish-catching or fish-processing vessels;
  • primitively built wooden ships and ships not propelled by mechanical means; and
  • government vessels used for non-commercial purposes.

The specific limits are based on an assumption that the transition to renewable and low-carbon fuels will take some time. The limit is calculated by using a reference value and reducing this value by a set percentage. The percentage of required reduction will increase over time, leading to gradually stricter requirements. The reference value is proposed to be the fleet average greenhouse gas intensity of the energy used on board vessels in 2020. The proposed specific limits are:

  • a reference value of -2% from 1 January 2025;
  • a reference value of -6% from 1 January 2030;
  • a reference value of -13% from 1 January 2035;
  • a reference value of -26% from 1 January 2040;
  • a reference value of -59% from 1 January 2045; and
  • a reference value of -75% from 1 January 2050.

The proposed structure is technology neutral. However, it has been criticised by some for favouring fossil liquefied natural gas and biofuels instead of zero-emission fuels and energy carriers such as electricity, hydrogen and ammonia. The reason for this is primarily the assumption that prudent shipowners will always choose the cheapest alternative fuel that satisfies the requirements. To accommodate some of this criticism, the European Commission has included specific provisions aimed at reducing the use of biofuels, biogas, renewable fuels of non-biological origin and recycled carbon fuels in its proposal.

The regulation will apply to all the energy used on a voyage from a port of call under the jurisdiction of a member state to a port of call under the jurisdiction of another member state. For voyages departing from or arriving to a port of call under the jurisdiction of a member state, and where the last or the next port of call is under the jurisdiction of a third country, the regulation applies to only half of the energy used. One of the reasons for including the energy used when the last or the next port of call is under the jurisdiction of a third country is to limit the risk of evasive port calls.

If a vessel has a compliance surplus for a reporting period, it is proposed that shipowners may bank it to the same vessel's compliance balance for the following period. Further, if a vessel has a compliance deficit for a reporting period, shipowners may, within certain limits, borrow an advance compliance surplus. Shipowners will also be allowed to pool the performances of different vessels and use the possible overperformance of one vessel to compensate for the underperformance of another vessel. The purpose of these rules is so that circumstances outside the vessel-owning company's control can be considered. These rules also:

  • reduce the risk of "technology lock-in";
  • create the possibility to reward overcompliance; and
  • incentivises investment in more advanced technologies.

The person or organisation responsible for compliance with the regulation is the shipowner or any other organisation or person, such as the manager or the bareboat charterer, who has assumed the responsibility for the operation of the vessel from the shipowner. This definition is in line with similar definitions used by the International Maritime Organisation, for example, in its 1994 international safety management code for the safe operation of ships and pollution prevention. Shipping companies that wish to hold other entities responsible for penalties and other loss which may occur will need to ensure that this is clearly specified in their contracts.

The proposed regulation obligates the responsible entity to monitor and report relevant data for each of its vessels. Monitoring and reporting must be complete and cover the energy used on board vessels while they are at sea as well as at berth. The data provided will be verified by accredited, independent and competent verifiers. Based on the data, the verifiers will calculate and establish the annual average greenhouse gas intensity of energy used and the vessel's balance with respect to the limit. Provided that there is no deficit, the verifier will issue a FuelEU certificate of compliance. Ships are obligated to carry this certificate.

Companies will have to pay penalties for any vessels that do not meet the annual limits. The penalties are calculated based on specific rules set out in an annex to the regulation. Generally, the penalties will be based on the amount and cost of renewable and low-carbon fuel that the vessel should have used to meet the requirements. The FuelEU certificate of compliance will not be issued until all penalties have been paid. Within the European Union, penalty payments received will be allocated to support projects aimed at the rapid deployment of renewable and low-carbon fuels in the shipping sector.

The enforcement of the regulation may raise some concerns. According to the regulation's current structure, a state should be able to hold shipowners responsible for actions which (primarily) may have taken place outside the state's territory. This may cause some legal concerns in relation to international law, for example, as regards the United Nations Convention on the Law of the Sea and its rules on jurisdiction. Having local (EU) rules for an international industry may also lead to challenges. Although it is noted in the proposal that the regulation will be "reviewed" and "aligned" if an agreement on a global approach on matters of relevance for the regulation is reached, the international aspects do not seem to have been considered by the European Commission in detail.

Comment

It remains to be seen whether the FuelEU Maritime proposal will be adopted, either in its current form or in a modified form. The proposed regulation is open for feedback until 8 November 2021. Feedback received before the deadline will be summarised by the European Commission and presented to the European Parliament and Council with the aim of implementing the feedback into the legislative debate. Thereafter, the proposal will be discussed and negotiated within the European Parliament and Council. However, with the increased focus on decarbonisation and transition to alternative low and zero-emission fuels and energy carriers, it seems clear that the shipping sector needs to prepare for additional regulations.

For further information on this topic please contact Øyvind Axe or Knut Magnussen