FuelEU Maritime comes into force 1 January 2025 – are your contracts ready?

This regulation applies to all vessels exceeding 5,000 GT that trade between EU and non-EU ports or within EU waters. The greenhouse gas intensity requirement will apply to 100% of voyages and port stays within the EU, and 50% of voyages to and from the EU. The regulation is not yet implemented into Norwegian law; however, it is expected that it will be implemented in the EEA as well. Unlike the EU ETS, the responsible party is the ISM Company.

A vessel must reduce the GHG intensity of the fuel consumed by the following percentages compared to the 2020 reference value:

• 2% by 2025
• 6% by 2030
• 14.5% by 2035
• 31% by 2040
• 62% by 2045
• 80% by 2050

The reference value has been set at 91.16 grams of CO₂ equivalent per MJ. This means that in order to be compliant in 2025 – 2030, the greenhouse gas intensity of the energy used on board must be less than 89.34 grams of CO₂ equivalent per MJ, and in 2030-2035 it must be less than 85.69 grams of CO₂ equivalent per MJ. Additionally, requirements for the use of onshore power supply or zero-emission technology will be introduced for passenger and container ships starting from 2030.

Failure to comply with the regulation may result in economic penalties, and ultimately expulsion from EU ports if the non-compliance continues for two reporting periods. The amount of the penalty will be calculated using the formula laid out in the regulation, which takes into consideration the difference between the required and achieved GHG intensity. The penalty is calculated based on EUR 2,400 per metric tonne of VLSFO equivalent emissions (41,000 MJ). Essentially, the higher the GHG emissions, the higher the penalty.

If the vessel is compliant with the GHG intensity requirements in the reporting period, or has paid the applicable penalty, the vessel will be considered compliant and will receive a Document of Compliance. This may then be used to demonstrate compliance when trading within the EU in the next reporting period. However, unlike the EU ETS which involves purchasing allowances for emitting greenhouse gases, the payment under the FuelEU Maritime regulation is essentially a penalty for non-compliance. Nevertheless, the vessel will be considered compliant with the FuelEU Maritime regulation as long as the penalty has been paid.

Banking, borrowing, and pooling options

If a vessel has a compliance surplus in a reporting period, that surplus can be ‘banked’ to the following reporting periods and may be used to achieve compliance later. A banked surplus does not expire.

Conversely, where a ship has a compliance deficit in a given reporting period, it can ‘borrow’ an advance compliance surplus of the corresponding amount from the subsequent future reporting period to meet its obligations. The borrowed surplus plus an additional 10% will be subtracted from the same ship's compliance balance for the subsequent reporting period, essentially entailing a 10% interest rate. The amount that can be borrowed from the advance surplus cannot exceed more than 2% of the current applicable limit multiplied by the ship’s energy consumption. Furthermore, a vessel is not entitled to borrow for more than two consecutive reporting periods.

The regulation permits pooling of compliance, which means that shipping companies could pool the balances of several ships together in order to avoid a compliance deficit. Essentially this means that the compliance surplus of one ship may therefore offset the compliance deficit of another.

The pooling of compliance for vessels owned or managed by different companies is permitted, provided that the ships in the pool are verified by the same verifier. The verifications must be made by independent and competent legal entities that are accredited by national accreditation bodies established pursuant to EU law.

This could provide opportunities for e.g. shipowners that have larger fleets with ships of different ages and propulsion methods, or who participate in shipping pools. However, such pooling agreements would require careful consideration and contractual drafting. The establishment of pools will have to registered in the FuelEU database.

We expect that "greener" vessels will be in high demand to join pools with "high emitting" vessels, and this may lead to business opportunities for the owners of such "greener" vessels. Issues that need to be taken into consideration before registering a pool include:

• Underperformance or downtime of the "greener" vessel
• The trading pattern of the "greener" vessel (EU or non-EU)
• The "high emitting" vessel emitting more or less than anticipated
• The trading pattern of the "high emitting" vessel (EU or non-EU)
• Payment model to the "greener" vessel
• Consequences if the pool is in a deficit
• Mechanisms and circumstances where the pool should come to an end, a vessel should exit or another vessel to be included
• Which verifier to use, and in which circumstances a verifier could be changed
• The possibility of banking a compliance surplus whilst participating in the pool

BIMCO is considering whether to develop a clause related to the pooling mechanism.

Management agreements

Unlike the EU ETS regulation, the responsible party pursuant to the FuelEU Maritime regulation is the DoC holder. For many ships, this entails that the technical manager, which has taken over responsibility for compliance with the ISM Code, would formally be the responsible party pursuant to the FuelEU Maritime regulation.

However, in line with normal ship management practices, managers will not want to commit their own funds to finance the penalty imposed by the EU for non-compliance with the FuelEU Maritime Regulation. Although arguably the owners would already be financially responsible to reimburse the managers for this cost pursuant to for example the SHIPMAN standard contract, we expect many managers will wish to include a specific clause addressing FuelEU Maritime in their contracts. BIMCO has announced that it is in the process of drafting a rider clause to SHIPMAN. In the meantime, some points which should be considered by managers and shipowners include:

• The clause should ensure that managers comply with their obligations under the regulation. The Managers should have submitted a monitoring plan for FuelEU Maritime by 31 August 2024 (or within two months for ships falling within the scope of the Regulation for the first time after 31 August 2024).
• The managers should comply with the annual reporting obligations, which require them to report emissions to the verifier by 31 January each year. The first report will be due on 31 January 2026. Timely submission of the report is required to ensure that the vessel receives a FuelEU Maritime Document of Compliance in due time.
• In case the vessel fails to comply with applicable requirements (either reporting requirements or being in a compliance deficit) there may be economic penalties or expulsion/detention orders. Therefore, the management agreement will need to deal with the allocation of responsibility in these situations. The economic penalties caused by the vessel being in a compliance deficit will be the owner's responsibility.
• However, situations where the vessel ends up in a compliance deficit due to e.g., poor maintenance or poor crew training leading to increased emissions may be an exception where the owners would not want to accept liability. Such circumstances should also be considered when negotiating these clauses.
• Termination of the management agreement in the middle of a verification period should be considered.

Time charterparties

As it is the charterer that will be responsible for selecting the fuel and determining the trading pattern of the vessel (within trading limits), owners and charterers will need to agree on a mechanism for allocating the financial burden and responsibility for compliance to the charterers.

Without such contractual regulations, the owners would likely become responsible either directly, if they are the ISM Company, or indirectly through an agreement with a technical manager as detailed above. BIMCO has now published a clause for use in time charterparties, which allocates the rights and responsibilities between the parties.

Charterers' main obligation

The BIMCO clause allocates the financial burden for non-compliance to charterers, which is natural considering that the charterer will be responsible for selecting the fuel and route for the vessel. The charterers will have the option to comply with FuelEU Maritime through the supply of compliant fuels, provided the fuels comply with the bunker specifications agreed in the charterparty. Parties may wish to renegotiate a fuel clause in the charterparty in light of this.

The owners will have to inform the charterers of the history of FuelEU Maritime compliance, in order for charterers to be able to plan for compliance and estimate the surcharge, if required. For example, if the previous charterer had borrowed compliance surplus from two reporting periods, this may prevent the next charterer from doing the same.

The clause does not consider a situation in which the vessel ends up in a compliance deficit for reasons the charterer is not responsible for, e.g., increased emissions due to poor maintenance or crew error resulting in increased emissions, and this may be something that the parties would want to consider.

Settlements of penalties

The clause provides a settlement mechanism which entails that the owners must provide verified emissions data, and then the charterer will transfer an estimated surcharge for non-compliance on a monthly or per voyage basis. To the extent the charterer subsequently improve the compliance balance later in the year, the charterer may request a reimbursement for any previously paid surcharge. Due to this back-and-forth mechanism, we expect some parties may agree to settle the surcharge on a less frequent basis, or at least agree an explicit right of set-off against the charterparty hire.

Longer charterparties

For charterparties that exceed one complete reporting period (i.e., more than a calendar year), charterers have the right to instruct the owners to bank or pool any compliance balance in accordance with FuelEU Maritime. For charterparties that exceed two consecutive reporting periods, the charterers may instruct the owners to borrow from the next reporting period.

We expect these provisions may need some tailoring to suit the specific needs of charterparties. For instance, it is expected that some owners may wish to retain the right to enter into pools for compliance within their own fleet, or that it is undesirable for the charterer to have a right of instruction in these matters. On the other hand, some parties may wish to grant charterers this right even though the charterparty is less than one reporting period. For shorter charterparties, the BIMCO clause also enables the parties to agree on a compensation mechanism to a charterer that is unable to bank or pool a surplus due to the duration of the charterparty.

If the charterparty exceeds two reporting periods and the vessel has a negative compliance balance for the last two consecutive complete reporting periods (or more) prior to redelivery, the Charterers shall pay liquidated damages to the owners to cover the multiplier of penalties that the owners will be subject to in the future due to the non-compliance for two consecutive reporting periods. There could be various methods to quantify those liquidated damages. These include assessing the fees required to enter a compliance pool for the following year, calculating the costs associated with bunkering using biofuels or other alternative fuels, or estimating the penalty for the vessel based on anticipated future trade within the EU.

The liquidated damages must be agreed between the parties, and it is expected that this may be a point subject to frequent negotiations as it is likely that many vessels will have a compliance deficit when trading on conventional fuels.

Sale and purchase of vessels

Buyers purchasing a vessel that has operated in the EU after 1 January 2025 should be aware of the possibility of becoming responsible for penalties that were incurred for emissions prior to the completion of the transfer of the vessel.

The new holder of the vessel’s DoC will assume responsibility for the vessel’s GHG intensity for the entire calendar year in which the sale occurs. This includes the obligation to pay any penalties incurred for excess GHG intensity during the seller’s period of responsibility.

If there is a change of responsible company pursuant to FuelEU Maritime in the middle of a reporting period, this would require the holder of the vessel’s Document of Compliance (DoC), to register the vessel’s GHG intensity of consumption for the period from January 1 until the date when the seller (or more accurately the previous DoC holder) relinquished operational responsibility for the ship.

This information must be verified and entered into the FuelEU Maritime database within 30 days following the completion of the sale.

For example, if a vessel is sold on 30 June 2025, the previous DoC holder must register the GHG intensity of the fuel consumed by 30 July 2025. When the new DoC holder submits the final report for 2025 by 31 January 2026, they will be liable to pay any penalties incurred by the seller by the 30 June 2026 payment deadline. This means that if the vessel was on track to incur a penalty before the sale, this will be considered in the final verification (unless of course the buyer has taken measures to reduce GHG intensity in the latter half of the year to avoid such penalties).

Therefore, it is crucial that sale and purchase agreements contain a mechanism accounting for any penalties that have been accrued prior to the sale, or a means for compensation to the buyer if the buyer incurs costs to avoid any penalties materialising, e.g. by purchasing more expensive, cleaner fuels in the latter half of the year.

Where the seller has borrowed compliance from a subsequent reporting period, this means that the buyer will have to compensate for the +10% "interest" on the borrowing. If the vessel has already incurred a penalty in the reporting period(s) prior to sale, any penalty incurred in the following reporting period will be +10% higher. The parties may wish to include a warranty relating to these issues, or alternatively reflect this in the purchase price.

If the vessel is in a compliance surplus at the time of the completion of the sale, this may also be something that the sellers would want to be reflected in the purchase price.

Please contact Thommessen if you would like our assistance in preparing your contracts for FuelEU Maritime, or have any other questions related to sustainability regulations and shipping.