FEATURE | Shipbrokers say European Union's cleaner marine fuel rules are inflationary

European Union marine fuel rules, effective from January 1 as part of efforts to cut emissions, will raise shipping costs, although firms with vessels that can run on alternative fuels, such as biodiesel and LNG, will benefit, two shipbrokers said.

The policy is the second major EU regulation focused on cutting the shipping industry's carbon emissions in as many years. Shipping transports over 80 per cent of all traded goods but produces barely three per cent of greenhouse gas emissions.

The FuelEU Maritime regulation requires commercial ships above 5,000 gross tonnes operating in EU ports to cut emissions from marine fuels, also called bunker fuels, or pay penalties.

Biofuels and other alternative fuels for ships are in short supply, and there is competition from aviation and other sectors. That means shipping companies' costs will rise - and ultimately, the increase will be passed onto consumers and businesses, shipbrokers said.

The new policy follows the regulation-happy bloc's inclusion of shipping in its emissions trading system (ETS) in 2024, which means ships pay for their emissions made on voyages that include EU ports.

"It is important that we understand that shipping decarbonisation will be inflationary, as freight rates will be impacted," Kenneth Tveter, head of green transition at shipbroker Clarksons, said.

Mattia Ferracchiato, head of carbon markets at shipbroker BRS, also said freight rates would increase as ships either pay a premium for greener fuels or a penalty for failing to comply.

FuelEU penalties could equal three per cent of the total freight cost for a tanker carrying around 70,000 metric tons of crude or fuel oil between the US Gulf and Rotterdam, calculations from BRS show.

A ton of very low sulphur (0.5 per cent) marine fuel in Rotterdam cost 505 euros ($522) on January 3, according to data from marine fuel platform ZeroNorth. Biodiesel-blended very low sulphur (0.5 per cent) marine fuel in Rotterdam, meanwhile, cost 686 euros ($709) per ton, according to bunker intelligence platform Engine.

Compliance options

Under the regulation, eligible ships must reduce bunker fuel emissions by two per cent each year between 2025-2029 from an emissions baseline of 91.16 grams of CO₂ equivalent, while the reduction target rises every five years up to 80 per cent in 2050.

Switching to biofuel-blended bunker fuels and liquefied natural gas (LNG) will be among the most popular compliance options, said Clarksons' Tveter.

But there were still drawbacks, he said.

"Biofuel supply is limited and competition will be fierce, especially from aviation," he said, adding aviation, unlike shipping, was used to having to pay up for "a premium refined product".

Shipping companies with vessels that can run on alternative fuels will benefit, Tveter added. Biodiesel-blended fuel oils and LNG are the most readily available alternative marine fuels.

Marine consultancy DNV said the preferred option could be a pooling system whereby ships that reduce emissions below the threshold of 91.16 grams of CO₂ equivalent create a surplus, allowing multiple ships to comply with the FuelEU regulation.

Companies with many vessels could secure a compliance surplus on selected vessels, most likely by switching to biofuels, then using pooling to make the whole fleet compliant.

Other firms could also buy or sell allowances from other shipping companies.

A single vessel running on LNG can make four other same-sized ships compliant with the FuelEU regulation, according to the European Commission.

(Reporting by Enes Tunagur, editing by Alex Lawler, Dmitry Zhdannikov, Simon Webb and Barbara Lewis)