Biofuels are poised to play an increasing role in international shipping as part of global efforts to decarbonise the sector. However, the use of biofuels raises several important legal issues which should be considered by parties prior to their purchase and consumption on ships.
Potential benefits from the use of biofuels by ships
There are two main regulatory regimes which provide significant incentives for shipowners and ship operators to shift to using biofuels.
First, the IMO introduced a target for achieving net zero greenhouse gas (“GHG”) emissions by or around 2050, as well as an interim target for reducing GHG emissions by at least 20% by 2030. As part of this initiative, shipowners are required to calculate and report their vessel’s carbon intensity annually under the Carbon Intensity Indicator (“CII”) regime and vessels will receive a CII rating ranging from A to E. Biofuels which have appropriate international certification and provide a well-to-wake GHG emissions reduction of 65% compared to marine gasoil (“MGO”)[1] may be assigned a lower carbon emission factor. This could potentially assist shipowners and ship operators with retaining or improving their vessel’s CII rating.
Secondly, the EU has taken steps to incentivise decarbonisation, as part of their target of achieving a 55% GHG emissions reduction by 2030. Starting from 1 January 2024, the EU has extended the application of the EU Emissions Trading System (“EU ETS”) to shipping. Shipping companies are now required to surrender emissions allowances for CO2 emissions on voyages to or from the EU. In addition, from 1 January 2025, FuelEU Maritime (“FuelEU”) will also be applicable, requiring significant reductions in the GHG intensity of fuel used by ships, with penalties for failing to comply with GHG intensity reduction targets. Vessels consuming biofuels which meet sustainability and GHG emissions saving requirements and are certified under the Renewable Energy Directive 2018/2001 (“RED II”), will benefit from preferable calculations of their emissions and GHG intensity, compared to the position if they continued solely consuming fossil fuel bunkers.
The CII and EU regimes, therefore, heavily incentivise the consumption of biofuels that meet applicable certification requirements.
Biofuels also offer a significant advantage compared to other forms of zero and low carbon technology, because they can operate as “drop-in” fuel (i.e. biofuels could potentially be used in conventional ship engines without any engine modifications). The use of biofuels could, therefore, allow shipowners to achieve GHG emissions reductions without expensive outlays on new ships or vessel modifications, that would otherwise be required for other forms of alternative fuel technology.
Issues relating to sustainability, emissions savings, and certification
Whilst there are considerable potential benefits for shipowners and ship operators in using biofuels under the CII and EU regimes, they should be mindful that these potential benefits are conditional on biofuels meeting the applicable sustainability and emission reduction criteria, as well as on receiving appropriate certification. If the biofuel does not meet the applicable standards or have the appropriate certification, then, under the CII and EU regimes, the biofuels are likely to be treated as producing emissions equivalent to the fossil fuel type. This would place shipowners and ship operators opting for biofuels in no better position than if they had continued using fossil fuel bunkers.
For this reason, it is essential for parties to consider whether the contractual wording in their charterparties and in biofuel supply contracts adequately protects their position.
Where shipowners are time chartering a vessel and have agreed that time charterers may stem biofuels, shipowners should carefully consider whether their charterparty terms properly set out the specification and certification requirements for any biofuels stemmed. Here, shipowners could be exposed to the risk that their time charterers might not stem appropriately certified biofuel, such that they do not receive any preferential treatment under the CII and EU regimes as compared to the position if the vessel had consumed fossil based bunker fuel. If this were the case, shipowners could face unexpected penalties and suffer losses.
Biofuel purchasers should consider whether the supply contracts include adequate provisions to protect their position under the regulations, for example, by including warranties that the biofuel meets applicable international standards, that evidence of certification will be provided, and that Bunker Delivery Notes (“BDN”) provided by the supplier will include details of the GHG emissions for the production and use of the biofuel supplied.
More generally, biofuel purchasers and sellers should consider whether the terms of the supply contract should include a mechanism for advancing claims for losses if there is a lack of appropriate certification. Typically, most bunker supply terms and conditions contain short time bars and provisions restricting claims for consequential loss. It may be that such contractual provisions could restrict the ability of purchasers to advance claims for consequential loss which arise from a lack of certification or from non-compliance with sustainability or emissions reduction criteria.
Potential issues with biofuel quality, handling, and storage
A further point worth considering relates to the quality of biofuels and to related onboard handling and management issues.
Bunker quality issues are not uncommon when it comes to traditional fossil based marine fuels. However, the use of biofuels presents additional challenges for shipowners, ship operators and bunker suppliers, given their unique physical characteristics and the fact that many vessels will have limited experience of handling and storing them.
Particular concerns revolve around difficulties with respect to the oxidation stability and cold flow properties of biofuels, the possibility that biofuels could cause the corrosion of engine parts and clog fuel filters, and the risk that biofuels could degrade in quality whilst stored in vessel tanks.
There is currently no clear international standard setting out quality specifications for biofuel bunkers. ISO 8217, which sets out quality specifications for conventional marine fuel oil, only covers biodiesel blends containing up to 7% of fatty acid methyl ester (FAME) by volume. While the ISO continues to work on the next ISO 8217 standard, with the intention of including specifications for biofuels, national authorities are stepping in to provide temporary frameworks for quality and testing of biofuel bunkers.
Singapore has developed its own specification for marine biofuel (WA 2:2022), which incorporates additional quality parameters and testing methods seeking to address the unique physical characteristics of biofuels. Meanwhile, South Korea has announced that it will be issuing its own standard for marine biofuel this year, ahead of planned biofuel bunkering trials, with a view to fully adopting biofuel bunkering by 2025.
In the absence of a recognised international standard for biofuels, buyers may wish to consider protecting their position by requiring that fuel supplied complies with a national specification or alternatively by agreeing bespoke terms regarding the specification of the biofuel to be supplied. Furthermore, given potential issues in relation to the quality of biofuels, it would be prudent for buyers to put in place robust testing and handling procedures to mitigate the risk of bad biofuel bunkers, and to avoid potential damage to vessel engines. This may involve testing for additional parameters that are not included in table 1 or 2 of ISO 8217.
Finally, given the risk of degradation of biofuels and the short time bars for quality claims typically found in bunker supply contracts, it is recommended that prompt fuel sampling takes place and that evidence of the handling and storage of the biofuel on the vessel is retained in the event of a bunker quality dispute. From the bunker supplier perspective, if any engine problems are alleged following the consumption of biofuels, it is likely to be worth investigating whether the biofuel was properly handled and stored on board, as this could potentially be a cause of any problems experienced.