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Impact of FuelEU rules to ‘ eclipse ’ EU ETS : Lloyd ’ s Register

By Greg Knowler

The FuelEU regulation that came into effect on Jan . 1 is a “ major market intervention ” by the European Union that will determine the long-term profitability and sustainable operation of vessels in European waters , according to Lloyd ’ s Register ( LR ).

While compliance with the EU Emissions Trading System ( ETS ) carbon tax represents an immediate cost for shipping companies , the financial implications of FuelEU for shipowners that choose to continue using fossil fuels may be gradual but would ultimately be significantly higher .

“ Today , many owners and managers are concerned with the EU Emissions Trading System designed to reduce emissions produced by shipping ,” Ryan Bax , lead business advisory consultant at Lloyd ’ s Register , noted in a recent report from the classification society .

“ However , LR projections show that the impact of FuelEU will eclipse that of the ETS around 2035 and dwarf it beyond that ,” Bax added . “ Business as usual is , therefore , no longer an option and progressive decisions must be made to deal with this challenge .”

FuelEU requires shipping companies to increase their uptake of renewable and low-carbon fuels by setting limits on the yearly average greenhouse gas ( GHG ) intensity of

FuelEU requires an 80 % reduction in average GHG intensity for ships calling EU ports by 2050 . Shutterstock . com the energy that vessels use when calling at European ports . The limits start this year with a 2 % reduction and require an 80 % reduction by 2050 .

The ETS tax of 40 % on carbon emissions in 2024 increases to 70 % this year . To recover and pass on those costs to cargo owners , carriers have announced plans to simplify the process by merging compliance with the ETS and FuelEU regulations into one fuel surcharge .

Bax warned that carriers adopting a “ wait-and-see ” approach would find themselves subject to penalties and in need of buying surplus fuels to comply with the rule , as well as facing reduced income from customers that want to reduce their indirect Scope 3 value chain emissions .

The Lloyd ’ s report estimated that , for a fleet of five ships running the same marine fossil fuel mix as today , and each using 5,000 metric tons of fuel per year between 2030 and 2034 , the shipowner would pay penalties of € 5.6 million ($ 5.8 million ) in 2030 , rising to € 7.2 million in 2034 .

Significant revenue driver

Bax said that increasing the use of lower-emission fuels comes at a cost , but could also generate returns that “ can be significant .”

“ The impact of FuelEU will eclipse that of the ETS around 2035 and dwarf it beyond that .”

“ If a ton of CO2 equivalent emissions could be worth at least € 500 on the open market , and you can save 7,500 tons of CO2 equivalent emissions a year , you see how this can quickly turn into a significant driver of revenue ,” he noted .

While shipping companies wrestle with the cost implications of FuelEU compliance , the commercial and contractual implications of the regulations add another highly complex element , according to Eirik Nyhus , director of environment for maritime at classification society DNV .

“ Dealing with responsibilities , liabilities and assets in this ever-changing interplay between managers , owners and charterers is going to require new contract structures , and that needs to happen quickly ,” Nyhus said in a recent podcast .

“ This has commercial and contractual implications , as charter parties rarely line up with the annual compliance cycle , meaning that contracts need to deal with how incurred liabilities and assets are handled as charters start and end during the reporting year ,” he added .

Data will also play a crucial role in managing the regulation , Nyhus noted .

“ If the managers , owners and charterers don ’ t have a common agreement on what the real data underpinning contract settlements is , there will be real difficulties and potential litigation ,” he said .

email : greg . knowler @ spglobal . com

34 Journal of Commerce | February 3 , 2025 www . joc . com