FuelEU Maritime: staying abreast of the regulations

As the shipping industry faces an increase in decarbonisation regulations from the EU and the International Maritime Organization (IMO), BIMCO has introduced its latest carbon clause: FuelEU Maritime Clause for Time Charter Parties 2024

“This clause has been eagerly awaited by the industry. January is almost here, and the FuelEU Maritime (FEM) regulation is complex. Because of this, we have carried out several industry consultations during the drafting process to make sure that we arrived at a clause that works in practice,” said Stinne Taiger Ivø, deputy secretary general and director of contracts at BIMCO.

The organisations said that the focus of the subcommittee has been on developing a standard clause that is workable for most scenarios and commercial relationships. For longer period charter parties, the charterers will have the flexibility to decide on their compliance strategy whether that be utilising pooling, banking or borrowing. “The FEM regulation will significantly impact the shipping industry, even more so than the EU Emissions Trading System (ETS). The clause we have adopted today is the result of a collaborative process between owners, charterers, P&I and legal experts and other stakeholders,” according to Nicholas Fell, chair of BIMCO’s documentary committee.

The company responsible for compliance with FEM under the new BIMCO clause is the shipowner. In reality, however, it may be a third-party shipmanager who has agreed to take over all the duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention (ISM). BIMCO is therefore working on developing a clause for BIMCO’s ship management agreement, SHIPMAN.

Legal view on FuelEU Maritime

Antonia Panayides, partner in Reed Smith’s transportation industry group who serves on the BIMCO drafting committee for FuelEU Maritime, said the clause is important to keep abreast of, as the regulation expressly provides that parties should look to their contractual agreements to implement the ‘polluter pays’ principle.

“It is not only time charter contracts that need to take FEM into account, many shipping contracts will need to consider the impact of FEM such as contracts of affreightment, ship management agreements, bunker supply agreements and sale and purchase contracts,” said Panayides.

 She added that the clause for time charter parties introduces an approach whereby charterers pay a surcharge to owners if the vessel incurs a compliance deficit during the charter period. “The parties are to agree when such payment should be made. The surcharge represents the owners’ exposure to a FuelEU penalty, proportionate to the charter period.

“Where the charterer redelivers the vessel with a surplus, the parties can agree on a sum to be paid by owners to charterers for generating such surplus, where that surplus remains with the vessel and has value. Subject to the duration of the charter period, charterers may also instruct owners on pooling, borrowing and banking,” she explained.

The clause can be adapted by the parties to suit their commercial arrangements, accounting for charter duration and whether owners have already committed to pools etc. “Everyone affected by the regulation feels strongly about its impact, and the clause has been structured to help achieve compliance. By offering guidelines and accommodating flexibility, the clause aims to provide a foundation for parties to collaborate and meet the Regulation’s requirements,” said Panayides.

Significant impact

FEM has the potential to have the most significant impact of the suite of regulations introduced in the past two years. FEM’s aim is to increase the share of renewable and low-carbon fuels in the fuel mix of international maritime transport in the EU.

It sets well-to-wake greenhouse gas (GHG) emission intensity requirements on energy used on ships over 5,000 gross tonnes trading in the EU. For voyages travelling to/from the EU, half the energy usage is covered in the scope. For intra-EU and EEA voyages, the scope is 100 percent of the energy used.

FEM covers not only CO2 but also methane, with the intensity ratcheting up in five-year increments. For 2025, the EU has set a 2 percent reduction requirement from a defined baseline, tightening to an 80 percent reduction in 2050. FEM is not about how much fuel is burned, but rather about what is burned, while considering the greenhouse gas production footprint for any given fuel

“This means that traditional energy efficiency measures do not really help with compliance, though they do alleviate the economic impact of the actions necessary to attain compliance. At its core, the FEM is designed to shift maritime fuel consumption away from conventional fossil fuels towards increasingly green alternatives,” said Eirik Nyhus, DNV’s director – environment for maritime.

The rules are likely to have a significant impact on the shipping industry. Two consecutive years of non-compliance can lead to ships being banned from EU waters and, in certain cases, detention until compliance is achieved. However, in most cases, fines will need to be paid.

Almost all ships burning liquid fossil fuels will be non-compliant from day one. To get in line, operators have a few options, the first being the use of alternatives such as biofuel. However, according to DNV, even the relatively limited demand generated by the shipping industry’s 2 percent requirement is likely to go well beyond what is available, at least initially. Option two is to work within compliance balance framework by pooling with other vessels. This mechanism allows compliance units to be traded between ships through the existing EU Thetis system. Excess compliance units can be banked for future years, or borrowed from next year’s balance at a 10 percent interest rate.

Compliance can also be achieved by paying a penalty based on negative compliance balance. While this is designed to be dissuasive, it is a legitimate strategy and may be attractive to some, at least initially when the availability of alternative fuels is low and its cost is considerably higher than fossil fuels.

While FEM regulations come into effect on January 1, 2025, that the actual first default compliance date was August 31, 2024, and FEM monitoring plans were being submitted to verifiers at that time.