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

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.
This week, we will be looking at how a ship can achieve compliance and obtain the important FuelEU document of compliance as well as the consequences of not complying.

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.