1. Background – The Regulation
From 1 January 2025, the new FuelEU Maritime Regulation (the “Regulation”) implemented by the European Commission sets requirements for vessels over 5,000 GT calling at ports in the EU. The Regulation seeks to strengthen climate commitments within the EU under the Paris Agreement forming part of the “Fit for 55” package, aiming to reduce greenhouse gas (“GHG”) intensity used on board vessels.
The Regulation establishes the framework for calculating a vessel’s compliance balance calculated on the basis of the vessel’s yearly average GHG intensity of energy used on board. GHG intensity threshold is based on a reference value which has been calculated to be 91.16gCO2e/MJ. Every five years the percentage of reduction of GHG intensity of fuels consumed by ships will increase, starting with 2% from 1st January, 2025 and ending with 80% from 1st January, 2050.
The Regulation introduces financial penalties for non-compliant ships, measured as the difference between the required and actual GHG intensity.
It further permits a compliance balance to be:
- Banked: that is, carrying over a deficit to the subsequent reporting period (1 January to 31 December);
- Borrowed: where an advance surplus is used from the following reporting period to reduce a deficit;
- Pooled: where the total of two or more vessels’ compliance balances is positive.
2. Parties responsible for compliance under the Regulation
The party primarily responsible for compliance with the Regulation is the entity responsible for the ISM management of the vessel. The ISM provider is also liable for any penalty for non-compliance. However, the ISM provider will likely require an indemnity from the owner, and therefore it is ultimately the owner who will be liable for the costs and risks of compliance with the Regulation..
While the EU ETS text anticipated national legislation would be enacted to make the charterer responsible for the costs of EU Allowances, the Regulation specifically refers to the need for contractual agreements to be able to shift such obligation (in the form of supplying compliant fuel and paying any penalties) to the charterer on the basis they are effectively the polluter. It is for this reason that BIMCO issued the BIMCO FuelEU Maritime Clause for Time Charter Parties 2024 which ultimately shifts financial responsibility for compliance with the Regulation onto the charterer, because it obliges the charterer either to bunker appropriate fuels to achieve compliance, or to pay any penalty for non-compliance.
3. The Clause and its implications
For use in time charters, the clause is comprehensive, spanning three pages and provides a starting framework for the functioning of the Regulation under a charterparty. The “polluter pays” principle is followed, providing charterers should carry the costs of compliance as the party procuring the fuel and deciding the vessel is to trade EU. Where there is a surplus, it also allows charterers to enjoy the benefit of over-compliance.
The clause contains a number of key provisions. Assureds should ensure that they carefully consider the implications of the clause and take note of some practical tips which may be useful to consider for the purposes of adapting standard wording, always keeping in mind how amendments may impact upon the overall contractual chain.
4. Reporting Upon Delivery
Owners’ obligation is to disclose to charterers information on prior performance relating to the vessel’s compliance balance for the previous two reporting periods. This is key to ensure charterers have visibility in evaluating their exposure to penalties which may arise in the future. A negative compliance balance will result in a 10% additional multiplier applied resulting in a larger penalty as a result of a prior charterers’ performance.
5. Monitoring Plan
Owners are responsible under the Regulation to monitor and have verified the GHG fuel intensity used by the vessel and to ensure the vessel’s monitoring plan is recorded in the FuelEU compliance database.
6. Charterer’s Choice of Fuel
Charterers are able to procure the supply of alternative fuels to meet compliance objectives. Assureds should consider how this will impact upon charterparty speed and performance warranties, fuel specification provisions as well as operationally and if corresponding contractual amendments will be required. When trading patterns, availability and the relevant charter so allow, Assureds may wish to consider alternative fuels.
7. Reporting and Payment of Surcharge
The vessels aggregate compliance balance is provided monthly or in voyage-based intervals alternatively, if no payment frequency is selected, at the same time as the hire payment or by 7 June each year. The clause requires the charterer to pay a monthly (or voyage-based) surcharge based on the calculated FuelEU penalty.
The clause also provides that the charterer may claim reimbursement for the repayment of the surcharge to the extent that the charterer is in surplus.
In a situation where there is a deficit, owners’ calculations must be ‘independently validated’ prior to being presented to charterers. Assureds may wish to make clear how such costs are allocated and to ensure once verified, that the decision is binding, including on a back-to-back basis in the contractual chain insofar as possible.
8. Suspension of performance
The clause entitles owners to suspend performance in the event of failure by charterers to pay the surcharge on time. This is an area for potential dispute, particularly where the surcharge is contested, and arguably is an extreme mechanism, however, owners may likely be reluctant to agree to do away with this contractual remedy.
9. Banking, Pooling and Borrowing
As set out in (1) above compliance in excess can either be banked to use in future to off-set against a deficit, pooled together with other vessels or borrowed for a future period of reporting.
Banking, pooling and borrowing are only dealt with during the reporting period of 1 January to 31 December in the clause (unamended). Assureds, particularly those under shorter charters may wish to tailor this provision to fit but should be cautious not to grant conflicting rights in respect of pooling/banking. The provisions on banking/pooling contain little detail as to how a compliance surplus will be dealt with and amendments for certainty may be required.
If charterers will not have the right to bank/pool, subclause (m) of the clause encourages the parties to agree a fixed rate benefit if there is a surplus at the end of the particular period. Owners may be reluctant to agree to a fixed and pre-agreed figure, where the actual cost is not yet known. However, parties could enter into an arrangement where the full credit is only passed to charterers once crystallised.
With borrowing, it should be noted that this will only apply where there are two consecutive reporting periods.
10. Conclusion
The clause is complex and subtly owner-friendly but serves as a useful foundation for further discussion and provides a framework under which the Regulation will be put into practice for time charterers. Whilst disputes will no doubt arise, the clause should not be seen as a “one size fits all” solution and Assureds should carefully consider its impact, as well as if amendments will be required in order to fit their needs and requirements.
