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Fuel EU – Achieving compliance; banking, borrowing, pooling and paying

Reed Smith lawyers look at how a ship can achieve compliance and obtain the important FuelEU document of compliance as well as the consequences of not complying.

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Global law firm Reed Smith on Friday (7 June) published ‘FuelEU – Achieving compliance; banking, borrowing, pooling and paying’ looking at how a ship can achieve compliance and obtain the important FuelEU document of compliance as well as the consequences of not complying.

Authored by Antonia Panayides and Alexander Drury

While the shipping industry is still coming to terms with the EU Emissions Trading Scheme (EU ETS) the next decarbonisation initiative, FuelEU Maritime (FuelEU), is rapidly sailing into view.

FuelEU is part of the EU’s Fit for 55 Package and aims to support decarbonisation in the shipping industry by setting and gradually reducing, emission targets from journeys to/from EEA ports. The scheme targets the greenhouse gas intensity of energy used on a vessel. This is largely determined by the fuel used, with the Regulation rewarding cleaner fuels.

FuelEU enters into force from 1 January 2025 but monitoring plans for vessels already calling at EEA ports must be submitted by 31 August 2024.

What is the compliance process?

To comply, a ship must not exceed its set emission target, expressed as greenhouse gas emissions per megajoule of energy used on board. If a ship is at, or under, the target stipulated by the EU, it will receive a FuelEU document of compliance. However, if a ship is over the emissions limit, it can still achieve compliance through a few different mechanisms and receive a FuelEU document of compliance.

Paying the price

On 1 June of the verification period, a company’s administering State shall ensure that any ships with a compliance deficit, i.e. those that are over polluted during the year, are issued with a FuelEU penalty.

If the penalty is paid by 30 June, the ship will receive a FuelEU document of compliance. If a ship has a compliance deficit for consecutive reporting periods, an uplift multiplier is applied to the penalty.

Using the bank

Where a ship has a compliance surplus, and therefore does better than the EU’s target, the company may ‘bank’ the unused emissions for the next reporting period. The decision to bank is subject to the appointed verifier’s approval and must be made before a FuelEU document of compliance is issued. The banked surplus can be used to achieve compliance the next year.

Borrowing from the future

A ship with a compliance deficit may borrow a proportion of the next year’s emission allowance to help it achieve compliance. However, this borrowed allowance and a premium is deducted from the following reporting period, making it even harder to achieve compliance that year. A ship cannot borrow in two consecutive years.

Pooling

Finally, a ship can enter a pool. This is not to be confused with a commercial pool. A pool for the purposes of compliance with FuelEU is a voluntary mechanism allowing ships to share their compliance surplus/deficit – as long as the pool’s total emissions result in a compliance surplus. Pools can consist of ships from different companies, but every company must approve the pool composition and allowance distribution across the pool.

The compliance is then assessed across the entire pool rather than looking at individual ships. This allows a cleaner ship to share any compliance surplus with more polluting ships.

Verifiers will confirm a ship’s emissions by 31 March and companies then have until 30 April to finalise their pooling arrangements, which the verifier must also confirm.

Consequences of non-compliance

A FuelEU document of compliance allows a ship to trade in EEA ports for 18 months, or until the next FuelEU document of compliance is issued. However, Member States must lay down rules on sanctions for non-compliance. If a ship has no FuelEU document of compliance for two consecutive years, it could be detained or expelled from EEA ports.

 

Photo credit: Thanasis Papazacharias from Pixabay
Published: 14 June 2024

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FuelEU

OceanScore reveals ship segments set to feel EUR 1.3 billion sting of FuelEU penalties

Container segment will bear the brunt of FuelEU costs, accounting for 29% of gross penalties, followed by RoPax on 14% with tankers and bulkers each on 13%, says firm.

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OceanScore Managing Director Albrecht Grell

Hamburg-based technology platform OceanScore on Tuesday (9 July) said the financial impact of FuelEU Maritime is focusing the minds of shipping companies as they face potential penalties for non-compliance with greenhouse gas (GHG) intensity reduction targets - and OceanScore has identified those segments set to be hit hardest.

The following is an article by OceanScore elaborating on the matter:

Vessels in the passenger/cruise, container, RoPax, bulker and tanker segments will have significant cost exposure from the complex regulation due to be implemented from 1 January next year, despite a relatively modest initial target of a 2% cut in GHG intensity, according to OceanScore.

The firm’s data analytics team has calculated that shipping will rack up total FuelEU penalties of €1.345 billion in 2025 through analysis of the 13,000 vessels over 5000gt trading within and into the EU/EEA that are subject to the regulation. This is based on data on trading patterns and fuel mix from 2022 - the last full year currently available.

Containers bear burden

The team has been able to determine FuelEU compliance balances and resulting penalties for each vessel using OceanScore’s proprietary data modelling incorporating AIS data, Thetis emissions data, bunker intelligence and advanced analytics/AI. It has factored in the likely fuel mix for each vessel between EU ports and to/from the EU, as well as in ports.

Vessels will be hit with a penalty of €2400 per tonne of VLSFO-equivalent for failing to meet the initial 2% reduction target relative to a 2020 baseline for average well-to-wake GHG intensity from fleet energy consumption of 91.16 gCO2e per megajoule (MJ) - or emissions per energy unit. The GHG intensity requirement applies to 100% of energy used on voyages and port calls within the EU/EEA and 50% of voyages into and out of the bloc.

As with the EU Emissions Trading System (EU ETS), it is the container segment that will bear the brunt of FuelEU costs, accounting for 29% of gross penalties, followed by RoPax on 14% with tankers and bulkers each on 13%.

“It is critical for shipping companies to determine a baseline for expected FuelEU costs to secure proper planning and budgeting processes to compare different mitigation options, as well as to decide what to do with outstanding compliance balances,” says OceanScore Managing Director Albrecht Grell.

“This will require, to a higher degree than the EU ETS, a corporate strategy to determine how to reduce the compliance balance/deficit, how to commercialise a surplus and deal with deficits that remain.”

Wide spread of vessel liabilities

OceanScore has found that liabilities per vessel will differ widely across the various segments due to increasingly diversified fuel choices, including greater uptake of biofuels and LNG. Passenger vessels will be penalised the most with an average of €520,000 per vessel annually, followed by RoPax at €480,000 and RoRo at €314,000, with an average penalty for container ships of only €214,000, according to OceanScore.

Grell points out there are also massive discrepancies between vessels within these segments, with a number of ships in the passenger and RoPax segments exposed to penalties of between €1.8m and €2.5m, and payment obligations for some container ships approaching €1m. This is driven by higher energy consumption simply due to vessel size and trading profile.

While penalties will arise from so-called compliance deficits for vessels using conventional fuels, surpluses totalling an estimated €669m will be generated mainly by vessels fuelled by LNG and LPG with significantly lower carbon intensity.

LNG carriers will account for 78% of the total market surplus and gas carriers 8%, while a further 8% will be generated by container ships that have seen a modest uptake in alternative fuels in recent years.

Pooling can halve costs for the industry

Taking into account this estimated compliance surplus, the net cost of FuelEU penalties for shipping from 2025 would be €680m, which indicates that pooling of vessels can roughly halve the gross burden for the industry.

Penalties will, in segments typically using conventional fuels with comparable carbon intensities such as HFO, LFO or MDO, be roughly proportional to the overall fuel consumption, thus correlating with the EU ETS cost.

Initial costs of FuelEU for most conventionally fuelled vessels, prior to pooling, will be around one-third of those associated with the EU ETS next year when the latter regulation will have 70% phase-in. But ultimately FuelEU is likely to prove a much more costly affair as the requirement for GHG intensity cuts rises to 6% by 2030 and then accelerates to reach 80% by 2050.

“It is therefore incumbent on shipowners to define their strategies not only towards fuel choices and the use of onshore power but also towards handling of residual compliance balances such as pooling, banking and borrowing of balances, to mitigate the financial impact of FuelEU. However, pooling will also come at a cost, while banking and borrowing will incur interest costs and only push liabilities into the future,” Grell explains.

‘Sound administrative processes’

He further points out that pooling compensations paid between different shipping companies will effectively divert cash flow away from the EU that it would otherwise have earned from FuelEU penalties – but that this effect is intended by the regulator to “reward” early adopters of clean fuels.

Another factor that will curb potential income for the EU from this regulation is that the compliance gap has been reduced to only 1.6% by 2022, as average GHG intensity from shipping has come down by 0.4% to 90.82 gCO2e per MJ, mainly due to increased LNG carrier calls to Europe after gas supplies via pipelines from Russia were halted when the latter invaded Ukraine. Given this trend and increasing adoption of biofuels, the 2% compliance gap will probably be closed before the first tightening of reduction targets in 2030.

Grell says the priority for shipping companies, especially at this early stage while cost exposure is relatively low, is to get to grips with the complexity of the regulation and tackle the risks arising from the fact the party liable for penalties - the DoC holder, or possibly shipowner - is not the one responsible for emissions, which is typically the charterer.

“As well as having costs oversight, companies require reliable monitoring and reporting mechanisms with high-quality emissions data. They must also have in place complex contractual arrangements and sound administrative processes to manage compliance and mitigate the financial consequences of the new regulation,” Grell concludes.

Related: FuelEU: New regulation leaves DoC holder with fuel liabilities risk, says OceanScore
Related: ‘Big opportunity’ for bunker traders, suppliers on upcoming FuelEU regulation, forecasts OceanScore

 

Photo credit: OceanScore
Published: 12 July, 2024

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EU ETS

Ship owners could face significant emission bills under EU-ETS, warns Oceanly

Integration of shipping sector into EU-ETS marks a pivotal step towards a decarbonised maritime industry but could bring substantial costs and compliance challenges for ship owners.

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Oceanly, a provider of fleet performance solutions, on Wednesday (26 June) warned that without proper management, ship owners could face considerable financial liabilities under the European Union Emissions Trading System (EU-ETS).

The firm said the integration of the shipping sector into EU-ETS marks a pivotal step towards a more sustainable and decarbonised maritime industry. 

“However, this new regulation brings substantial costs and compliance challenges for ship owners,” it said. 

From 1 January, 2024, ship owners are required to purchase emission allowances for the CO2 their vessels emit. 

With the current EU Allowance (EUA) price hovering around EUR 70 per tonne, the financial impact can be substantial, particularly as the EU-ETS phases in over the next three years. Initially, ships must cover 40% of their emissions liabilities, but this escalates in subsequent years.

Validation of voyage emissions data and the allocation of EU-ETS costs are critical hurdles for ship owners as failure to accurately monitor, report, and verify emissions could result in substantial bills.

Matteo Barsotti, Operations Manager of Oceanly, stated: “The integration of shipping into the EU-ETS represents a major milestone in our industry's sustainability journey. However, ship owners could find themselves facing enormous emission bills if they do not proactively manage their emissions under the EU-ETS. These costs can escalate quickly so effective emissions management is essential not only for compliance but also for mitigating financial risks.”

To address these challenges, Oceanly offers its Oceanly Performance solution, designed to streamline emissions management and compliance so owners can stay ahead of the regulatory curve while optimising their operations.

Oceanly Performance reduces administrative burdens by automating the collection of essential data, such as fuel consumption and voyage information.

The firm said its monitoring capabilities provide real-time insights into carbon emissions, enabling timely operational adjustments to enhance fuel efficiency and reduce emissions.

Barsotti added: “Oceanly Performance empowers ship owners to manage their emissions effectively, ensuring compliance and promoting energy efficiency. Our solution not only helps reduce emissions but also drives significant fuel savings of between 3% and 11% per vessel.”

“Oceanly is committed to supporting ship owners in meeting these new requirements and advancing towards a more sustainable future.”

 

Photo credit: Oceanly
Published: 27 June, 2024

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EU ETS

DNV explains how its Emissions Connect can help in navigating new EU ETS landscape

DNV released a report on its Emissions Connect service and how the shipping industry could benefit from it in view of the expansion of EU ETS into shipping in January this year.

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Classification society DNV on Thursday (16 November) released a Maritime Impact report on its Emissions Connect and how the shipping industry could benefit from it in view of the expansion of EU ETS into shipping in January this year: 

The introduction of the EU’s Emissions Trading System (ETS) into shipping has brought significant changes, deeply impacting financial operations, day-to-day management and commercial transactions. Frontline, a global leader in tankers, explains how DNV’s Emissions Connect is helping them to navigate this complex environment.

Growing moves to decarbonize the maritime industry are being accompanied and advanced by its rapid digitalization. Following the expansion of the EU ETS into shipping in January 2024, the importance of accurate, reliable data has never been higher. DNV’s Emissions Connect offers a comprehensive solution that ensures accuracy and dependability in emissions verification, helping stakeholders manage costs effectively under the new regulatory framework.

The role of data in a changing maritime environment

“We’re in a whole new dimension now,” says Pål Lande, Digital Business Development Director at DNV. “A lot of work has been done in recent years, and new regulations have emerged, gradually raising the importance of emissions data. This started with the EU’s Monitoring, Reporting and Verification (MRV) regulation, which mandates emissions reporting on an annual basis.

“While MRV reporting will continue to be a requirement in itself, since January 2024 companies also have to manage the costs of carbon credits through the expansion of the EU’s Emissions Trading Scheme into shipping.”

Frontline’s digital journey

Although the implication of the EU ETS has changed the dynamics of emissions reporting, this has been on the horizon for some time. For some companies, this has been just another stage on their digitalization journey.

“We decided to embark on a journey about four years ago, together with DNV, to handle our digital transformation,” says Lars Pedersen, CTO at Frontline. “This started with data collection for ESG reporting and has since evolved into reporting for the EU’s MRV regulation and IMO’s Data Collection System.

“These were frontrunners to the EU ETS reporting and enabled a very smooth transition when this came into force in January 2024. This also means that we are well prepared for further regulations down the line, such as FuelEU Maritime.”

From annual to daily reporting

The implementation of the EU ETS in 2024 means that many shipowners now also need to report emissions data, and have it verified, as part of their day-to-day operations.

“Traditionally, decision-making in shipping has been informed by annual aggregated data, where deadlines were not urgent and the impacts from incorrectly inputted data were limited,” says Lande. “However, the introduction of the EU ETS has created a paradigm shift. While the ETS itself does not mandate daily reporting, the financial implications of emissions costs necessitate daily management of emissions data.

“Effective management of this data is now crucial, influencing everything from compliance and certification to financial accounting. It also profoundly affects how shipping companies interact with their commercial partners.”

Impact of EU ETS on commercial transactions

Under the EU ETS scheme, the shipowner is responsible for the reporting of data and the purchasing and surrendering of carbon credits, a change from previous regulations where the ship manager was responsible. Nonetheless, the complexity of commercial relationships means that clarity over emissions – and who will pay for them – is now a fundamental part of many transactions.

“Carbon costs and other liabilities need to be handled throughout the value chain. How this is done will depend on a range of factors, such as segment, geography and agreements between key stakeholders like owners, managers and charterers,” says Lande.

“For all of this to function correctly, it is vital that there is a high degree of trust in data related to emissions, and other things like ship performance. Failure to do this correctly could lead to a lot of disputes.”

The value of verification

Frontline operates one of the largest tanker fleets in the industry, dealing with commercial transactions across the value chain on a daily basis.

“Every voyage involves a commercial settlement between owners and charterers,” says Pedersen. “Before, this was limited to the hiring of the vessel, but now it also includes the settlement of emissions.”

For this to function correctly, it is crucial that the data is both accurate and reinforced by a stamp of approval from a trusted third party.

“Having accurate, trusted data, delivered in a timely and cost-efficient way, and verified by a recognized classification society like DNV, provides it with a level of trust and security. This generates confidence throughout our own operations and helps a lot in commercial settlements.”

Note: The full Maritime Impact by DNV can be found here

 

Photo credit: Frontline Management
Published: 21 June, 2024

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