Philippos Ioulianou, Managing Director, EmissionLink

FuelEU Maritime has succeeded in creating a compliance market. The question now is whether that market is becoming too successful for its own good.

As the first reporting year closed at the end of June, compliance surplus prices have fallen faster than many anticipated, making it increasingly affordable for shipowners to buy their way into compliance rather than invest in lower-carbon fuels. That may be welcome news for operators facing rising regulatory costs, but it raises an uncomfortable question for policymakers. If compliance becomes too cheap, will FuelEU still deliver the fuel transition it was designed to achieve?

FuelEU has done more than introduce another environmental regulation. It has created a new commercial market for compliance, one that has developed at remarkable speed. That flexibility is useful for shipowners with different trading patterns, fuel strategies and levels of EU exposure. But if the market consistently makes compliance cheaper than investing in low-carbon fuels, does the regulation still encourage genuine decarbonisation?

Most shipowners did not ignore FuelEU. There was uncertainty and confusion, but most moved towards pooling as their favourite option, alternative fuels (i.e biofuel) also were used, or a combination of both rather than accepting a penalty. Some owners with limited EU exposure assumed the regulation would have little impact on them. Others waited because they didn’t believe the pooling market would mature quickly enough.

FuelEU exposure is not only a penalty calculation. It is a commercial, operational and contractual risk. Owners who leave decisions until the end of the cycle can face price volatility, fewer pooling options, unclear charterparty responsibility and rushed documentation.

The closing of the first FuelEU compliance cycle saw activity intensified and surplus prices strengthened as companies looked to minimise exposure. Once the main pooling window had passed, however, long positions, banked surplus and stronger than expected generation of compliance units affected the price.

This suggests there may have been more surplus in the market than expected. Surplus prices discussed around €175 to €185 per unit during the busy pre-deadline period moved down towards €120 to €130 after the pooling window closed.

For shipowners, this looks attractive. Lower surplus prices reduce the immediate cost of compliance and an owner who expected to pay a high price for pooling may now find a much cheaper route. In some cases, buying surplus may sit much closer to the cost of generating it through biofuel use. That, however, is also the problem.

FuelEU was designed to encourage the uptake of renewable and low-carbon fuels. If surplus becomes abundant and cheap, some operators may decide not to burn biofuel and instead buy cheaper compliance units from the market. That may satisfy the regulation on paper, but it does not accelerate real alternative fuels demand.

The mechanism has worked. It created a market, encouraged early movers, rewarded surplus generation and offered flexibility to companies with different operating profiles. But authorities cannot set a framework and then wait several years before asking whether the market is behaving as intended.

The European Commission and national authorities should assess whether current targets are creating the right balance between flexibility and fuel uptake. If surplus continues to build and prices continue to fall, FuelEU risks becoming a low-cost accounting exercise rather than a driver of decarbonisation and transition to alternative fuels. Shipowners also need to learn from this first year. FuelEU is now a live commercial market. Prices will move, surplus availability will change and biofuel economics will shift with conventional fuel spreads. Geopolitical events, fuel prices and trader positions can all affect the cost of compliance.

The first FuelEU phase has delivered valuable lessons. Cheap compliance may be welcome for shipowners, but it should not become a substitute for genuine progress. Regulators should study this sooner rather than later and shipowners should do the same.