A new year ahead for shipping – environmental and regulatory compliance
By Global Co-head of Shipping, partner Philip Roche, and Client Knowledge Director Kelli Bodal Hansen at Norton Rose Fulbright
ESG regulatory developments
The two main legislative developments in the EU which will have an impact for many in the industry in the year to come are: the expansion of the EU ETS and the introduction of the FUEM.
EU ETS
From January 2025, the scope of the EU ETS will expand further to include offshore vessels over 5,000 GT which call at EU ports. New challenges also remain for the vessels which have been subject to the EU ETS since 2024 in the next stage of compliance with the scheme: the emissions data for the 2024 year must be reported on and verified, by an accredited verifier, by 31 March 2025. Shipowners and operators then have nearly six months – until 30 September 2025 – to submit the number of EUAs required to cover their emissions for 2024. Failure to do so can result in financial penalties. Those responsible for ETS compliance will need to make sure that they are well prepared to the meet these deadlines. 2025 will also see the percentage of emissions for which EUAs must be purchased rise to 70%.
FuelEU Maritime (FUEM)
From 1 January 2025, all ships – regardless of their flag state – over 5000 gross tonnes (GT) which call at a port within the EU will be subject to the FEUM.
Ship owners and operators will be required to calculate the yearly greenhouse gas intensity of the energy they use and this should not exceed the limits set by the regulation. The FUEM then requires that greenhouse gas (GHG) emissions from eligible ships are reduced incrementally as against the baseline set out in the legislation.
Shipowners and operators should have already started thinking about this as vessels which will be subject to the FUEM should have submitted a monitoring plan by the end of August 2024 and the obligation to record data about emissions from these vessels started from 1 January 2025. The regulation introduces a number of mechanisms to allow different ways to comply with the legislation, which shipowners and operators will need to consider carefully. These options include ‘pooling’ the compliance balance for a number of ships so that, for example, new ships using low carbon fuels and therefore having a compliance balance surplus could be used to offset emissions from other vessels in the pool that cannot use such fuels. The commercial basis on which these pools operate will need to be carefully considered by participants as those contributing vessels with a compliance balance surplus will ask to be rewarded for reducing the penalties incurred by the rest of the pool.
There is also the ability for shipping companies to roll over surplus emissions compliance from one year into the next year for the same ship (known as “banking”) and FUEM provides a limited ability to ‘borrow’ from future surpluses in the next year. These mechanisms will become particularly complicated when delivering and redelivering ships – parties will not wish to inherit liabilities for compliance balance deficits that were incurred when that party was not responsible for compliance.
Accordingly, shipowners and operators will need to give much thought to how they will meet the requirements of the FUEM regulation. Chartering arrangements will require particular consideration and parties will need to ensure that they have properly documented the commercial agreement they reach on how the risks and costs of compliance with the FUEM regulation will be allocated. At the time or writing, it is clear that many companies have not worked out a strategy for dealing with this new challenge and we are seeing a lot of “agree to agree” clauses inserted in contracts as placeholders. BIMCO has produced a comprehensive but consequently quite long and involved clause which some are finding hard to digest – largely caused by the issues arising on delivery and redelivery.
There will be a lot of discussion on this issue over the next few months, but what seems unarguable is that the purchaser of the fuel will have to take responsibility for any penalties if the ship ends up with a compliance balance deficit. Pooling will be an option for charterers and owners – but the benefits of this may be illusory if there are insufficient ships with a compliance balance surplus to offset the deficit caused by ships using conventional fuel. Until the supply of low – or lower – GHG emission fuel is available, it seems likely that the penalties will have to be added, like the cost of EUAs, to the cost of shipping goods.
Sustainable finance
Sustainability is likely to remain at the top of the agenda for financiers over the next year. Whilst the focus of these sorts of sustainable financings for the shipping industry is likely to continue to be set around environmental targets, it is likely that more social and governance elements might be included in some facilities, for example, looking at gender diversity in the industry and also the improvement of working conditions for crew.
With the increase in environmental regulatory measures being introduced to the industry, financiers and borrowers will need to consider how they can set environmental targets which are ambitious enough to go beyond what companies are required to do by law, but also commercially achievable.
Transition finance is also likely to be relevant to the maritime industry. Aimed at helping to decarbonise hard to abate areas, there has been a great deal of focus on these sorts of financings and we expect this to be an area of interest to shipping in 2025.
Carbon capture and storage (CCS)
On-board CCS
There is still much discussions within the industry about which alternative fuel or fuels should be used to achieve decarbonisation aims. Until consensus is reached on this issue, one option to reduce emissions is to capture some or all of the carbon emitted from, or present in, traditional maritime fuels.
It should be noted that the use of onboard carbon capture is not accounted for in the FUEM regulation, though the EU says that it might assess the possibility to propose some changes, if appropriate in the event of future technological progress. In contrast, EU ETS regulations state that ship owners will not have to surrender allowances for fuel used where the CO2 is captured and stored in accordance with the relevant CCS directive or where the CO2 is permanently chemically bound in a product so that it doesn’t enter the atmosphere.
The challenges of onboard CCS remain high – the equipment is expensive to install and to run; current units do not capture sufficient CO2; there is limited provision for offtake of captured CO2; many units use amines which escape to air and may cause potentially carcinogenic gases to form – and the current benefits are therefore marginal at best. There are reports that many units at sea are not used due to the cost of operation. Without doubt, if these issues can be solved, then it will be a huge step forward in helping shipping to decarbonise, but the technology must catch up with the hopes and expectations before becoming a proven route to decarbonisation.
Onshore CCS
Carbon capture, utilization and storage is seen by many as an important technology to help mitigate greenhouse gas emissions from the use of fossil fuels in many land-based industries such as steel and cement making, power generation and other heavy users of power.
There has been much work on, and investment into, carbon capture technologies and CCSprojects, with Norway, the UK and other northern European countries working hard to exploit the storage potential of geological storage in the North Sea. These projects involve the permanent sequestering of captured CO2, with many looking to transport the captured carbon to depleted oil and gas fields. Whilst there are different options for transporting the captured CO2 to the store, pipeline seems to be the best option for many industrial hubs. However, for more isolated industrial centres, for instance SW England and South Wales, the transport of captured CO2 by ship is an attractive and perhaps the only commercially viable option.
Due to cost, it seems that government support in one form or another, as well as a regulatory framework, is going to be necessary to develop and fully integrate shipping into these projects. However, the interest that projects such as Northern Lights and the recent final investment decision in the UK Teeside CCS project is generating, means there is no shortage of ship owners who see this as a real opportunity and orders have been made for a new type of vessel to carry captured carbon.
Artificial Intelligence (AI)
AI technology is expected to have a big impact on ship management and trade, and it remains an area to watch in the year ahead.
With the increased regulatory focus on AI, those shipping companies looking to use AI applications in their business should carefully consider their compliance obligations in this respect. Shipping companies will need to consider, for example, the effect of the EU Artificial Intelligence Actand what steps they will need to take to comply with the complex regulatory requirements in the different jurisdictions in which they operate.
Notwithstanding this, this astonishing new technology offers tremendous opportunities for shipping companies to solve problems such as routeing, congestion avoidance, slow steaming and find other possible solutions to increase efficiency, increase profits, cut costs and reduce emissions.
Ship Recycling
There is much change on the horizon on the issue of ship recycling, with The Hong Kong Convention for the Safe and Environmentally Sound Recycling of Ships (HK Convention) entering into force on 26 June 2025. Once it is in force, the HK Convention will be applicable to any ship that is flagged in and any recycling yard which is located in a state which has ratified the HK Convention.
The HK Convention will require authorised ship recycling facilities to prepare a ship recycling facility plan covering issues such as safety and training and protecting human and environmental health. Each ship must also have a tailored ship recycling plan for each vessel before it is recycled, setting how it can be recycled safely. Shipowners will need to ensure that their recycling plans for the year ahead comply with the HK Convention.
The reaction of the EU to the coming into force of the HK Convention will be interesting. The EU Ship Recycling Regulation (EU SRR) largely mirrors the requirements of the HK Convention, but the HK Convention does not have the oversight mechanism of the EU SRR. Consequently the EU Commission does not see a need for the EU SRR to be aligned with the HK Convention, but rather they can continue as complimentary to each other.
However, the restricted list of ship recycling centres permitted under the EU SRR, which does not include the main SE Asian centres in India, Bangladesh and Pakistan, is a major challenge for EU shipowners. It remains to be seen whether the EU will be able to square its obligations under the Basel Convention and EU waste management regulations, which forbid EU waste being exported to developing countries, with expanding the EU SRR list to include SE Asian yards.
Failure to prevent fraud offence
The UK’s new failure to prevent fraud offence (FTPF Offence) under the Economic Crime and Corporate Transparency Act 2023 (ECCTA) will come into force on 1 November 2025. Under the legislation, an organisation will be liable if it fails to prevent a specified fraud offence from being committed where: (i) an employee or agent commits the fraud; and (ii) the fraud is intended to benefit the organisation or a person to whom services are provided on behalf of the organisation.
There are, however, defences available to the offence if an organisation has “reasonable procedures” in place to prevent fraud. The practical effect of this is that organisations will need to carefully review and where necessary, update their anti-fraud systems and controls to cover fraud committed for their benefit by employees, subsidiaries or third party agents.
The scope of the new FTPF Offence means that non-UK companies may be more likely to be caught by it than by the UK Bribery Act. As a result, both UK and non-UK shipping companies (and multinationals) with a UK nexus will need to consider how the new offence applies to them and to put appropriate anti-fraud procedures in order to manage the risks that this poses.
Sanctions
The level of new sanctions regulations released during 2024 and at the start of 2025 showed no sign of let up and continues to be a challenge for all those involved in international shipping. As the Russia-Ukraine war extends into its third year, politicians and regulators have remained alive to Russia’s efforts to avoid sanctions. From a maritime perspective, efforts are being increasingly directed against the so-called “dark” or “shadow” fleet transporting Russian oil. This ‘dark’ fleet reportedly numbers some 180 vessels which have caused concern due to their age, quality of maintenance and lack of recognised insurance, particularly for pollution. The US, UK and Europe have recently introduced sanctions against this fleet but this is, in effect, just a further step in increasing pressure from regulators to prevent owners inadvertently selling ships into the shadow fleet.
The introduction of UK OTSI (the Office of Trade Sanctions Implementation) and the Trade Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024 demonstrate an increased appetite to find and prosecute those who breach or evade sanctions. Although headlines are dominated by Russian-targeted sanctions, it must be remembered that strong sanctions against states, individuals and entities exist relating to Iran, North Korea, Syria, Libya, Myanmar and many more.
All participants in the shipping industry must ensure they have robust policies and procedures in place to ensure that effective due diligence checks are made on counterparts, trades, cargoes, ship to ship transfers and vessel acquisition and disposal, and that strong compliance programmes are in place and are effective to guard against inadvertent breach. Parties attempting to evade sanctions have become increasingly sophisticated in their approach. All companies must be on their guard against this.
Takeaways
2025 will be a further period of huge change and challenge for all participants in the shipping industry. Shipping will become more expensive for users as EU regulations increasingly affect ship owners and operators. However, with this change comes opportunities. Increased co-operation between ship owners and operators is going to be key in the year ahead as the industry gets to grips with new regulatory, technological and emissions-based issues which need to be factored into day to day commercial and administrative operations.
Whilst marginal increases in efficiency and reduction of consumption will help ship operators to comply with a number of new obligations in the short to medium term, the aims of industry regulators will only be achieved through technological developments in new fuels, energy storage, carbon capture and radical new designs of ships. Vision, finance and a certain amount of courage are going to be required if the challenge is to be met. And, in the meantime, the industry needs to ensure that it complies with the ever-increasing regulation and the increased appetite of regulators to take enforcement action.
On top of all this, there are the increasing geo-political risks due to wars in Europe, and the increasing hostility of some state and non-state actors to international shipping –these issues must remain close to the top of concerns for the industry. With these ongoing threats, there is a constant worry about getting good people to sea to crew the increasingly sophisticated ships. And human rights at sea campaigns are throwing light onto a dark and often deeply unpleasant aspect of the industry, with modern slavery being a concern.
And yet, despite all this, 2024 was a good year for shipping which economically is in rude health. Posidonia 2024 and other events were happy and optimistic. Shipping has survived all sorts of crises over the many centuries it has operated and seems in good shape to weather the many challenges that 2025 and beyond will present.
