What does FuelEU’s first year tell us about the future of maritime compliance markets?

I'm Joe Battles, a climate policy manager at the Merck McKinney-Muller Center for Zero Carbon Shipping, and this is the current, a podcast about the forces shaping maritime decarbonization. While much of the attention this year has been on the development of a global greenhouse gas regulation at the IMO, the fuel you has been quietly completing its first reporting year after it entered into force in 2025. I say quietly, because for the most part, it seems to be working. Fuel you maritime is, of course, part of the EU's Fit for 55 package, a set of policies designed to cut European emissions by 55% by 2030. It entered into force in January of 2025 for ships sailing to calling EU ports. The regulation sets a limit on the greenhouse gas intensity of all energy used on board, tightening that limit to 80% in 2050. Ships that fall short of the target must either pool with over-compliant vessels borrow against the next year or pay compliance penalty. Ships have now finished reporting their emissions from 2025 with documents of compliance coming at the end of June. The European Commission is starting to release data on the first year, providing a glimpse into how the world's first fuel standard for shipping is working. So that makes this a good time to ask, what happened in the first year of fuel you? What did we learn? And how could this inform a global regulation at the IMO? And to look into this, I am joined by two guests who have been deeply involved with fuel you compliance, Thomas Christensen is a managing council at the law firm, Gorson Fedorspiel, and someone who has spent a lot of time thinking and working in the legal side of fuel you and maritime contracting. Lauret's shack is at Boston Consulting Group, where he works on the commercial and strategic dimensions of shipping decarbonization. So looking at some of the data coming out of the European Commission on how ships chose to comply in the first year, we see that over 90% opted for pooling, around 2% used borrowing and this is where ships put off compliance to the next year and then the rest, roughly 7% submitted no request. And so that split between those that met compliance obligations but did not pool and those that complied by paying the penalty. So Lauret's, to start, can you help first explain what pooling is and how it works? Of course. So essentially pooling allows for one vessel's compliance to be spread across a larger number of vessels. So that's what we call a pool. For instance, if you have one vessel that use, let's say, e-methanol, that vessel can in the beginning, depending on carbon intensity, of course, serve the compliance need of 50 or 60 vessels. So in other words, by introducing a pool, you'll give the incentive for a given ship owner operator to use a green fuel and then you can get paid for it by all the other pool members who can continue operations as it is before essentially. And are you surprised to see 90% uptake of the pooling mechanism? No, I'm not surprised at all. I think it's actually great because it allows the ones who are best at decarbonizing to decarbonize. It also alleviates some infrastructure challenges, right? If everyone had to use 2% green fuel, then there would be a scramble at different ports to bunker that and you sort of alleviate some of all those practical issues. And sometimes easier paying someone else to do the hot job if they're very good at it. And I guess I ask if you're surprised because part of me, to be honest, was a little surprised because there were many companies that were confused about the pooling mechanism and found some of the complications around ownership of pooling to be challenging. Thomas, you and I participated in a workshop where we heard many companies complain about this. So one are you surprised by the uptake of pooling and maybe also talk about some of these complexities? Yeah. Well, I think starting point, it's important to say that the industry is very collaborative to begin with and I think actually the most stakeholders they want things to work. Now let's just talk about the penalties. Obviously, when the penalties are so high compared to what the pooling cost is, then it's quite obvious that these market people would go for the market solution. But obviously, it has been difficult for many to accomplish that from a contractual perspective because the legal framework is as it is. It is the DC holder, the so-called ISM company, who is the responsible entity. And that will in many contexts, in many situations, be the technical manager. And that's where it's really difficult, or at least it's required a lot of collaboration and a lot of contracts to make sure that you can then execute that pooling that Lounge just mentioned. So let's take a bit on this. So the DLC, the Document of Compliance Holder, where does this concept come from? Yeah. So the DLC or the Document of Compliance is a document that allows you to operate a certain kind of vessel. And that concept found in the ISM code, which is part of Soldars, which is the main international convention from the IMO on safety of vessels, how these are operated. It has a long history, going back to the Titanic, that we need to make sure we operate vessels safely. And based on the developments through history, at one point, we needed to set out certain procedures that you need to fulfill on board. So you need a company that's in charge of making sure everything is hand in appropriately. And that operational responsibility has to be somewhere. It can all be in one place, because you need as, you know, from the native point of view from the regulators to know who's in charge of operating a ship safely. And in shipping, that is quite often not the registered owner. It will often be a baseball charter or a technical manager. That's then the entity that the regulators know, that's the entity that they are normally asking to comply with regulations. And that's why they ask this entity to also take upon itself to ensure compliance will fuel you. But it's not where the money is. That's often, obviously, with the owner or the charter. And that's why you need the contracts to make sure that the regulatory responsible entity that you seeholder is not actually paying for the underlying compliance. Because these technical managers, for example, they are simply providing a service to operate the vessel, so they aren't owning the ship, they aren't also responsible for the commercial service. Exactly. And they're not procuring the fuel, which is the essential point right when we talk about fuel you. It is about what fuel you use. And that decision is not taken by the technical manager, they just executed. It is a stunning point of the owner, but often, obviously, you will have a time charter, for instance. And they have, under the time charter party, the responsibility to procure the fuel. And that's why they obviously need to pay for compliance. From contractual point of view, not from a regulatory point of view. So you have the regulator needing, I need one point of entry to send the bill. But then on the commercial side, that person that they're sending the bill to is not, in fact, the one responsible for making any of the changes necessary to lower the costs of the bill, essentially. So then that's where contracting comes into place and collaboration, I would say. That's also looking at what has happened during the reporting. I think that people have done more than what they were required to contract, to be honest, but I think many entities actually wanted to make this work interesting, because they rely on each other to the degree that they do. That's great. I think there was a fear going in the opposite direction that companies would not collaborate, which is really essential for this regulation to work. That's promising to hear. Can you talk a little bit more about these charter party contracts without getting too deep in the weeds, but we might have to do a little bit of legal weeds here. Also where, of course, there are BIMCO clauses and BIMCO is an organization that produces standard contracts for shipping. What role did that play and what is this charter party contract? When we say charter party, it's important to say that we have many different forms of charter parties. We have babbards, time charters, and voyage charters mainly. What has been really important is, of course, for an organizational BIMCO, which is really crucial in this space, to facilitate the compliance in practice by having contract clauses that work. In particular, that's important in the most collaborative contract we have, which is the time charter party. In time charter party, you have the owner, who is obviously the owner of the vessel as a starting point, but they are basically giving the commercial benefits of the vessel to the charter for a certain time period. Then it will be the time charter, who decides whether the vessel will be sailing, what kind of cargo it will be trading, and also what kind of fuel will be used. That's why it's only fair and accepted by everyone, I think, that it will be the time charter who will also bear the burden of the compliance, but also the potential benefit that is associated with using green fuels under the fuel you. you couldn't. And only achieve that by having a contract clause that allows for it. And that's where BIMCO gets into the picture. BIMCO saw very early on that they needed to produce a few review clause for time charters, just as they have done for the ETS clauses and other fields within decobilization. And that's basically a clause that will allow the owner to say to the charterer, depending on the length of the time charter party, that the charterer can ask the owner what to do with the surplus or the deficit during a certain year. And then they will also bear the burden if there's a deficit, but will it obtain the benefit if there's surplus? Because it will be often the charterer who then agrees with another owner, another charterer, whether to pull the vessel or not. And then it's just a matter of execution from the owner side. In practice, it's a lot more complex than I'm just explaining it now. And you have more people involved, verifiers, etc. But that's a basic concept that you want the burden and the benefit to live with the charterer where the fuel decision-making is taking place. I want to now dig into this decision on the part of the charter party, whether to pull. So I've got a vessel. I've now got a contract with the owner that I am responsible to some degree to ensuring that that vessel follows the mandate of fuel you. And I can choose to just do enough fuel so that I'm meeting my obligation or I can go beyond. If I want to go beyond, I then look to selling or monetizing the value of that overcompliance. Laurets, can you talk about that commercial decision? What does that look like, where am I going, third parties? So I think, as you said, either you can just get by a little bit or you can do overcompliance. I think the first fundamental questions that we, as BGG here when we speak with clients is, is there a belief in my ability to procure and operate green fuels better than the market? If I can procure fuels advantageously, if I can get it cheaply, if it fits the roots that I go where I can bonger, LNG, bio-LNG, fame or whatever, then I may have a competitive advantage, right? Because if I find out, well, I'm actually not going to these port where I can get the cheapest and best fuels, then someone else should do it. So that's the first fundamental question you ask yourself. Are you well positioned to do this? And then the second question is, well, you find out, okay, you can probably source that fuel well, and I believe I can handle it. I have the vessels. I have the tonnage I need. And then the second stage question is, okay, to monetize it, do I have a path that I believe is suitable for me? Well, either it is, I use it for the rest of my fleet. If I'm lucky enough to have that exact time, but as you said, overcompliance is the premise here. So then the question is, how do I pool? And what we've seen in the market is that these pooling mechanisms are pooling providers I'm urging. We've seen several pooling providers in lack of better words here, and those are sort of the parties that I would sign up for as an overcompliance. And then they will ensure that they're traded out. And in the ideal world, this would then act like a liquid market, where then that overcompliance, trades, and follows supply and demand. Do we see these third parties starting, is it starting to look like a market where buyers have some flexibility, where they buy, and the end same with sellers? I think it's a good question, and please stop me if I go too far here. But I think if we look at pricing, pricing was well around, about 200, 250 for some time, we saw it up there. And then we saw prices fall a bit down towards the 100. And well, the question is, why and what happened, right? I think there are a number of reasons that are interesting there. First of all, I think we were in an immature market, as it was the first time this happened right? The regulation came into force by beginning of 2025. So there were, well, you can argue lack of transparency. People look towards this, you know, noncompliance penalty of almost 650 euros a ton, and you know, how do you benchmark this price, right? And I don't think it was fully transparent to anyone how that was done. And then you also just had friction, you had people who didn't know how it worked. You had some people withdrawing, and I think those were sort of some of the dynamics. I would almost argue we were at sort of the beginning of an S curve. And then what we saw is that the prices dropped sharply. I think that is something to do with maturity. I think the market started to relax a little bit, the panic of the initial having to comply fear of having to pay 650 euros a ton, that sort of, you know, sparked panic at the beginning. And then, you know, people started to relax a little bit more. I think we also had some, you know, you asked about a well-functioning market. So I'm looking at some of the frictions here. I think we also, we still don't have a, you know, a single pool operator. And I think that's okay. But this is a market where there should be network effects, right? You know, if you have one, like, main pool of, you know, a few bigger, that wouldn't make it easier for a sort of supply and demand to clear it out. So there are network effects. So the question is, where do we get to an equilibrium, where, you know, you don't see behavior, where pools are trying to, you know, price highly to attract supply, cut prices to get demand. I mean, we don't want a situation like every time Uber comes into a city, they start, you know, half price on fast to get people on the platform. And then, you know, that changes the year after. So I think we still need to settle a little bit how these dynamics are going to work. That's a big question for me right now. You referenced there's a number of platforms, a couple of them, publish prices. So we get some glimpse into this. As you mentioned, and you already mentioned this, that they've been fairly stable around 200 euros per ton of CO2 equivalents over the course of 2025 through 2026. But then that's now changing. And the question I have in my mind is, yeah, are we reaching now market equilibrium that we weren't seeing before because of the immaturity, or we have a lot going on in the world at the moment, particularly around fuel prices. So alternatively, we're seeing just a momentary a pinch because of hormones and potentially other factors. I guess that's a question we won't resolve here today, but yeah, we'll all be looking at what the price does in the next couple of months, or over the next year as potentially maybe the fuel prices start to stabilize, but just maybe let's dig in now to the different fuels that are used and how this relates to those prices. So go ahead. No, I don't want to interrupt. No, no, please. So I think first, just to address the hummus really quickly, I think fundamentally, there is the price setting mechanism that I can talk about in a moment where you have the different fuels play in the operation of those fuels. But then you also had the hummus crisis where you all of a sudden saw the price of the fossil alternative increased disproportionately more than the green alternative. So even net net after regulatory payments had to be made, you actually saw some places where biofuels or bioblins actually were net net cheaper, which was fantastic once in a lifetime moment. Or hopefully not. Well, we haven't seen it before. Let me put it that way. So I think that there was probably short term spike, but I do also want to say that maybe we will also see a world where the whole idea of sovereignty starts to play a role. And you know, people are okay paying a little more for biofuels. But anyway, I just wanted to clear the whole energy crisis spikes out of the way. No, yeah. Tell me more about this sovereignty. Well, so now it's out of the topic I should, but I think generally on sovereignty, it's I think there's been a fear at least among some clients, and I'm also looking to especially the European owners that you initially when, you know, so you can look for fossil fuels Europe is very dependent on on the Middle East and well, also the U.S. Spatial Phil and G. And you know, that dependence, well, also in Asia, turned out to be a challenge for the widely for the economy over the, when the homeless crisis happened. And now we're seeing a world where well initially the low carbon fuels that came out a lot of them were based in Northern Europe. You had something so low in Southern Europe. And now you're seeing sort of Asian low carbon fuels be very attractively priced. And I think some of them are thinking, well, not only on a ship owner, operate a level brought on them all on a state level, they're thinking, well, maybe it's okay. We pay a little more because we never know when the next hummus crisis going to happen, whenever, you know, conscientious ships get stuck in its west or whatever happens. So I think that that sovereignty idea could put a little premium or could justify a little premium on some fuels. And is that because the low carbon fuels tend to be on longer term contracts? I think that's a factor, right? You still see for many of the low carbon fuels, especially if you look beyond the bio diesel blints, you see bilateral contracts, you see longer contracts, they're not traded in the same way. So Xs is not just calling your bongo a provider in the same way. What about, I mean, if you've got a contract between this owner and the gender party, and you've potentially fixed a price in some cases, right? But then that price now goes all over the place. - Yeah, obviously there will be a risk to that. I think it's important to say that this standard thinking would be on the time charter party that you don't price the general handling of the compliance panels because that would be given to the charterer and then it would be for the charter to do his own contracting. The place where you need to do it though is when you take the literary under the charter party and when you really deliver the vessel. And that's why pricing is really difficult, right? Well, it's not difficult if you just agree on a price obviously, but there have been ideas and concepts in the marketplace where you want to link it to an index, for instance, then you had the problem that you didn't really have that many of those indices. And you also had then the option that should be then just say that when we are to really deliver the vessel, then the charter will pay based on a progress independent assessment or whatever because you cannot really assess what the market price would be in one year's time, right? All five years time if you have a very long term charter party. So you need a contribution to handle that in some way. And this is because of this kind of funny part of fuel you that maybe not everybody knows that you have to be, it counts for the full year. So if I've got a vessel for half a year under an agreement and I've over-complied beyond that half a year, I'm now sitting with this, I've got a unit of value that maybe because I couldn't sell it because it hasn't been the full year, I now pass the vessel under somebody else. And hey, wait, they're getting the benefit that I paid for. So yeah, have I understood that correctly? You understood it completely correctly. There's an added problem that you don't have final verification at that point. So there's a risk even that you don't know of the exact surplus or deficit. I think in practice the verifiers are quite good at assessing that. So the big issue is really the pricing and how you handle that when you have the compliance in a reporting year basis. And that's really one of the very inflexible features of the flexibility mechanisms of pooling, which the IMO, that's your framework, will handle better for different reasons, but it is difficult in practice. That's really where the fuel you is so much more difficult. And for instance, the UETS, where you don't have that problem that you assume the responsibility when you take over the vessel. We're going to get into what the implications are for IMO a little bit later. So hang on to those suggestions. I'd like to now dig into the fuel mix. So we have a bit more data on this from the commission, looking just at the sustainable fuels that we're used to comply. Bio-diesel makes up around 2/3. And as we've been discussing, this is a drop in fuel. And it's sold typically as blends in the major ports. Then around 1/3 was Bio-LNG, or liquefied bio-methane. And finally, around 5% is a mix of onshore power, bio-methanol, e-methanol, wind-assisted propulsion. This does not include fossil LNG, which is certainly part of the compliance story. It can comply even up to 17% reduction against the baseline for the high-pressure engines with low methane slip. But setting that aside, looking at the sustainable fuels-- Laritz, are you surprised by these numbers? I guess it is in line with what you mentioned earlier around Bio-diesel. Yeah, I mean, so apologies for getting a bit technical. We like to do that as such, vices. So just to justify ourselves. But essentially, in my head, I sort of see if you line up all fuels from the cheapest abatement cost to the most expensive, then you need to move rationally. You take the cheapest fuels first, of course, constrained by supplier that fuel in the fleet. And then you will move up and up in abatement cost until you've hit the amount of fuel you credit you need. So with that in mind, obviously, the cheapest abatement cost now, that is, as you just said, allowed until 17% or can abate up to 17% is LNG, fossil LNG. So rationally, what I would have expected is that fossil LNG would take up a large share of this. Was that the intention? Now, that starts with a political question, right? But I mean, that's the same dynamic you see here, right? So fossil LNG will take up, right? That will take up as much as it can. And then you need to move up abatement costs. And if we look at something like Bio-LNG, that is when it's possible-- it's a bit harder to bongo and you need an LNG engine-- that kind of bait at-- it's not-- I don't think it's on anything to say-- 2 to 300 dollars a ton in the early 200s of Euro-a-ton. So that is a bit-- That's a ton of CO2 abatement. Exactly, exactly. And when you move into fame, you probably, as a general rule of thumb, move into the 300s. So I think the dynamic we've seen is that a lot of the LNG users, fossil LNG users, they've tried to generate some credits. And they can principally do that, especially with the high-press engine you mentioned, until into the 2035-ish. And then you will see an increasing amount of Bio-LNG, again, Bio-LNG is given what I just said. It appears to be the cheapest. And then you will get fame. And then you can see, as we move over time in fuel yield as the reduction requirements increase, you need to go into Eucannacu, greener and greener fuels. So fuels with lower CI scores, so carbon intensity scores. So from into the 2030s, LNG can no longer do it. You need something greener. And that's where Bio-LNG, again, constrained by the amount that shipping can actually get, can do the place fame. And then as we move into the future, fuels that I can bio-methanol, potentially ammonia can get in there. But I'm not surprised to see that the amount of, for instance, Bio-Methanol used here is quite small, because it's just, for the time being, a more expensive way to comply. Yeah, I think, you know, to the question earlier on, is pooling working? I think this is maybe one sign that it is, that according to the logic you laid out, which makes sense. You line up the abatement, the quantity, then defines the price. That if we compare what the pooling prices are, they line up pretty closely, actually, with what you mentioned, and they are bringing in those low cost abatement fuels. So in one sense, I think it seems to be working. I think on the question of, is this the intention of the regulator, the fuel use actually quite explicit on what its intention is, which is to bring in renewable and low carbon fuels, I guess maybe the definition of what is a renewable low carbon fuel is, potentially. Yeah, bring that back up, and we talk about learning's final. Yeah, there is, of course, an RFNBO, renewable fuel of non-biological origin. Well done. Well done. It's a very European union term for e-fuels. There is a multiplier in there, but we don't see too much uptake. Yeah, and I mean, that's an incentive to try and drive that uptake of e-fuels. We are still in a world, for many reasons, where e-fuels are just expensive, you know, it hasn't scaled as we'd hoped for. So of course, it's supportive of e-fuels, but we just still see the supply being so nascent. I think that's a challenge there, but hopefully, now I'm passing judgment, hopefully. But you can see that drive uptake over the coming years. And do you see this as on the supply of e-fuels? You said the scale isn't there, is it really the availability or essentially the price that if we could produce it at a cost that was competitive, we would find a way to get it. So I think you're asking me if it was the chicken or the egg. I mean, we had a bit of a search situation. You had the domain side. And I'm thinking about a famous project that was closed down a couple of years ago. You had the domain side saying, oh, we can't get this e-methanol because it's not available. And then you had this supply side saying, we can't produce it because no one wants to buy it. And I was like, well, that's a big contradictory. But the truth was in the fact that it was just expensive. So we need to get the cost curve down, which is a longer story about electricity prices, value chain prices, and so on. Well, we'll leave the chicken and egg for a future episode. I want to dig in a little bit more into the liquefied bio-mething or bio-LNG. I know people have strong feelings about what you call it. So I'm using bio-entery and something like that. Yeah, it has too many names. Certification. This has been tricky. I think what is interesting to me about the bio-LNG is that essentially it can be a paper trade on both sides, that a vessel that can burn LNG and its engine can purchase credits upstream, guarantees of origin for bio-mething, and then use virtual liquefaction to in essence on board that bio-LNG, even if it's not. physically unboarded. But that's only allowed in the EU. Then they can then go on the other side and then trade the overcompliance. So it seems to be we have a third that is using this option, I guess, determined largely by prices. Can you talk about the certification and then challenges because that's not the full story? It's another animal in the sense that we have the fuel you which is one thing in itself and it's complex for many reasons and I daily thank the EU Commission for giving us these wonderful regulations. Another regulation is the renewable energy directive known as red and we're now red-free which basically sets out all the requirements for certification of biomass-based products including biofuel and it's a quite extensive framework but it's been there for some time and I think that many of the fuel producers in the EU have gotten used to it and there's a framework for certification and my understanding generally works what hasn't quite worked yet in my understanding is how it's applied in practice in terms of bunkering for instance that there's a delay in the certification compared to when you actually sent the, oh sorry, get the bunker delivery notes. So there's some practical difficulties within to the delivery of biofuel but the the the l&g bio-l&g is not the most complex at all I think it's and at least not if it's produced in EU there are other issues like certification of foreign-based products which is much more difficult. Can you talk a little bit about that? That's been a big topic. It's partly a different topic but when you use gas-based products from the first grade for instance in low, low fossil carbon fuels then it needs to be connected to the EU gas grid in order to actually be approved on the red meaning that you cannot get certification on the red if you have uers-based products for instance and that's restricting the market to EU producers when you're talking about these fossil-based gaseous fuels and that's a bit sad from a market perspective I think because it clearly lowers the supply side and that's basically because of a regulatory issue that the commission has made this restriction. For valid reasons I'm sure but in practice it has a market impact and that's general for not only red but also fuel you obviously that the regulations really set the market how it can be and the market will be constrained by the constraints of the regulation and that's really true with fuel you also so yeah I want to then dive into this point on regulations creating a market and now shift into IMO. One of the things that I have seen work really well with the fuel you is the long term certainty it provides I've heard shipping companies say with the fuel you I know what to do and setting aside any variability around the pooling price perhaps some uncertainty near term around where that price will land they know long term there is an 80% target in 2050 and this will fundamentally need to change how they think about planning their fleet and to me that has been highly successful so even if there are some perhaps gaps near term in incentivizing the most ambitious fuel types long term this should generate that shift so first I'd love to hear if this is something that you're hearing in conversations around that long term certainly do do shipping companies understand this and is it impacting their their planning and strategies definitely whenever we help shipping companies make decisions we usually have several scenarios right we have a fuel EU only world which you can argue should act as a backstop for any investment and then we also try and model in okay what would happen if you have an and IMO that's you a framework in you know next year and five years and 10 years and that fuel EU backstop is just needed right because without it we don't have that much regulation so that certainty is absolutely crucial and uncertainty is poisonous investments it's something that you know I've I've been kind of diving into fuel standards more broadly the fuel use unique and that it applies to maritime first of all it's the first but it's also unique among other fuel standards that it has this 2050 target most fuel standards only go out five 10 years so I it seems to be a powerful yeah and it's completely as as you say now it's fuel is so important for the future not only for you know the certainty that she bonus to know now but also for the development of development of a future regulations like obviously in the next year framework if it hadn't been for fuel you I'm not sure that there have been this push that there has been even though we haven't gotten it yet but it's a very important point how the regulations impact the market and so on and if I may make a follow-up comment to the discussions we had on pricing before because obviously the market prices is yeah affected by what happens in the world to me it's also funny to see how the regulation affect the pricing on a monthly basis for instance that you know and I remember that when we were approaching the deadlines in April under the fuel you how some owners and some chattels really got anxious now they need to get prepared for the pooling and that push prices up and my understanding a tiny bit at least and then you have a drop for many different reasons probably but one of them may be that now it's done and we have this settlement in April but it's only because we have this framework that says that we hand in compliance on a yearly basis and from a contract to a point of view as I mentioned before it creates some issues and I think that many things could be solved from a market perspective much better if we didn't have that but also if we had a more easy access for marketplace to actually be involved in fuel you pooling one really big problem is that you don't have the ability as a non-duc holder to trade fuel you surplus and deficits you can only transfer between a vessel and another vessel you're not allowing a surplus to be put into an account for instance and then to be re-transfered to another party like you have with the EWS where you have that flexibility and that's really essential for creating that marketplace flexibility that you don't have in fuel you or all you need to do a lot of work around because of this very fixed setting of transferring surplus and deficits now turning to IMO we don't have a regulation in place of course we do have draft regulation from last April now we're starting to see new proposals new draft regulation but taking what we learned in April what elements have been now fixed and maybe if you if you could have the ear of the IMO what would be your yeah as a starting point I'm really impressed actually by what what they have made because regulations are difficult they're hard it's not easy to make completely new regulations when you don't have anything that you can base it on and that's why there are some problems with the fuel you that are now fixed with the NETSURE framework and obviously there's still some issues out there one really really important aspect of the NETSURE framework is that you talk about surplus units or remedial units where you actually allow to transfer those without transferring the whole balance for a vessel for given year and that's essential to allow a more even or easy split for instance between one owner and another owner in a year or between one charter and another charter because today with the fuel you you cannot do that you need to do that settlement when you take delivery or redirect and you cannot say I want to to transfer a vessel sorry a surplus or deficit one vessel but out also involving the other vessel that you need to to involve in order to obtain that certain surplus do you think the fuel you would be more efficient if you allow for some sort of IMO it's zero framework yeah remedial you are trading yeah definitely I think it would and and luckily you know the commission has said that they are looking okay to be viewing the the fuel you once the IMO has been passed and it will also be crazy wouldn't it if we had the UITS fuel you and IMO NETSURE framework on top with different you know thresholds and different pricing points and etc so I think it's it's clear that you needs to amend the the fuel you if IMO NETSURE framework is passed how they will do it I don't know it may be that they will put you know and add it you know pricing element into it saying that they follow the thresholds of the IMO NETSURE framework but adds another penalty I don't know how that will impact the market well we've certainly modeled a little bit and tried to stack them up and see those prices and I don't think the market would like those so I think we'll yeah we have to see some some sort of compromise yeah and I honestly if I was asked I would believe that having a common global standard would would would benefit us all more than having a tapestry of regulation yeah well tell me more why I mean for instance I think a hot topic right now is around carbon intensity scores and and allowance of of different types of fuels right let's say you have a world where where the big ethanol producers ethanol producing countries are successful as in introducing some sort of first generation ethanol into the ImoNet CEO framework. That is not currently allowed under the fuel EU, and well, also it's not produced in Europe, so there are also political issues to that. So, well, are you just going to comply with one fuel outside the EU, and in the moment you enter, you use another fuel, and also thinking about investment predictability that just makes it more difficult as a fuel supplier, where you have to, you can't just say, "Okay, for the next couple of years, you need to look into decades to return such investment." So, that kind of uncertain, she's not good, neither for vessel owners. Yeah, I guess for an industry that by its nature has to operate internationally, apart from some of the segments, you need to have similar rules so that you can make the most efficient decision. I don't know the point you made earlier on predictability. When you buy a vessel, it needs to live in this world for 25 years, the same with the fuel plant. Yeah, we'll be interesting when we get more data to see if there are shifts in patterns of certain vessels that are sailing more into the EU. For example, are LNG-powered vessels trading more in the EU than they are outside? I would believe so if I had to stick my neck out, would you? It would make sense. Okay, great. Are there anything, Laurets, that other than having a global regulation that we can learn, we've got moving to a surplus unit, which sounds like this will address that problem earlier you mentioned around the turn authority. Is there anything else you would say on the floor of the IMO, if given the mic? Yeah, I think, well, many things, but let me start simply here. So I think, first of all, you have a fuel EU emissions trajectory that inherently favors LNG. Then with the CIS goals that we have today, LNG, at least some of these can comply onto the 2030s, as I said, right? The initial draft for IMO was much more ambitious, if I can use that word, to not allow LNG for so much. So I do think, of course, it's a more pragmatic solution to allow a well-functioning value chain of LNG to comply. But others would argue that it's a bit counter to the idea of incentivizing green fuels. I mean, we work with clients, fuel producers, who look at that and say, okay, you know, bio-methanol is first going to be in the money in so many years, so making that investment decision now is simply too risky for our investment committees. So there is a balance that you need to strike really carefully between allowing what some would call LNG transition fuel and actually incentivizing the real low carbon fuels. So I think that's something that they need to look into. And is that mostly a function of where you set the targets? I think it's a function of sort of that trajectory. Yeah. You know, what is the percentage reduction in carbon you need, right? And as the fuel EU looks, you know, with the first 2%, then 6%, then 15%, and so on, you can't get by quite long with LNG. And again, with these long-term decisions of investing in fuel supply in vessels and so on, you need predictability for that. And I would just fear a world, and I don't want to be fear-mongering, but I would fear a world where if you allow LNG for too much, people are just going to say, well, this is a commoditized industry. Already, margins are thin. I'm not going to go into this. I'm going to ignore it for the next 10 years, and all of a sudden, there's a squeeze and then people weren't prepared well enough. So I think that's at least the learning that needs to be striked very carefully. And then I think, but well, something that actually politically could work very well with the fuel as opposed to the initial draft of IMO is the inclusion of this centrally-managed fund, you know, for some geographies and some countries that was too much to what they could agree to. So you can argue if you have a well-functioning market like the fuel EU that we know, well, we're seeing it, we're seeing it commoditized, we're seeing it work, you know, with a little bit of flaws, as always, I think that could be a learning for the IMO. We haven't touched on the penalty very much, which I think is misnamed in the fuel EU because it's really more of a compliance mechanism. It has this useful benefit of being called the penalty that you can take that into a boardroom and scare your leadership about what happens if you don't comply. But there is a fundamentally different approach between the IMO and the fuel EU here, where the fuel EU attempts to create kind of a threat of noncompliance, even though it is a compliance mechanism of the penalty. Whereas the IMO uses the remedial unit approach, which, first of all, there's the name, which actually I think is a more accurate name, right? It's a way in which to remediate your compliance, but the price is very different, so 380. Knowing today what the fuel EU prices are sitting around 200 to 50 at the top, we would probably likely see not very many ships using the remedial unit if the IMO were in place today because there would be the pooling surplus unit available. But it also is in place to act as a kind of price ceiling. So it can ensure shipping companies don't worry. You will never have to pay more than 380, but that's a different approach to policy-making. What are your thoughts on these two approaches and what is maybe more effective? Well, by putting the 380, it's more deterministic in a way, because you're saying this is what you have to pay. Whereas in the EU, you allow for more flexibility. You can see a world where we have many of the low carbon fuels if they cannot deliver a payment below 380, then we have an issue. Then if it becomes cheaper for people to just pay the price of 380, then you're not seeing the uptake of greenfield you want to see. Whereas it's a bit different than the EU. The EU is essentially saying let the market determine, by the price of setting mechanisms we discussed before, let the market determine what that price should be. And then that very high penalty, you have the fuel EU, for me, is almost more like on paper, you don't. I would not. Well, we saw in the data you presented initially, right? People are not paying that fine that much because it's so high. So it's more almost as a threat or backstop in that sense. So there is a risk with the lack of flexibility of having that 380. Do you think it's an effective threat, though? I just imagine that these boardroom presentations were. It motivates. I mean, we certainly like to use it, but. For the time being, the raw compliance mechanism with the trajectory of emissions going down in the beginning, it's easier to avoid it, but I think as we move on, as we move into e-fuel territory, I think that 380 is not that high. Thomas, any reflections on anything else, too, if you had the mic? Well, it's. Sadly, I won't, no, but I think. I'm always interesting. I think the numbers may not be sufficient, I'm not a numbers guy, I'm a text guy, but just to say that they're things that they could consider. First of all, I think they should trust the verification more, in the sense that everything is obviously depending on the verification, but if they allow for verification on a. What should you call it? Not that you allow for verification, that is not just fixed to that particular point every year. If you allow for verification, for instance, in April, when you're done with that. An ongoing kind of rolling. An ongoing kind of rolling, where you also allow for the parties to, for instance, transfer the surplus unit at that time, and you allow it to non-ship owner entity, then you would create a much more effective market. And that's really the problem with both you, Ryu and Netsu, from a legal perspective. I think that the industry is doing great things, doing workarounds, but it would be much easier if they had a more market-based approach, allowing for a more flexible transfer unit, and I think that will also create a better basis for the price development section. Maybe just to add, I wouldn't say that the 380s is necessarily too low. My point was more that it's not that flexible, right? We don't know what will happen to fossil prices, to. Sure. Energy prices and so on, and then we may see a situation we don't want to be in. Right. All right. Well, I don't know if we fully solved how the IMO can implement a regulation, but I think there's a lot of interesting learnings here, and I'll be very curious to see how this data continues to progress. I think we all will. Yes, exactly. So thank you both very much for coming. I think this has been a really interesting conversation, and look forward to following the fuel you with both of you. Thanks for coming. Thank you so much. Thank you. Thanks for listening to The Current by the Merisk Mechanic Moleur Center for Zero Carbon Chipping. You can find references and links to our work in the show notes. I'm Joe Bettles. Thanks for listening. Thank you. See you next time. Bye.