FuelEU Explainer: Practicalities of pooling

This is the sixth article of our series on FuelEU Maritime Regulation from the Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping (MMMCZCS). We will share the latest analysis, strategic insights, and practical tools for organizations to leverage FuelEU for achieving decarbonization goals.

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Explore previous articles and understand the basics of the regulation on our FuelEU page.

In case you haven’t seen it, the European Commission published Questions and Answers on FuelEU Maritime.

Join us for another FuelEU webinar on 18 September with EMSA and DG MOVE that will focus on how companies can go beyond FuelEU compliance to lead the way in maritime decarbonization.

In September we will kick off a new Countdown limited series dedicated to the IMO mid-term measures under consideration at MEPC.

As we have covered throughout the series, FuelEU pooling can create a business case for advanced alternative fuels and technologies that can decarbonize the industry. However, the benefits of pooling depend on the ability of vessels with surplus compliance (sellers) and those with deficits (buyers) to easily transact and form pooling arrangements. From discussions with industry players, we find that a lack of awareness and misunderstanding about the process prevent companies from incorporating pooling into strategies.

Here we outline what a workable pooling process might look like. To make this process work, a marketplace for buying and selling compliance is needed. We highlight four third-party platforms that have emerged to facilitate pooling arrangements.

Finally, when considering whether to pool, companies need to understand who can take credit for sailing green in their sustainability reports. Pooling is a trade of regulatory compliance and emissions reductions credits are outside the scope of the regulation. When selling emissions reductions to customers, the rules are defined in voluntary markets which typically include additionality requirements.

In Figure 1, we outline the steps companies can take when forming pools. This figure integrates regulatory requirements with our recommendations for how companies should plan and arrange pools.

Pooling between multiple companies will, in many cases, require support from third parties. Pooling platforms will facilitate arrangements between companies. Legal services will ensure that those responsible for fuel procurement are entitled to make pooling arrangements. BIMCO will play an important role through clauses under development that can be used to establish contracts between the various entities (reach out to BIMCO for the latest draft time charter party clauses and provide input).

Breakdown of the three compliance periods

• Pre-reporting period: Prior to the year in which the vessel is sailing to EU ports of call, the buyer(s) and seller(s) will evaluate if they expect the vessel to over- or under-achieve on compliance targets. Based on these assessments, companies can choose to buy or sell surplus in pooling arrangements. We expect negotiations to begin before sailing starts to provide assurance of compliance and compensation for expensive green fuels. However, decisions and negotiations will likely continue through the reporting period.
  
  
• Reporting period: Once agreements are in place, the buyer(s) and seller(s) will monitor and track the vessels sailing to and within EU ports during the calendar year. Depending on the operational structure of the vessel (owner operated vs. charterer), the parties may have agreed on different arrangements as to which (alternative) fuel is to be used onboard and how the parties expect to be able to utilize the pooling mechanism.
  
  
• Verification period: Following the reporting period, EU-accredited verifiers for each vessel will calculate the compliance balance according to FuelEU Annex IV(A). Verifiers will then record this figure in the FuelEU database by 31 March. Any differences between actual performance and the anticipated performance from the pre-reporting period will be accounted for and settled based on the negotiated agreements. To complete the pooling process, the companies in the pool must choose a single verifier who will allocate compliance balance surplus to vessels in the pool. The verifier must ensure that the following three rules are met before finalizing the pool:
  
  
  • the sum of compliance balances in the pool is positive,
  • ships that had a compliance deficit do not have a higher deficit, and
  • ships that had a compliance surplus do not have a deficit.
    
    

  If the rules are met and an agreement has been reached between all companies, the chosen verifier will record the pool’s composition and the allocation of compliance to each vessel in the FuelEU database by 30 April.

While some companies will negotiate pooling arrangements between themselves, often, companies will need a third-party platform to facilitate pools. Platforms will enable buyers and sellers to find each other and, in many cases, will provide a range of services to support pooling and compliance.

To get a sense of the maturity of the pooling platform market, we reached out to four companies who facilitate pools. We found that the complexity of the new regulation means that no platform resembles a mature marketplace, where buyers and sellers can easily transact at a market price. Instead, these platforms connect buyers and sellers within their network and provide services to help companies develop strategies and systems for pooling. As the platforms mature, we may see them develop into something closer to a liquid market for buying and selling FuelEU compliance.

• AHTI Climate, founded in 2023, is focused on optimizing emission compliance costs by leveraging digital technologies. The team see themselves as a full-service “pooling manager” going beyond software for pooling, and including strategy, contractual frameworks, risk mitigation, monitoring, regulatory fulfillment, and verification.
  
  
• BetterSea, founded in 2023, plans to streamline the process for users, allowing for banking, borrowing and pooling; and going beyond tailored “matchmaking” by ensuring management of liability and surplus ownership. The team is now working with industry partners to enable a seamless compliance process from start to finish.
  
  
• Prosmar, founded in 2013, provides business intelligence software for bulk commodity and freight trading companies. The team will launch a pooling platform in Q4 2024 for companies to make agreements in pre-reporting, reporting, or post-reporting periods. The platform will also address additionality concerns for those trading emissions reductions in voluntary markets. They aim to develop a spot market where companies can directly buy and sell pooling surplus.
  
  
• Zero44, founded in 2022, offers services to manage companies’ EU ETS, CII, and FuelEU compliance. The team aims to assist ship owners, managers, and operators in identifying optimal FuelEU compliance strategies by year-end. This involves monitoring commercial agreements and vessel performance data, as well as planning and forecasting for future compliance requirements. While they do not currently offer a pooling platform, Zero44 will provide the option to pool resources with other clients.
  
  

While we contacted as many platforms as we could find, we realize there are more platforms offering pooling services than are listed here. Our list should not be taken as an endorsement or recommendation of a particular platform.

In addition to the questions on the process, there is uncertainty in the market around how FuelEU will impact sustainability reporting. This is a factor for companies deciding whether to exceed targets and sell surplus. Here we break down the current understanding, noting that in some cases, guidance is under development.

Scope 1: Pooling and sustainability reporting

When a company sells surplus in a pool, what are they selling? According to FuelEU Regulation Art 21(2), a ship that overachieves on FuelEU reduction targets can establish a pool with other vessels and allocate “compliance balance to each individual ship”. Therefore, the company is trading FuelEU compliance, and not the emissions reduction attributes which are typically traded in voluntary markets. Emissions reduction attributes, such as Scope 1 and 3, are outside the scope of FuelEU Regulation and require further agreements between companies.

Is a seller in a pool able to claim the emissions reductions on sustainability reports? Reporting of emissions reductions is outside the scope of FuelEU. Companies based in the EU, subject to the Corporate Sustainability Reporting Directive (CSRD), report emissions according to the standards established under this directive. According to Appendix A of ESRS E1, the company is required to disclose all GHG emissions from “sources owned or controlled by the undertaking.” Therefore, the actual emissions of ships in operational control must be reported regardless of pooling or banking of FuelEU compliance.

Scope 3: Pooling and the voluntary market

What is the voluntary market? Cargo owners seeking to reduce the Scope 3 emissions of ocean transport may turn to a voluntary market to purchase reduction credits. This can take place as a service sold directly between shipping companies and their customers, as well as through third-party book and claim systems.

Can pooled emissions reductions be sold in a voluntary market? In voluntary markets there is an emphasis on ‘additionality’. This means that the emissions reductions which companies reached because they were mandated by regulation cannot be sold on the voluntary market. In the case of FuelEU, companies should not sell Scope 3 credits if the reduction is in line with compliance targets. Rules in voluntary markets on additionality are also likely to prevent companies from selling any emissions reductions which have been saved for future years (banking) or allocated to other ships (pooling). However, Scope 3 reductions from overcompliance which are not banked or pooled can be sold on the voluntary market, provided the company is able to demonstrate that the fuel was indeed additional.

For more on this topic, the Center is collaborating with Global Maritime Forum to develop guidelines on additionality and FuelEU for use in the voluntary market, and this initial report provides a useful start. The Center is also in the process of developing a Maritime Book and Claim system which will follow these guidelines.

Thank you to Louise Dobler from NORDEN and Thomas Edelgaard Christensen, Johan Casper Hennings, and Cecilie Vestergaard from Gorrissen Federspiel for reviewing the content of this newsletter.

• Two reports outline policy and technology pathways for maritime decarbonization and were featured on a Volts podcast
• If you are looking for some good news, this RMI deck shows exponential forces behind the rapid scaling of cleantech
• ClassNK releases 2nd Edition of “FAQs on the FuelEU Maritime”
• Gorrissen Federspiel releases newsletter on charter party clauses for FuelEU

• Preparing tanker vessels for conversion to green fuels
• Global availability of biogenic carbon dioxide and implications for maritime decarbonization
• Tackling methane slip for LNG-powered ships
• Series of six reports on biogas as a source of maritime fuels

The European Commission has a dedicated helpdesk for EU ETS and FuelEU: fitfor55@emsa.europa.eu

• Questions and Answers on FuelEU Maritime by the European Commission
• Webinar by DG MOVE and EMSA on FuelEU
• Text of the FuelEU Regulation
• The Renewable and Low-Carbon Fuels Value Chain Industrial Alliance (RLCF) is a useful member initiative where both the supply and demand sides of transport fuels can collaborate, learn, and support sustainable fuels in the EU