Key aspects of FuelEU Maritime proposal

On 14 June 2021, the European Commission presented a package of proposals aimed at ensuring that the European Union achieves its goal of cutting greenhouse gas emissions by at least 55% by 2030. The proposals include, amongst other things, the new FuelEU Maritime initiative, specifically aimed at the shipping industry.

The FuelEU Maritime proposal, together with the proposed implementation of the EU Emissions Trading System (the ETS) (on which we comment in a separate article) and the EU Energy Taxation Directive (the ETD), forms part of a basket of measures designed to, amongst other things, ensure emission reductions in the shipping sector by increasing demand for renewable and low carbon fuels.

The FuelEU Maritime proposal is of course highly technical in nature, however, at its core, the proposal aims to implement two specific measures, namely:

  • an obligation for certain types of vessel to use an onshore power supply or zero-emission technology in ports; and
  • the introduction of increasingly stringent limitations on the carbon intensity of fuels/energy used on board vessels.

The obligation to use an onshore power supply or zero-emission technology in ports is so far only proposed to apply to containerships and passenger vessels, and is not set to kick in until 1 January 2030. The reason for limiting its application only to the container and passenger vessels is that these are the vessels which, according to data collected by the European Union, produce the highest amount of emissions at berth. Although this part of the regulation currently only has a limited scope, there is a relatively high likelihood that the scope may be expanded to include other vessel types in time.

Due to this measure’s limited application however, this article focuses on the second measure, namely the requirement to reduce the greenhouse gas intensity of fuel/energy used on board vessels.

Limiting greenhouse gas intensity of energy used on board vessels

As drafted, the proposed limitation on greenhouse gas intensity will apply only to vessels with a gross ­tonnage of over 5,000 GT, regardless of the vessel’s flag. Various types of vessel will however be exempted, such as fishing vessels, naval vessels and government vessels used for non-commercial purposes.

For those vessels to which the proposal will apply, the required reductions in the carbon intensity of fuels/energy used on board will be applied on a sliding scale based on the following timeline:

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

How these reductions are to be achieved is not ­specified however. As a result, there has been some ­criticism that many shipowners will, at least initially, simply look to switch from more carbon heavy bunker fuels to lower emission fuels such as liquefied natural gas (from fossil fuel sources) and biofuels rather than seeking to switch to the use of zero-emission fuels such as electricity, hydrogen and ammonia. Whilst the European Commission has responded to such criticism by including specific provisions aimed at reducing the use of biofuels, biogas, renewable fuels of non-biological origin and recycled carbon fuels in its proposal, there will no doubt be continued criticism that the ­proposals does not go far enough, at least in the early phase of its application.

In terms of its scope, the regulation is intended to apply to all fuel/energy used by vessels on voyages between EEA member states’ ports of call. To disincentivise shipowners from seeking to avoid their responsibilities by evasive port calls, it will also apply for voyages departing from or arriving to a member state port of call but where the last or the next port of call is in a third country outside the EEA, albeit to only 50% of the energy consumed.

To reward good practice, in the event that a vessel has a compliance surplus for a particular reporting period, it is proposed that shipowners may bank that surplus to the same vessel’s compliance balance for a subsequent period and if a vessel has a compliance deficit for a reporting period, shipowners may, within certain limits, borrow from a projected future compliance surplus. Shipowners will also be allowed to pool the performances of different vessels within a fleet and use the possible overperformance of one vessel to compensate for the underperformance of another vessel.

The person or organisation responsible for compliance with the regulation is intended to be 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 IMO, for example, in its 1994 international safety management code for the safe operation of ships and pollution prevention (the ISM Code). Shipowners that wish to hold other ­entities responsible for penalties and other losses which may occur in connection with the FuelEU proposal will therefore need to ensure that this is clearly specified in their contracts.

The relevant responsible entity will also be responsible for monitoring and reporting relevant data for each of its vessels. Monitoring and reporting must be complete and cover the fuel/energy used on board vessels whilst they are at sea as well as at berth and the data provided will be required to be verified by accredited, independent and competent verifiers. Based on the data, the verifiers will then calculate and establish the annual average greenhouse gas intensity of fuel/energy used and the vessel’s balance with respect to the applicable limit. Provided that there is no deficit, the verifier will issue a FuelEU ­certificate of compliance.

For any vessel that does not meet the annual limits, a penalty system will be established, with the ­penalties being calculated on the basis of specific rules set out in an annex to the regulation. Generally speaking however, the penalties will be based on the amount and cost of renewable and low-carbon fuel that the vessel would have needed to use in order to meet the relevant requirements and 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.

In addition, where a vessel has failed to present a valid FuelEU certificate of compliance for two or more consecutive reporting periods and where other enforcement measures have failed to ensure compliance, the competent authority of the member state of the port of call may issue an expulsion order. Upon the issuance of such an expulsion order, all other member states shall refuse entry of the vessel to their ports. Where the vessel flies the flag of a member state, the member state concerned may also order a flag detention until the relevant company fulfils its obligations.

Comment

The feedback period for the proposed new FuelEU ­regulations ended only on 8 November 2021, the results of which will now be summarised by the European Commission and presented to the European Parliament and Council for subsequent discussion and negotiation. It therefore remains to be seen whether the FuelEU Maritime proposal will be adopted, either in its current or in a modified form. However, with the increased focus on decarbonisation and transition to ­alternative low and zero-emission fuels, it seems clear that the shipping sector needs to be prepared for ­significant additional regulations in the months and years to come.

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