FuelEU

FuelEU applies to commercial vessels (passenger and cargo) over 5,000 gross tonnes traveling to European Economic Area (EEA) ports consisting of EU member states, Iceland, and Norway. It will apply to 100% of the intra EEA traffic (including consumption at berth), and 50% of traffic from an EEA port to a third country. It complements the existing EU Emissions Trading System (ETS) which has been extended to maritime transport in 2024. While the ETS focuses on reducing total emissions and therefore drives energy saving, FuelEU addresses the type and GHG intensity of fuels.

The responsibility for compliance under FuelEU and ETS lies with the ‘shipping company’. However, an implementing regulation of ETS clarified that the responsibility can stay with the shipowner rather than the Document of Compliance (DoC) holder. This change had no effect on FuelEU; therefore, the responsibility for FuelEU compliance is with the DoC holder.

While FuelEU obligates reduction of yearly GHG intensity, it takes a technology-neutral approach. To meet FuelEU targets, vessels have a suite of compliance pathways to choose from, each contributing to the reduction GHG intensity:

1. Alternative e-Fuels: Use of renewable fuels of non-biological origin (RFNBO) such as e-methanol and e-ammonia can reduce the intensity of fuel well below the targets. If they meet certain requirements, RFNBO qualify for a multiplier incentive through 2033 which effectively halves their GHG intensity. These fuels come with a cost premium and in many cases require a new vessel or retrofit.
   
2. Biofuels: Conventionally fueled vessels have the ability to blend drop-in biofuels such as biodiesel (e.g., FAME) and biomethane with no or minimal modifications to the vessel.
   
3. Wind-Assisted Propulsion (WAP): Special consideration is given to ships equipped with WAP which are eligible for a Wind Reward Factor that reduces the intensity of energy onboard.
   
4. Onshore Power Supply (OPS): Utilizing shore-based electrical power or an equivalent zero-emission technology during port stays is required for container and passenger vessels from 2030. OPS energy counts as zero emissions energy and can be used by any vessel as part of compliance with the intensity targets.
   
5. Paying the Penalty: Vessels unable to adopt the above strategies may resort to paying a penalty to get their Documents of Compliance. This option is designed to be a disincentive for inaction and is therefore typically more expensive than other options.

Flexibility measures are designed to assist those that either underachieve or overachieve on the emission reduction targets.

1. Borrowing: Allows companies to use a portion of anticipated surpluses from future years to comply with current year targets. A 10% borrowing penalty is applied to the compliance balance and added to the following period.
   
2. Banking: Enables companies with surplus reductions to save them for future compliance needs (with no expiration).
   
3. Pooling: Vessels that overachieve on the intensity targets can generate value by monetizing excess compliance, known as ‘surplus’, with other vessels. If companies are able to find buyers for the surplus, pooling can become another source of revenue that potentially closes the cost gap between green and fossil fuels.

Companies will need to submit a monitoring plan in August of 2024 and then will be responsible for working with an accredited EU verifier to submit an emissions balance in compliance with FuelEU intensity requirements (Figure 2).

FuelEU is the world’s first regional GHG intensity regulation of maritime fuels. It provides a comprehensive structure for reducing maritime GHG emissions through new sources of energy. By understanding mechanisms like pooling, the maritime industry can leverage the policy to enable investments in alternative fuel. Furthermore, as the IMO develops mid-term measures, preparing for FuelEU can give companies an advantage in an evolving policy landscape.