FEATURED: Which Shipping Fuels are Fit For 55?

The impact of fuel choices on allowance exposure under the EU Emissions Trading System and penalties under FuelEU Maritime requires careful consideration.

The European Union's 'Fit for 55' regulatory package, aiming to reduce the region's greenhouse gas emissions by at least 55% by 2030, contains two elements that will dramatically reshape how shipping manages its emissions. Shipping's inclusion in the EU Emissions Trading System (ETS) and FuelEU Maritime will affect how vessels are built, equipped, fuelled and deployed, as well adding demanding areas of expertise that will be new for many maritime operators, such as monitoring emissions beyond CO2, strategic vessel pooling and even energy trading.

Fuel choices are one of the most direct means that operators can use to manage their exposure to both the EU ETS and FuelEU. But understanding the impact of various fuel options is complicated by differences in the two regimes, as well as by incomplete information on how different fuel types will ultimately be accounted for. In a new report and webinar, 'Shipping and Fit for 55', Lloyd's Register delivered insights into how fuel selection – and several other operational and business measures – could help operators to manage compliance.

In principle, the regulations are straightforward. From 2024, emissions from vessels using European Economic Area (EEA) ports will be included in the EU ETS, requiring the responsible shipping companies to purchase allowances each year to cover emissions from those voyages. From 2025, under the FuelEU Maritime regulation, those vessels will also need to implement stepped reductions in the greenhouse gas intensity of energy used onboard or pay penalties for the excess.

The devilish details

In practice, the regulations are far less straightforward. The impact of various fuels on each regulation is a key example. One difference between EU ETS and FuelEU is that while the former considers tank-to-wake (TtW) emissions, the latter accounts for well-to-wake (WtW) energy intensity. Put simply, what comes out of your funnel is the crucial factor for EU ETS, while the lifecycle analysis of the fuel in your tank is the key for FuelEU Maritime.

A significant area of complexity is in the handling of biofuels. To acknowledge the potential of biofuels in reducing emissions across the value chain, emissions resulting from the combustion of sustainable biomass compliant with the sustainability criteria established by the Renewable Energy Directive have a CO2 emission factor of zero under the ETS.

Under FuelEU Maritime, however, the same biofuels will not have a zero rating, as their entire WtW greenhouse gas intensity is considered, including emissions produced during production, supply and use. This is measured in grammes of CO2 equivalent per megajoule and ranges between 30-40 – around a 75% reduction compared to conventional fuel oil - depending on the source of the different biofuels available on the market.

There may also be differences in how RFNBOs and RCFs are treated under the two regulations – as yet the implementing legislation determining the accounting of these fuel types under the EU ETS has not been published. However the European Commission has committed to giving equal treatment to both RFNBOs and biofuels in the ETS. Under FuelEU Maritime, between 1 January 2025 and 31 December 2034 use of RFNBOs will be incentivised with a reward factor of 2x in the calculation of the GHG intensity of energy used on board.

Another consideration evident in the FuelEU Maritime treatment of RFNBOs is that early adopters will gain more. The 2x reward ends in 2034, to be replaced by a sub-target for RFNBO use if they account for less than 1% of the overall fuel mix in 2031 and less than 2% in 2033, while the FuelEU surpluses that can be gained from RFNBOs decreases as greater reductions in GHG intensity are demanded. So any fuel choice needs to consider the specific treatment under both regimes at the time the fuel is going to be used.

Energy efficiency pays

RFNBOs are expected to remain both scarce and costly for several years. While penalties under FuelEU remain relatively low, it is anticipated that many operators will seek to reduce exposure through operational measures and the installation of energy saving devices. However, for operators with the ability to invest in new fuel technologies and a supply of low-carbon fuels, early over-compliance could deliver a clear competitive advantage.

Alongside energy saving devices, there is another technology that offers benefits under both EU ETS and FuelEU Maritime. Users of wind-assisted propulsion gain the apparent benefit of reduced fuel consumption and the impact that will have on ETS allowances required and their FuelEU penalty calculation. And a further reward is supplied under FuelEU Maritime, which offers up to a 5% reduction on the GHG intensity calculation of energy used onboard for those vessels where wind assisted propulsion accounts for 15% or more of the energy used for propulsion.

The examples above highlight the complexity facing maritime operators in choosing fuels and understanding their impact on EU ETS and FuelEU exposure. And fuel choice is just one of the operational decisions companies can make to secure cost-effective compliance. Other factors, including fleet utilisation, routing and emissions trading strategy, will also play a role. Taken together, the new regimes

To learn more about managing compliance and optimising operations under EU's new emissions and energy regimes, download LR's 'Shipping and Fit for 55' report.