FuelEU Explainer: Is the Industry Ready for 2025?

August 29, 2024

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(Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping) It’s the final (FuelEU) ‘Countdown’ -- This newsletter concludes the series by the Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping on how companies can embrace the opportunity created by FuelEU Maritime to decarbonize.

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Explore previous articles and understand the basics of the regulation on our FuelEU page.

The big picture

In this final FuelEU newsletter, we look ahead at the expected impact of the regulation on the industry. Our analysis finds that in order to meet the 2025 FuelEU targets, the industry will need to reduce 2.4 million tonnes of CO2eq. However, according to our analysis, the existing maritime fuel mix, including LNG and biodiesel, will be able to achieve up to 90% of the needed reduction. While biodiesel is, in many cases, the most cost-effective compliance option in the near-term, future prices are subject to high uncertainty due to feedstock constraints and competition from other sectors.

Current fuel mix may satisfy nearly all the 2025 reductions

What does the MRV data show?

To estimate needed reductions, we used reported emissions of all 13,000 vessels sailing to EU ports in 2023, publicly available through the EU Monitoring, Reporting, and Verification (MRV) database.

As shown in Figure 1, we converted 2023 tank-to-wake (TtW) CO2 MRV data into well-to-wake (WtW) GHG emissions regulated by the FuelEU. To do this, we increased the values to include upstream emissions and two other GHGs: nitrous oxide (N2O) and methane (CH4). After adjusting to exclude 50% of voyages to or from non-EU ports, we found that 97.9 million tonnes of GHG emissions coming from 26.4 million tonnes of fuel will be subject to FuelEU. Assuming all vessels sail on heavy fuel oil (HFO) as a baseline, this would require 2.4 million tonnes CO2eq of abatement in 2025.

Figure 1 Emissions subject to Fuel EU based on 2023 MRV data

Figure 1. Emissions subject to FuelEU based on 2023 MRV data

How much low-carbon fuel is currently being used?

Biodiesel, which can be blended with fuel oil and used in conventional engines, is increasingly used by companies to meet regulatory requirements as well as voluntary decarbonization goals. In addition, fossil LNG provides emissions reductions, albeit limited, for vessels equipped to operate on the fuel.

We use 2023 bunker sales in Rotterdam, Europe’s largest bunkering hub, to understand how much abatement we can expect from the existing use of LNG and biodiesel. B30, a blend of 30% biodiesel and 70% fuel oil, made up 7% of the total 10 million tonnes of bunker fuel sold in Rotterdam. LNG represented 3% of sales and a small amount of bio-methanol was bunkered for the first time by Laura Mærsk.

As shown in Figure 2, if we extrapolate Rotterdam’s fuel sales to the 26.4 million tonnes covered by FuelEU, we can expect the industry will demand 0.7 million tonnes of LNG and 2 million tonnes of B30 blend in 2025 (equal to 600,000 tonnes of B100 or 100% biodiesel).

Figure 2 Rotterdam fuel mix extrapolated to volume covered by Fuel EU

Figure 2. Rotterdam fuel mix extrapolated to volume covered by FuelEU

Will there be enough biodiesel?

There are several views on whether supply can meet demand for biodiesel. Industry experts we spoke to noted that it will be difficult for EU ports to procure and provide 600,000 tonnes of biodiesel in 2025 due to competition from other sectors. Furthermore, concerns over the quality of used cooking oil, which is the primary feedstock for biodiesel, could lead to a tightening of the market.

However, the strain on supply could be alleviated as other ports increase volumes to meet demand. For example, Singapore sold roughly 500,000 tonnes of bio-blended fuel oil in 2023, and the Spanish port of Algeciras-Gibraltar started offering a B24 blend in 2023. These developments suggest ports may be able to meet rising demand.

Another consideration is that a significant portion of the biodiesel bunkered in Rotterdam is marketed to customers as emission reductions. Additionality guidelines will likely prevent companies from using biofuel sold to cargo owners as emission reductions towards FuelEU compliance. If companies continue to use biodiesel and sell the emission reductions to customers, then more volumes of biodiesel will be needed to meet both voluntary emission reductions targets as well as FuelEU compliance targets. High demand for both FuelEU compliance and voluntary emission reduction markets could strain supply.

How much more abatement is needed?

If you translate the 2023 Rotterdam fuel mix into emissions reductions across the full EU fleet, we find that the current use of B30 can cover 1.8 million tonnes and LNG can cover 0.4 million tonnes (2.2 million tonnes in total) of the 2.4 million tonnes of CO2eq required. Shown in Figure 3, this represents 90% of needed CO2eq reductions between 2025 and 2029, but only 35% of reductions in 2030.

Our estimates assume that the reductions from biodiesel and LNG are uniformly distributed across the full fleet of 13,000 vessels. However, some ships are likely to bunker more biofuel than is necessary and bank the surplus instead of allocating it to other vessels through pooling. This could initially create a surge in biofuel demand, exceeding the volumes needed to meet the reduction targets. However, as companies use banked surpluses over time, we expect demand to align with the actual reduction requirement.

Alternatively, if other compliance pathways become prominent, Figure 3 may overestimate needed abatement. Other compliance pathways include:

Biomethane: The current use of biomethane is limited; however, demand is gaining momentum and could play a significant role in helping LNG-powered vessels meet FuelEU targets.
Onshore power: Currently, 10% of ships calling at EU ports are equipped with onshore power, which is considered to have zero emissions for FuelEU compliance, thereby reducing some of the demand for alternative fuels.
Wind-assisted propulsion: The growing adoption of wind technologies, such as rigid and rotor sails, are eligible for a reward factor that can reduce the intensity of energy used onboard.
Borrowing: We can expect some vessels will borrow a portion of compliance from future years with a 10% penalty added.
Penalty: For some, the simplest compliance option is to pay the penalty. However, the penalty's cost is designed to be a disincentive for inaction and is typically more expensive than other options.

Given the range of compliance options and the existing fuel mix, we do not expect compliance to be a significant burden in the first five years. However, by 2030, companies will face significantly higher costs and will benefit from strategies to source potentially scarce low-carbon fuel.

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Money well spent?

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Uncertain biofuel prices will be a growing challenge for conventional vessels

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Industry reflections on biodiesel availability

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The new risk in shipping: standing still

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Resources

The European Commission has a dedicated helpdesk for EU ETS and FuelEU: fitfor55@emsa.europa.eu

Questions and Answers on FuelEU Maritime by the European Commission
The European Commission launched a Ship Financing Portal that helps companies identify financial tools for investing in green technology
Text of the FuelEU Regulation
Webinar by DG MOVE and EMSA on FuelEU
The Renewable and Low-Carbon Fuels Value Chain Industrial Alliance (RLCF) is a useful member initiative where both the supply and demand sides of transport fuels can collaborate, learn, and support sustainable fuels in the EU READ MORE