zero44 has delved into BIMCO’s new FuelEU Clause for Time Charters, focusing on its practical implications for shipowners and charterers.
The polluter pays?
According to zero44, it will be the DOC holder who is facing the regulator and who will be responsible for FuelEU compliance. As the DOC holder is often a third party ship manager, close alignment between the manager and owner is needed. BIMCO addresses this relationship in its SHIPMAN clause. But it is often not the owner of the vessel who makes the operational decisions, including what fuels to bunker, that affect the greenhouse gas intensity and the resulting compliance balance of the vessel.
In line with the polluter pays principle, indicating that the cost of emissions can be passed on along the value chain, owners should therefore be looking to get reimbursed on FuelEU costs by their charterers.
We already know this setup from EU ETS, and here it is relatively straightforward. Cargo owners pay charterers, who pay owners, to compensate for the allowances they have to surrender to the EU. For FuelEU the puzzle is more complex as paying the FuelEU penalty is not the only way of achieving compliance. Underachieving vessels can also obtain their Document of Compliance by joining pools with overcompliant vessels or by borrowing compliance from future reporting years. This means that there is an incentive for generating surpluses, as these can generate additional revenue streams.
The easiest way to generate these surpluses is by switching to lower-carbon fuels. As a result, close alignment between owner and time charterers becomes even more important. And this is where BIMCO’s T/C clause comes in.
The clause in a nutshell:
- In line with the polluter pays principle, BIMCO suggests that – in case of compliance deficits – penalties will be forwarded as FuelEU surcharges from owner to charterer. These surcharges are based on frequently provided compliance balance reports by the owner.
- If this forwarding happens on a monthly or per voyage basis, any positive changes to the compliance deficit shall lead to reimbursement of the charterer by the owner.
- If the charter period covers the whole compliance period (i.e. the full calendar year), the charterer can instruct the owner on pooling or banking and will be fully liable for the result.
- If the charter period covers at least two consecutive compliance periods, the charterer can also instruct the owner to borrow from the second year and will again be fully liable for the result.
- If after a long charter the vessel is delivered back to the owner with two or more consecutive compliance periods with deficits, both parties agree on a specific sum to be paid by the charterer to the owner in addition to the FuelEU surcharge to cover the additional penalty.
- A positive compliance balance will lead to the owner passing on the benefit to the charterer based on a price per tonne of CO2eq that both parties agree on.
The price of a tonne of CO2eq depends on the chosen strategy – the more informed party will come out on top
The flexibility the regulation offers in reaching FuelEU compliance means there is not a unified way of determining the FuelEU surcharge. Paying the FuelEU penalty as a means of compliance will be the most expensive option, at an abatement cost of about €639 per tonne of CO2eq. The price for pooling will be below that. Although it remains to be seen how the market will develop over the year, the first pooling arrangements indicate a price of about €330 per tonne of CO2eq. Charterers should take that knowledge into account when negotiating on the to be paid FuelEU surcharge in case of compliance deficits.
In preparation of these conversations, charterers should have a proper understanding of what their own costs would be in bringing the greenhouse gas over the charter party period down to the FuelEU target of 89.3 gCO2eq/MJ. They will soon realise that – when trading patterns and availability allow for it – blending in biofuels will come at a much lower cost than paying the penalty. This means that there might be a financial incentive to generate surpluses by bunkering more biofuels than required to meet the targets.
It is therefore interesting to notice that the clause pays little attention to short-term (i.e. shorter than the reporting period) charterers generating surpluses. The clause does not address how revenues generated from pooling surplus should flow back to the charterer, even though it would be the charterer that has incurred the costs of more expensive biofuels.
Instead, it proposes that owners compensate charterers with a fixed price per tonne of CO2eq in case of a positive balance. We already mentioned that the flexibility in the regulation leaves room for discussion on what the price for a FuelEU surcharge should be. The same argument holds true for the value of a tonne of CO2eq surplus and it remains to be seen what both parties will consider a fair price. Should it cover the cost premium for biofuels? Or the revenues owners can expect when selling the surplus on the external pooling market?
Both owners and charterers need to analyse their options before entering negotiations. The more informed party will come out on top, zero44 concludes.
