Authored by Antonia Panayides and Alexander Drury.

Welcome to the final FuelEU Friday post in our series examining the Regulation. We have already looked at what the Regulation is and who has to comply with it, how it seeks to reduce emissions and the different routes to compliance. Now we turn to some of the expected consequences of the Regulation.

Alternative fuels

The Regulation incentivises companies to burn the cleanest fuels, Renewable Fuels of Non-Biological Origin. These are generally more expensive and/or less available than the alternatives. As the allowed emissions decrease over the coming years, these greener fuels will likely become a key tool in achieving compliance, but in the short term, many are likely to use blended fuels, biofuels or other transitional fuels to bridge growing compliance gaps.

In the short term, fuel management will become ever more important. Companies may seek to ensure that traditional fuels are burnt outside the EEA and that they have sufficient compliant fuel for use within the EEA. Aligning bunkering routes with this model will also be key. 

Existing vessels may increasingly be retrofitted with dual-fuel engines capable of operating on both traditional fuels and alternative options like LNG or methanol.

Contracts

Charterparties, contracts of affreightment, ship management agreements, bunker supply agreements and other relevant shipping agreements involving EEA trade that will be in play from 2025 onwards, should be reviewed and revised to address the new Regulation. 

If the Regulation is not covered in these agreements, then the burden of achieving compliance will fall on the vessel’s ‘company’ under the Regulation. Given the numerous avenues to achieve compliance, and with options such as borrowing impacting the following year’s allowance, companies will need to decide how they intend to comply with the Regulation and ensure this is reflected contractually. Further, if a company is considering pooling, those arrangements should be put in place as soon as possible. 

Global regulation

The EU has introduced a suite of decarbonisation initiatives focused on reducing emissions from the shipping sector, but it is not alone in seeking to reduce emissions. The IMO is also looking at reducing emissions through schemes such as the Carbon Intensity Indicator. While the EU and IMO initiatives work towards a similar goal, they take different approaches. As these schemes mature, we may see more alignment between the competing systems.

That brings an end to our FuelEU Friday series. Please get in touch with Antonia if you have any further questions