Understanding FuelEU Maritime Borrowing: Risks and Strategies

The FuelEU Maritime Regulation introduces several compliance mechanisms. These help companies meet their greenhouse gas (GHG) intensity targets. One notable mechanism is borrowing, which allows ships to offset a compliance deficit by using surplus from the following reporting period. This approach may seem straightforward, but it comes with strict limitations, risks, and long-term implications.

In this week’s newsletter, we explore how borrowing works, when it is allowable, and why companies need to assess its potential impact thoroughly.

How Borrowing Works Under FuelEU Maritime

Borrowing, as defined in Article 20(2) of the FuelEU Maritime Regulation, allows a ship to compensate for a compliance deficit. This is done by utilizing an "Advance Compliance Surplus" from the following year.

On the basis of the calculations undertaken in accordance with Article 16(4), if a ship has a compliance deficit for the reporting period, the company may borrow an advance compliance surplus of the corresponding amount from the subsequent reporting period. The advance compliance surplus must then be added to the ship’s compliance balance for the reporting period. However, 1.1 times the surplus must be subtracted from the same ship’s compliance balance in the next 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 ship’s energy consumption as calculated according to Annex I; b) for two consecutive reporting periods.

While borrowing offers short-term relief, it is not an unlimited option. The regulation imposes significant constraints, including:

• Borrowing is limited to a maximum of 2% exceeding the GHG intensity limit in the reporting period. This calculation is multiplied by the ship’s energy consumption.

• Any borrowed surplus must be repaid in the following year with a 10% penalty.

• A ship may not borrow for two consecutive reporting periods.

• It is only possible to borrow 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 cannot participate in pooling during the same verification period.

  
  

An important note is that the GHG intensity target applied to borrowing is based on the reporting year rather than the next year's target. This means that if the regulatory target tightens the following year, the borrowed surplus is still calculated on the previous year's requirement. For instance, if a ship borrows from the 2030 compliance balance for the 2029 reporting period, the GHG intensity limit will be based on the 2029 (2% reduction) instead of the 2030 (6% reduction).

The Risks of Borrowing Under FuelEU Maritime

While borrowing provides some flexibility, it carries multiple risks that companies must manage effectively.

Financial Risks and Compliance Liability

Borrowing effectively shifts compliance obligations to the following year. This arrangement can create financial and operational risks. The 10% penalty further complicates matters since it leads to an accumulating deficit. This accumulation can make future compliance more expensive and challenging.

Regulatory Restrictions and Strategic Limitations

When a ship borrows, it locks itself out of pooling for the same verification period. Pooling becomes an option only for the next verification period. Additionally, ships that have borrowed cannot borrow again the following year. This restriction could leave companies in a difficult position if compliance balances do not improve, compelling them to pay FuelEU penalties.

Long-Term Compliance Strategy Implications

Borrowing should not be treated as a default compliance option. It is best utilized as a last resort. Companies that lean heavily on borrowing risk losing flexibility in the ensuing year. They will have fewer compliance mechanisms available to them.

Comparing Borrowing to Other Compliance Mechanisms

Borrowing is just one of the compliance mechanisms available under FuelEU Maritime. It is crucial to explore how it compares to other options.

While borrowing can efficiently fill short-term compliance gaps, long-term strategies should also consider pooling, alternative fuels, or other applicable technologies.

Implications for Charter Agreements and Compliance Contracts

Because borrowing influences compliance liabilities over multiple years, it’s essential for charter agreements to clearly specify decision rights regarding borrowing. This clarity is particularly significant in time charters.

Short-Term Time Charters (<1 Year)

• The ISM company retains full compliance responsibility, meaning the shipowner must decide whether to borrow.

  
  

Long-Term Time Charters (≥1 Year)

• The charterer gains decision-making authority regarding compliance strategies, including borrowing.

• Charterers must ensure that they do not inherit borrowing restrictions from previous periods.

  
  

In all scenarios, contracts should explicitly outline who bears responsibility for repaying the borrowed surplus and managing the associated penalties. Beyond charter contracts, shipping companies also need to consider potential borrowing during previous periods when engaging in buying and selling transactions.

Conclusion: Borrowing as a Strategic Compliance Tool

Borrowing under FuelEU Maritime can be a valuable yet risky compliance tool. It is best used to bridge gaps in compliance and should be chosen only when no better alternatives exist. In many circumstances, pooling or using alternative fuels may yield better outcomes than resorting to borrowing. Even in cases of unexpected events or compliance gaps, relying on a streamlined pooling process can save companies from incurring the additional 10% penalty.

BetterSea’s FuelEU Maritime Compliance Platform, equipped with an integrated marketplace, can facilitate this process efficiently. It streamlines compliance and helps you manage sudden data changes or unforeseen events with just a few clicks—without the burden of penalties.

Book a Product Demo!

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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