The FuelEU Maritime Regulation introduces several compliance mechanisms to help companies meet their greenhouse gas (GHG) intensity targets. One of these mechanisms is borrowing, which allows ships to temporarily offset a compliance deficit by pulling a surplus from the following reporting period. Sounds like an easy way out? While borrowing provides short-term relief, it comes with strict limitations, risks, and long-term implications.
In this week’s newsletter, we explain how borrowing works, when it is allowed, and why companies must carefully assess its potential impact.
Understanding Borrowing Under FuelEU Maritime
Borrowing, as defined in Article 20(2) of the FuelEU Maritime Regulation, allows a ship to compensate for a compliance deficit by using an "Advance Compliance Surplus" from the following year.
On the basis of the calculations undertaken in accordance with Article 16(4), where the ship has, for the reporting period, a compliance deficit, the company may borrow an advance compliance surplus of the corresponding amount from the following reporting period. The advance compliance surplus shall be added to the ship’s compliance balance in the reporting period and the advance compliance surplus multiplied by 1,1 shall be subtracted from the same ship’s compliance balance in the following reporting period. The advance compliance surplus may not be borrowed: a) for an amount exceeding by more than 2 % the limit set out in Article 4(2), multiplied by the energy consumption of the ship calculated in accordance with Annex I; b) for two consecutive reporting periods.
However, borrowing is not an unlimited option—the regulation imposes strict constraints as per the above:
Borrowing is limited to a maximum of 2% exceeding the GHG intensity limit within the reporting period, multiplied by the energy consumption of the ship.
The borrowed surplus must be repaid in the following year with a 10% penalty.
A ship may not borrow for two consecutive reporting periods.
Borrowing is only possible if the Compliance Balance of the ship within the reporting period is negative but within the 2% threshold.
Ships that borrow in a given year are not allowed to participate in pooling during the same verification period.
One key element to note is that the GHG intensity target used for borrowing is based on the reporting year rather than the target for the following year. This means that even if the regulatory target tightens in the following year, the borrowed surplus is still calculated based on the previous year’s requirement.
Let’s assume a ship is borrowing from a 2030 compliance balance for the 2029 reporting period, the GHG intensity limit that will apply is the 2029 (2% reduction) rather than the 2030 (6% reduction).
The Risks of Borrowing Under FuelEU Maritime
While borrowing offers flexibility, it is not a free option and introduces several risks that companies must manage carefully.
Financial Risks and Compliance Liability
Borrowing shifts compliance obligations to the following year, which can create financial and operational risks. The 10% aggravation also means that ships will accumulate an increasing deficit, making future compliance more expensive and tricky.
Regulatory Restrictions and Strategic Limitations
Once a ship borrows, it is locked out of pooling for the same verification period. Pooling is then only an option for the following verification period.
Furthermore, a ship that borrows cannot borrow again in the following year. This could leave it in a difficult position if compliance balances do not improve, potentially forcing it to pay FuelEU penalties.
Implications for Long-Term Compliance Strategies
Borrowing should not be a default compliance option. It is best used as a last resort. Companies that rely too heavily on borrowing risk losing flexibility in the next year, as they will have fewer compliance mechanisms available to them.
Comparing Borrowing to Other Compliance Mechanisms
Borrowing is just one of the compliance mechanisms under FuelEU Maritime. How does it compare to the other options?
Borrowing is useful if a short-term compliance gap must be filled, but long-term strategies should consider pooling, alternative fuels, or other applicable technologies.
Borrowing in Charter Agreements and Compliance Contracts
Because borrowing impacts compliance liabilities across multiple years, it is crucial that charter agreements clearly define who has the right to decide on borrowing. This is especially important in time charters.
Short-Term Time Charters (<1 Year)
The ISM company retains all compliance responsibility and the ship owner must decide whether to borrow.
Long-Term Time Charters (≥1 Year)
The charterer gains decision-making power over compliance strategies, including borrowing.
Charterers must ensure they do not inherit a borrowing restriction from a previous period.
In all cases, contracts should explicitly define who takes responsibility for repaying borrowed surplus and handling the associated aggravation. Further to charter contracts, shipping companies must also consider potential borrowing during a previous period when engaging in S&P.
Conclusion: Borrowing as a Strategic Compliance Tool
Borrowing under FuelEU Maritime is a valuable but risky compliance tool. It should be predominately used to fill gaps and only when no better alternative is available. In many cases, pooling or using alternative fuels may provide better outcomes than borrowing. Even in case of unexpected events, data changes, and non-foreseen compliance gaps, pooling following an end-to-end streamlined and fast process is a better alternative and saves the 10% aggravation.
BetterSea’s FuelEU Maritime Compliance Platform with integrated marketplace provides you with exactly that, a fast, streamlined, end-to-end process that can even help you cover unexpected data changes or other events in a few clicks without paying for aggravation. Book a demo below!
Stay tuned for more insights on navigating the FuelEU compliance mechanisms in our upcoming newsletters. If you have any questions or need further guidance on pooling, feel free to reach out!
Best regards,
The BetterSea Team
Contact Us: info@bettersea.tech
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