FuelEU Maritime: A new trading opportunity in shipping

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Eklavya Gupte:

Welcome to Energy Evolution, a Platts podcast by S&P Global Commodity Insights where we dive deep into the energy stories shaping our world today.

I am your host, Eklavya Gupte, and in this episode we sail into the intricate world of maritime regulations and the development of new carbon-compliant systems in the world of shipping.

The maritime industry stands at a crossroads. Shipping sector emissions are a significant and growing contributor to global greenhouse gases representing around 3% of global emissions. To put that into perspective, if shipping were a country it would rank as the sixth-largest emitter globally sitting between Japan and Germany.

Now, the European Union has been particularly focused on reducing emissions from the maritime sector. From 2024, it made it mandatory for this sector to be part of its emissions trading system. But today we are focusing on another groundbreaking piece of legislation that's reshaping how ships fuel their journeys across European waters.

The Fuel-EU Maritime Regulation represents one of the most ambitious attempts to decarbonize shipping. This regulation is aimed at boosting demand for marine, renewable and low-carbon fuels by setting a maximum limit on the greenhouse gas content of energy used by ships, calling it European ports.

Since January 1st, 2025, FuelEU has established a greenhouse gas emissions intensity requirement for ships over 5,000 gross tons operating within the EU and the EEA area mandating a gradual reduction in the greenhouse gas intensity of ship emissions. Now, against a baseline greenhouse gas intensity level from 2020 the reduction starts at 2% in 2025, scaling up to a staggering 80% by 2050.

But here is where it gets interesting from a market perspective, the FuelEU ecosystem doesn't stop at simple compliance ship owners and operators can trade excess compliance through what is known as pooling. Essentially, if they reduce their greenhouse gas intensity by more than the required percentage through alternative fuels, they can sell those excess credits to other operators who might be struggling to meet their targets.

This creates an entirely new market dynamic with growing complexity around price discovery. As this compliance market emerges, it necessitates new pricing solutions to anchor trading negotiations, which is exactly where our expertise at Platts comes into play.

Now, to get more details on this regulation and how the maritime sector is responding to this, I'm joined by Chris Stowe, lead specialist for alternative Marine Fuels in the Platts Price Reporting team.

Welcome to the podcast, Chris. Great to have you here. Now, obviously this FuelEU maritime policy has only been placed since January 1st this year, but it'd be good to find out what are the options available for the shipping sector and how are they dealing with this compliance?

Chris Stowe:

Thanks, Eklavya. Great to be here. So of course all ship owners will now have the mandate of reducing their greenhouse gas intensity by 2%. The reality is that a lot of these ship owners do not want to undergo the strategic complication of bunkering that compliant fuel to reduce their greenhouse gas intensity of 2% so they're going to be looking at other mechanisms. And FuelEU offers three different flexibility mechanisms to become compliant.

So the first one is that they can potentially bank any surplus that they generate. So any vessels that are generating more compliance balance with a higher reduction of 2% greenhouse gas intensity reduction, they can bank that surplus and potentially offset any compliant-deficit vessels within their own fleet or for their own vessels in the next compliance period.

They can also borrow. So when you borrow, you recognize that you have a compliant deficient vessel you can borrow for the subsequent year and bring over that compliance deficit that you have generated into the next compliance and therefore compound the amount of greenhouse gas intensity reduction you are mandated to do.

But then the third option that you have is the pooling option. And pooling is the process where two or more ships, including from different ship owners, can pool their compliance balance allowing those who generate a surplus to pass to those who are in a deficit. It allows for a complete circumnavigation of reducing your greenhouse gas intensity by operations alone, and you are able to pass that unit over to another ship owner who might be in deficit.

Of course, what we're trying to analyze here is what is going to be developing in the pooling space will eventually formulate the makings of a new market in which this compliance surplus is priced and what tradeable value this compliance surplus is negotiated at when it comes to those pooling mechanisms that we have.

Eklavya Gupte:

Thanks, Chris. Very interesting.

Now, out of these three options you mentioned, are there any particular ones that the big-to-medium-sized ship owners find more appealing?

Chris Stowe:

That's a very interesting question, Eklavya, because that is one that we don't actually have information for because obviously that compliance data is very private data for reach ship, individual ship, which they submit at the end of their compliance heading towards the end of the first quarter of 2026. But there are theories out there in the market in terms of the banking, the pooling, and the borrowing in terms of what demographic of ship owner would prefer what option and which avenue to pursue.

So with banking, you could probably say that the bigger ship owners who have the most invested in the order books for compliant vessels would probably have banked a lot of their compliance surplus already. We're talking about the 640 LNG carriers that are already on the water, the dual-fuel LNG carriers that are already on the water generating compliance surplus because LNG is a compliant fuel for now. We're talking about the dual fuel vessels that are invested in methanol, for example, which will be on the water in a few years as well.

There are big financial investments made by the big container liner companies in which they would have probably looked to bank a lot of that surplus but also potentially even pursue the pooling. So they probably have the optionality of analyzing that. They'd be working out what their journeys are strategically aligning how much compliance surplus they'll need for any EU voyages which they can distribute that compliance surplus to the rest of their fleet, which might be compliant deficient. But then they can also potentially analyze an emerging but nascent market in the pooling space where they will have that compliance surplus and they will be able to potentially trade it within net pools to those who are a bit more compliant deficient.

Now, on the opposite side of the spectrum, you have the smaller ship owning companies. And those are the ones that don't have the flexibility, the operational flexibility to look to either bunker compliant fuels or even maybe have analytics teams to work out what is best calculated for them to pursue to make their vessels more compliant.

They, as mentioned before, have the option of borrowing, right? And if I know shipping well, I know that everyone is a little bit last minute when it comes to their compliance, they might decide that, "We've generated this amount of compliance deficit. We might not actually decide to potentially either pay those penalties, pay for the compliance surplus. We will just borrow in a subsequent year and work it out from there." So there is a little bit of a sense of potential last minute nature that could be dwelling in the buildup to 2026. And a theory is that that's going to be mostly from the smaller ship owners.

Eklavya Gupte:

Thanks. Very interesting.

And now obviously carbon dioxide abatement is central to this regulation. So can you tell me a little bit about what is abatement and how is it going to work?

Chris Stowe:

So what has emerged in terms of the compliance surplus potential markets and the makings of the markets, and how this is going to potentially formulate into what is known as probably a commodity down the line, is how are you going to price this compliance surplus, right? So abatement as we define it, is the overall cost of abating or removing one ton of CO2 equivalent from shipping emissions by bunkering a lower emissions marine fuel. So effectively what you're doing is profiling a compliant fuel against a conventional bunker fuel, which is non-compliant.

So for example, I am burning something like a B30 Rotterdam bunker fuel. I know that it is a higher cost. For me it is a lower calorific value compared to a conventional fuel. What I would be doing is to calculate what the trading compliance cost would be is deducting the cost of the conventional fuel off that B30 compliant fuel that I have, and then dividing it by the difference in the well to weigh emissions. And therefore you're generating and profiling a CO2 abatement cost that gives you a sense of how expensive it was for you to offset all of your emissions, remove all of your emissions, abate all of your emissions using B-thirty, and you try and pass that cost on as a negotiating base when it comes to trading compliance surplus with a deficient owner.

Eklavya Gupte:

Thanks. And why is abatement considered a fair way to calculate compliance?

Chris Stowe:

Well, as mentioned before, there are diverging theories or methodological pursuits in which FuelEU compliance surplus is calculated. But what has resonated with a lot of the industry is that abatement provides the best cost-calculated profile of passing on what compliance surplus should be as an emissions overhead or emissions abatement overhead, so to say, that a ship owner has to undertake when they burn a compliant fuel. It gives an understanding of what a base-level cost is for a ship owner to pass on because they themselves are able to profile that compliance surplus and then bring some visibility to the buyer in terms of how much it costs for them to generate that compliance surplus. And it gives the buyer a sense of how much that compliance surplus should be considering the spot prices of the bunker fuel.

One problem with the compliance surplus market in itself is that of course abatement is not fuel agnostic. So for example, if I'm generating abatement costs with a bio-bunker such as B30 or B24 against very low sulfur fuel oil or marine gas oil, I would have a much different abatement cost than if I was generating abatement using fossil LNG, for example, or even LPG. And this has been an interesting point of contention because compliance might in itself be fuel agnostic. If I'm a buyer of that compliance, of course what I'm going to be pursuing is the cheapest option available, right? But what abatement does is provide that base level understanding of how much using one particular fuel to abate the emissions of another particular fuel should be when it comes to the negotiating table.

Eklavya Gupte:

Thanks, Chris. It does show that there's a whole new market emerging here. And can you tell us a little bit about how Platts is looking at some of these price assessments?

Chris Stowe:

So yes, Platts has launched a series of assessments focused on carbon dioxide abatement costs using biodiesel over conventional bunker fuels since September the first. So all of these assessments will reflect the abatement costs of the following combinations of daily Platts assessments along with their monthly averages with bunkering locations as follows.

So what we're doing is B30, so that's 30% biocomponent with 70% VLSFO, against very low sulfur fuel oil in Rotterdam and that's one of our assessments. We have then B30 with marine gas oil, we have used cooking oil methyl ester against marine gas oil. We have used cooking oil methyl ester against a very low sulfur fuel oil. And finally that we have our own Singapore based assessments, which is B24 against very low sulfur fuel oil. And obviously with inter-EU voyages when it comes to the FuelEU maritime, these only account for 50% of the energy used, which is an important factor for all shipping markets around in that people often believe that European shipping only relates to Europe, but it also relates to global shipping into and out of Europe as well.

Eklavya Gupte:

Thanks, Chris. I like how you mentioned the fact that this industry is so global, but a big policy in the EU does tend to have ramifications in the rest of the world. Now, the other thing I wanted to explore was obviously the maritime sector in Europe is currently part of the EU emissions trading system. And under the EU ETS there is a clear charter party which adopts a polluter pays principle, but FuelEU maritime, correct me if I'm wrong, doesn't have this clause, which is bringing some confusion to the market. So can you elaborate a little bit on that?

Chris Stowe:

Yeah. So this is a very interesting point of contention as we head up into the compliance period in the first quarter of 2026. So with the EU ETS, it's very clear, those shipper operators are the ones who eventually have to pay or surrender those carbon allowances. But with FuelEU, because there's a big gray area right now in which we don't really know who is going to be owning that compliance that is being generated out of those vessels. So for example, ship owners obviously charter their vessels out to other chartering parties for big period fixing, and those charters themselves can actually even re-let those vessels.

The charterer is ultimately responsible for bunkering the fuel. So if they decide to bunker the compliant fuel, they would want to own that compliance surplus that they can potentially either sell or bank for themselves. However, the ship owner would want to come in here and say, "No. That vessel that we have chartered out to you is generating compliance surplus for us to potentially either bank or pool ourselves."

So the chain of command in which the ownership of the vessel and the re-letting of the vessel and the chartering of the vessel complicates and muddies the water of who actually owns this compliance. Because on the opposite side of the spectrum, if a vessel is chartered out to a charterer who decides they want to burn pure VLSFO and return that vessel to that ship owner with a huge compliance deficit, there is going to be a little bit of a problem in terms of who actually ends up paying for that deficit.

So our understanding as of right now is there are no distinct concrete guidelines with charter party clauses right now to determine who owns the compliance surplus, and who has to offset the compliance deficit when vessels are chartering out. That was actually one of the main theories in which biobunker sales in Rotterdam were very slow at the beginning of the year because there was no clear understanding on whether those who bear those costs overheads of bunkering the compliant fuel, which is obviously a lot more expensive, will be able to garner and ring-fence the benefits of compliance surplus for banking or pooling.

Eklavya Gupte:

Thanks, Chris. And now to complicate things even further, we obviously have the International Maritime Organization's net-zero framework, which may be ratified at the upcoming MEPC meeting in October. But could we have two overlapping compliance systems for shipping?

Chris Stowe:

Yes. That's also a very good question there, Eklavya. So what we understand is that fuel EU has a self-destruct mechanism in which it will, after the year of 2027, potentially align with any IMO framework that decides to instill a compliance system similar to FuelEU. So what we have is potentially after October, should we get what as many people believe, a positive outcome in which the April proposal was ratified and we go through with the IMO's net-zero framework, which is a lot more complex and a lot harsher in terms of GHG reductions as part of their GFI, what we will potentially see is a build up in which FuelEU decides to potentially assimilate that IMO framework in itself.

But the principles of abatement still remain the same. The IMO will also have a framework in which if you are compliant below the direct compliance target, which is a heavy reduction on an annual basis which staircases quite heavily, you will be able to generate surplus units to potentially trade with those who are in compliance deficit.

So frameworks of abatement, and frameworks of calculating compliance using abatement will remain. There might be a market that formulates in and of itself through standard supply-demand fundamentals and the kind of architecture that we see in commodities of a more mature nature, that might actually happen. But abatement is still one of those very important tools for both shipowners who are deciding to bunker expensive compliant fuels and profiling whether it's worth bunkering those expensive compliant fuels, and also a framework to negotiate the compliance surplus trades that they want to engage in to foster and help manifest what is going to be a much more liquid market in the years to come.

So to answer your question, we don't know what will happen with FuelEU if the IMO does take over. But a lot of people believe that there will be an overall assimilation from the FuelEU into IMO.

Eklavya Gupte:

Okay, listeners, so that is all we have for this episode. Thank you for tuning in. Now, please stay up to date with upcoming episodes and subscribe to Energy Evolution on Apple, Spotify, or wherever you prefer to listen in. If you have ideas for guests or topics, please email energyevolution@spglobal.com.

Now, before we sign off, I want to give a shout-out to my other podcast team members, my co-host, Taylor Kuykendall, Dan Testa, Camilla Naschert, and Karen Willembrecht. Also, a huge thank you to our agency partner, The 199, and the Commodity Insights Digital Content Team. Thank you.