On May 26 this year, we published our very first Monday Newsletter covering FuelEU Maritime Banking, one of the regulation's compliance mechanisms. The regulation is, in fact, clear when it comes to those. Unfortunately, a recent webinar, in which the European Maritime Safety Agency (EMSA) presented, put in question the clarity of the regulation among maritime stakeholders when it comes to FuelEU Maritime compliance mechanisms. Let's investigate what has been presented by EMSA and how it may, or may not, fit with the regulation!
A Recap: What are the Compliance Mechanisms under FuelEU Maritime?
Under FuelEU Maritime, every vessel must meet a greenhouse gas (GHG) intensity target to comply. The deviation from this target is calculated as the so-called compliance balance. If the compliance balance of a ship is negative, it is non-compliant and has a deficit. Vice versa, if the compliance balance is positive, the ship is over-compliant and has a surplus. The FuelEU Maritime regulation allows for a number of different compliance mechanisms to achieve compliance with the regulation. Those include banking, borrowing, and pooling:
Banking in the context of FuelEU compliance refers to the process by which a vessel that has achieved a compliance surplus (i.e., its greenhouse gas (GHG) intensity performance is better than required) can carry over this surplus to offset future deficits. This mechanism allows vessels to store their compliance surplus for future use, effectively smoothing out the compliance process over multiple years.
Borrowing in the context of FuelEU compliance refers to the process by which a vessel that has achieved a compliance deficit (i.e., its greenhouse gas (GHG) intensity performance is worse than required) can take from a future surplus to offset present deficits. This mechanism allows vessels to borrow their future compliance surplus for present use but comes at an interest rate.
Pooling in the context of FuelEU compliance refers to the process by which a vessel that has achieved a compliance surplus (i.e., its greenhouse gas (GHG) intensity performance is better than required) can create a group (pool) with deficit ships to offset their non-compliance. This mechanism allows a group of compliant and non-compliant vessels to achieve compliance on a group level.
The Webinar: Does EMSA's presentation contradict the regulatory definition of the compliance mechanisms?
Two main differences between the webinar and the regulation can be identified. The below text will investigate those further, starting with pooling, and afterward focusing on banking.
Pooling under FuelEU Maritime vs. EMSA's interpretation in the webinar
The FuelEU Maritime regulation defines the pooling mechanism in Article 21. The general definition according to Article 21(1) is:
"The compliance balances for GHG intensity referred to in Article 4(2) and, if applicable, the RFNBO subtarget as referred to in Article 5(3) of two or more ships, as calculated in accordance with Article 16(4), may be pooled for the purposes of complying with the requirements set out in Article 4 and, if applicable, Article 5(3). A ship’s compliance balance may not be included in more than one pool in the same reporting period."
Important is the validity of a pool, which according to Article 21(4) can only be created when its sum of compliance balances is positive.
"A pool is valid only if the total pooled compliance is positive, if ships which had a compliance deficit as calculated in accordance with Article 16(4) do not have a higher compliance deficit after the allocation of the pooled compliance, and if ships which had a compliance surplus as calculated in accordance with Article 16(4) do not have a compliance deficit after the allocation of the pooled compliance."
Interestingly the answer to Question 21.2 of the official FAQ (as of October 21) is less stringent and, in fact, already contradicts Article 21(4). It leaves out the part regarding the positive compliance balance, and only states:
"The validity of a pool is dependent on ensuring that a ship with a compliance deficit does not end up with a higher deficit."
At the bespoken webinar by EMSA on September 18, an equally contradicting definition of pooling was presented, which is not in line with Article 21(4). As per the below Image 1, a created pool can still endure penalties which would only be possible if the created pool would have a negative compliance balance.
This not only contradicts the regulation, but also raises an additional problem. If pools with negative compliance balances were created to reduce the compliance penalty of the deficit ships, how would the compliance penalty be allocated between the participants?
Ignorance of Rule 1 under Article 21(4): The only possible option to create a negative compliance pool
The only option to create a pool with a negative compliance balance is by ignoring the first rule under Article 21(4), which states a pool is only valid if its compliance is positive, and by applying the remaining two rules, namely:
"if ships which had a compliance deficit as calculated in accordance with Article 16(4) do not have a higher compliance deficit after the allocation of the pooled compliance"
"if ships which had a compliance surplus as calculated in accordance with Article 16(4) do not have a compliance deficit after the allocation of the pooled compliance."
Example case: Ship A: +20 CB / Ship B, C, D, E, and F: -5 CB
When ignoring rule 1, a pool could be created consisting of all sample ships, resulting a negative pool compliance of -5 CB. In accordance with Article 21(2), the companies would then allocate the pool compliance to each individual ships in the FuelEU Database, following rule 2 and 3.
Example allocation: Ship A: 0 CB / Ship B, C, D, E, and F: -1 CB / Pool: -5 CB
Here, the ship (A) with the surplus would not have a deficit after pooling and the ships with the deficit (B, C, D, E, and F) would not have a higher deficit (before: -5 CB / after: -1 CB).
In this case, a pool with a negative compliance balance would have been created that would still result in penalties but follows the rules 2 and 3 of Article 21(4), while totally ignoring rule 1. While this might be an explanation for EMSA's interpretation, it is highly questionable especially when considering that within Article 21(4), the rules are connected with an 'and if', which leaves no room for only adhering to a subset of the three defined rules for pool validity.
Banking under FuelEU Maritime vs. EMSA's interpretation in the webinar
In our newsletter about FuelEU Maritime Banking, it was stated that
"(...) it's essential to note that banking is vessel-specific; the surplus generated by one vessel can only be used by that same vessel in subsequent reporting periods."
The same is pointed out in Article 20(1) of the FuelEU Maritime Regulation (EU) 2023/1805 on the EUR-Lex website:
"On the basis of the calculations undertaken in accordance with Article 16(4), where the ship has, for the reporting period, a compliance surplus on its GHG intensity as referred to in Article 4(2) or, if applicable, on the RFNBO subtarget as referred to in Article 5(3), the company may bank it to the same ship’s compliance balance for the following reporting period."
It is further underlined by the answer to Question 20.1 in the official FAQ (as of October 21):
"A compliance unit is only generated for banking purposes, from the effective compliance balance generated by a specific ship. Once banked in the ship-specific FuelEU account, the compliance units do not expire."
At the bespoken webinar by EMSA on September 18, a different definition of banking was presented.
The question that is raised by the above Image 2 is what banking after pooling actually means. The regulation is again clear by mentioning under Article 21(6) that
If the total pool compliance balance results in a compliance surplus for an individual ship, Article 20(1) shall apply.
However, the slide gives the impression that the compliance surplus of a pool, not of a single ship, can be banked. In contradiction with the regulatory text, this can also result in several problems:
Problem 1: More than one surplus ship in the pool - How can you bank the resulting pool surplus to only one ship? The allocation of the sum of surplus fed into the pool is not defined and therefore surplus ownership and its right to bank for a specific ship is unclear.
Problem 2: Banking compliance surplus on a pool level - If Problem 1 results in banking surplus for a pool instead of a ship, this pool must be formed in the same manner in the subsequent compliance year to ensure that all pool participants profit from the banked surplus.
Further to the above, the fact that the slide mentions 'Banking' as a follow-on of pooling a deficit ship is also contradicting the regulation. It gives the impression that a ship with a deficit that joins an over-compliant pool can take up the remaining surplus and bank it for the subsequent compliance year. This, again, is not in any way following the regulatory text and also relates to the above-mentioned Problem 2.
Conclusion
Although the regulation provides clarity on the compliance mechanisms under FuelEU Maritime, EMSA's interpretation continues to raise questions. Unfortunately, this confusion adds to the complexities of implementing FuelEU Maritime, which without a doubt is already challenging.
Stay tuned for more insights on the FuelEU Maritime regulation and its complexities in our upcoming newsletters. If you have any questions or need further guidance on how to navigate FuelEU Maritime, feel free to reach out!
Best regards,
The BetterSea Team
Contact Us: info@bettersea.tech
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