Shipowners and operators should have already started thinking about this as vessels which will be subject to the FUEM should have submitted a monitoring plan by the end of August 2024 and the obligation to record data about emissions from these vessels started from 1 January 2025. The regulation introduces a number of mechanisms to allow different ways to comply with the legislation, which shipowners and operators will need to consider carefully. These options include ‘pooling’ the compliance balance for a number of ships so that, for example, new ships using low carbon fuels and therefore having a compliance balance surplus could be used to offset emissions from other vessels in the pool that cannot use such fuels. The commercial basis on which these pools operate will need to be carefully considered by participants as those contributing vessels with a compliance balance surplus will ask to be rewarded for reducing the penalties incurred by the rest of the pool.
There is also the ability for shipping companies to roll over surplus emissions compliance from one year into the next year for the same ship (known as “banking”) and FUEM provides a limited ability to ‘borrow’ from future surpluses in the next year. These mechanisms will become particularly complicated when delivering and redelivering ships – parties will not wish to inherit liabilities for compliance balance deficits that were incurred when that party was not responsible for compliance.
Accordingly, shipowners and operators will need to give much thought to how they will meet the requirements of the FUEM regulation. Chartering arrangements will require particular consideration, and parties will need to ensure that they have properly documented the commercial agreement they reach on how the risks and costs of compliance with the FUEM regulation will be allocated. At the time or writing, it is clear that many companies have not worked out a strategy for dealing with this new challenge and we are seeing a lot of “agree to agree” clauses inserted in contracts as placeholders. BIMCO has produced a comprehensive but consequently quite long and involved clause which some are finding hard to digest –
largely caused by the issues arising on delivery and redelivery.
There will be a lot of discussion on this issue over the next few months, but what seems unarguable is that the purchaser of the fuel will have to take responsibility for any penalties if the ship ends up with a compliance balance deficit. Pooling will be an option for charterers and owners – but the benefits of this may be illusory if there are insufficient ships with a compliance balance surplus to offset the deficit caused by ships using conventional fuel. Until the supply of low – or lower – GHG emission fuel is available, it seems likely that the penalties will have to be added, like the cost of EUAs, to the cost of shipping goods.
Sustainable finance
Sustainability is likely to remain at the top of the agenda for financiers over the next year. Whilst the focus of these sorts of sustainable financings for the shipping industry is likely to continue to be set around environmental targets, it is likely that more social and governance elements might be included in some facilities, for example, looking at gender diversity in the industry and also the improvement of working conditions for crew.
With the increase in environmental regulatory measures being introduced to the industry, financiers and borrowers will need to consider how they can set environmental targets which are ambitious enough to go beyond what companies are required to do by law, but also commercially achievable.
Transition finance is also likely to be relevant to the maritime industry. Aimed at helping to decarbonise hard to abate areas, there has been a great deal of focus on these sorts of financings, and we expect this to be an area of interest to shipping in 2025.
Carbon capture and storage (CCS) On-board CCS
There is still much discussion within the industry about which alternative fuel or fuels should be used to achieve decarbonisation aims. Until consensus is reached on this issue, one option to reduce emissions is to capture some or all of the carbon emitted from, or present in, traditional maritime fuels.
It should be noted that the use of onboard carbon capture is not accounted for in the FUEM regulation, though the EU says that it might assess the possibility to propose some changes, if appropriate in the event of future technological progress. In contrast, EU ETS regulations state that ship owners will not have to surrender allowances for fuel used where the CO2 is captured and stored in accordance with the relevant CCS directive or where the CO2 is permanently chemically bound in a product so that it doesn’t enter the atmosphere.
The challenges of onboard CCS remain high – the equipment is expensive to install and to run; current units do not capture sufficient CO2; there is limited provision for offtake of captured CO2; many units use amines which escape to air and may cause potentially carcinogenic gases to form – and the current benefits are therefore marginal at best. There are reports that many units at sea are not used due to the cost of operation. Without doubt, if these issues can be solved, then it will be a huge step forward in helping shipping to decarbonise, but the technology must catch up with the hopes and expectations before becoming a proven route to decarbonisation.
THE REPORT | MAR 2025 | ISSUE 111 | 55
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