FuelEU Maritime: an imperfect storm?

Another year, another environmental regulation. This year heralded the coming into force of FuelEU Maritime – and yet another ambitious push forward for shipping to decarbonise.

At its core, FuelEU Maritime introduces stringent greenhouse gas (GHG) intensity requirements that apply to vessels operating in European waters. The regulation covers 100% of energy used on intra-EU and EEA voyages and 50% on voyages to and from EU and EEA ports, establishing a comprehensive framework for emissions reduction when sailing.

Significantly, 100% of the energy used when ships are at berth in EU and EEA ports is also covered by the regulation – a fact that is often overlooked in commentary but that will be significant in driving decarbonisation in the port environment. 

Shipping companies operating in the EU and EEA must now report energy used on board their vessels, as well as their emissions, through the European Maritime Safety Agency’s THETIS-MRV system, which is already used for EU ETS compliance. 

The baseline for FuelEU Maritime’s measurement is set against the global fleet's average well-to-wake GHG intensity in 2020, which was an extremely specific 91.16 gCO2e/MJ.

From this foundation, the regulation strives to achieve significant reductions in GHG intensity: starting with a 2% decrease in 2025, advancing to 6% by 2030, and ultimately targeting an ambitious 80% reduction by 2050. In theory, the EU’s well-to-wake approach will cover emissions throughout the fuel lifecycle, from extraction and production to onboard consumption.

For shipowners and operators, FuelEU Maritime introduces several innovative potential compliance pathways. A notable feature is the new pooling mechanism, which allows companies to achieve compliance at a group or fleet level. This system enables strategic collaboration, where companies can team up with newbuilds or other vessels to collectively meet requirements. The flexibility extends to trading compliance surpluses, particularly benefiting companies that exceed their targets through alternative fuel usage.

Pooling has been embraced by the EU as a compliance strategy because of an acceptance that it will be easier for more modern vessels to comply, and that emissions from older vessels are more challenging to prevent.

FuelEU Maritime also provides a pathway for the rolling over of surplus compliance from one year to the next for the same ship. Arguably more interestingly for shipowners and operators, the reverse is also true; there is limited ability outlined in the regulation for shipping companies to borrow from predicted surpluses when a vessel is expected to see an improvement in its GHG intensity in the next year. However, ships using this mechanism (perhaps to account for planned clean technology installations or future fuel conversions) cannot also be involved in a FuelEU Maritime pool.

So, the regulation is flexible and reasonably pragmatic, which is a step forward. In theory, it will have the effect that the EU has intended: legal certainty for shipping companies and fuel producers as they struggle to break the supply/demand trap that has settled like an ugly mist over our combined decarbonisation efforts.

Indeed, FuelEU Maritime includes a specific, if complicated, incentivisation strategy for what the EU calls “renewable fuels of non-biological origin” – or ‘RFNBO’. To briefly play translator, shipping calls these green or synthetic fuels. But even what was laid down in the EU’s own statute book admits the challenge here: "the production costs of RFNBO are currently much higher than the market price of conventional fuel and are expected to retain such higher costs in the mid-term."

To address this barrier, the EU proposes a two-pronged approach: first, a multiplier system running until 2033 that effectively doubles the counted value of RFNBO energy within FuelEU Maritime, and second, a conditional target that would come into effect if adoption remains low. 

Specifically, the regulation states that "a 2% RFNBO sub-target should apply as of 2034" if market penetration fails to reach 1% by 2031. This might seem like a staggeringly unambitious number – is there a zero missing? – but instead the EU’s RFNBO incentives reflect the reality that shipping has to overcome: that it is at the back of the queue for future fuels and faces a crunch in supply through the next decade.

Experts are clear that under most assumptions this isn’t much of an incentive, and FuelEU Maritime is unlikely to encourage much demand for RFNBOs beyond what the GHG intensity reduction targets will already drive. This could change if biofuels become cheaper or if future fuel engines are slow to develop; the sub-target could then nudge demand in the right direction.

What, then, should we make of FuelEU Maritime? Let’s be clear: there is no doubt that this is a flagship policy that requires sophisticated compliance approaches.

However, it is an inescapable fact that FuelEU Maritime’s ambitions are not in lockstep with the Paris Agreement. The unspoken expectation shared widely within the industry is that the regulation will not drive much uptake of future fuels until the 2040s. There are concerns that it may be cheaper to ‘pay-to-comply’ rather than make the transition.

But it’s still a ‘proper’ environmental regulation aimed at shipping. The tightrope of policymaking pragmatism or perfectionism is always challenging to walk across. Yet walk the EU has.

Eyes must now turn to the International Maritime Organisation and whatever it manages to concoct over the next 18 months. While my preferred approach would be that shipping steps up and uses its international regulator to set the pace of the transition, it has been clear for half a decade or more that others are happy to dictate the rate of change.

The EU has now properly fired the starting gun. We don’t know the course we’re following, where the hurdles will be, or where the twists and turns will take us, but make no mistake: we are running.