Decarbonisation – new year, new rules
This article was originally published in Maritime Risk, February 2023.
The shipping industry has had its fair share of complex issues to contend with in the past few years. The natural drive towards automation and better use of technology has come with increased cyber risks; no sooner had the global COVID pandemic begun to show signs of declining than Russia invaded Ukraine, something which brought the constant thorn to international trade of sanctions to the fore.
However, as we enter into 2023, the shipping industry faces another stage of one of its biggest and most complex challenges – to achieve a reduction in greenhouse gas (GHG) emissions of 50% (compared to 2008 figures) by 2050. The continued pressures on shipping companies, in a time of a financial and energy crisis, is now going to increase with the additional requirements on them to achieve these goals.
International Maritime Organisation (IMO) targets
The IMO action plan to reduce GHG emissions from ships dates back substantively to 1997 when there was an IMO mandate to control them. A plan began to form and in 2013, regulations were introduced for mandatory design requirements for new ships – the Energy Efficiency Design Index (EEDI). This was aimed at ensuring that new vessels were more energy efficient and set increasingly strict carbon intensity standards, requiring a 10% reduction in the carbon intensity of a new ship by 2015 and 20% by 2020.
2023 is an important year in the IMO action plan as the short-term measures came to an end and the mid-term measures began. The mid-term measures are to reduce carbon intensity of the entire shipping fleet, extending now beyond just newbuilds, by at least 40% by 2030. Then, in 2030, the long-term measure to reduce carbon intensity of the fleet by at least 70% should begin, which should equate to the ultimate aim of the 50% GHG reduction by 2050.
These IMO mid-term measures started with the mandatory requirement from 1 January 2023 that all ships must calculate their attained Energy Efficiency Existing Ship Index (EEXI) to measure their energy efficiency and to initiate the collection of data for the reporting of their annual operational carbon intensity indicator (CII’, which links the GHG emissions to the amount of cargo carried over distance travelled and determines the vessel’s CII rating.
The EEXI Regulations apply to all existing ships above 400GT and in simple terms (albeit attained by way of complex formula), the EEXI estimates the CO2 emissions per transport work, or grams of CO2 per ton-mile. It is concerned with the vessel’s energy efficiency based on the design of the vessel (as opposed to her operation) – in effect, it applies the EEDI (previously applicable to new ships from 2013) to all existing ships retroactively. Different calculations will apply for different kinds of ships, e.g. bulk carriers, tankers or containerships.
The IMO regulations require that for a vessel’s first survey (be it annual, intermediate or renewal) on or after 1 January 2023, it must be compliant by ensuring that its attained EEXI (i.e. the EEXI specific to that vessel) is equal or less than the allowable maximum value (the required EEXI). That will grant a vessel its International Energy Efficiency Certificate.
The most common method for a vessel to achieve compliance if it was not to meet the required EEXI would be to adopt engine or shaft power limitation, both of which have the effect of reducing fuel use, and therefore CO2 emissions. A 20% reduction in speed can amount to a 50% reduction in CO2 emissions - but that amount of reduced speed can be critical for ship operators. There are however additional methods that have been available to vessels in order to achieve compliance such as retrofitting clean technologies or using low carbon fuels.
CII – Continuous improvement requirements
As opposed to one time attained EEXI obtained for a vessel, the CII is verified annually but requires that there is continuous improvement of the vessel’s operational carbon intensity. The operational CII achieved by a vessel each year must be verified and documented against the required annual operational CII and this will establish the CII rating.
A ship will be rated A (major superior, and best), B (minor superior), C (moderate), D (minor inferior) or E (inferior). Ships must operate at least a C rating – any ship rated at D for three consecutive years or E for one year must submit a corrective action plan to achieve a C rating. The first annual reporting will be completed in 2023 and so initial CII ratings will be given in 2024. As with the EEXI, the required CII will vary depending on the type of vessel.
The continuous improvement of the vessel’s CII is relative to the 2019 reference line and requires a reduction factor from that by 5% in 2023 and a further 2% every year until 2026 (with the reduction factor from 2026 to 2030 yet to be decided).
As mentioned above, the CII looks at how efficiently a vessel transports goods – it is concerned with more than just the design of the vessel but also her operation in the transport of her cargo. Therefore whilst vessels can adopt the same methods used to achieve EEXI compliance in order to ensure a CII rating of at least C, in particular, engine or shaft power limitation, there are other operational methods that can be utilised. This includes improving voyage planning, for example proceeding more efficiently between ports so that a reduced speed can be used for arrival at the destination at the right time rather than sailing at maximum speed and then sitting at anchorage outside the port. Reducing the cargo volume intake can also help to achieve a better CII rating or ensuring that fouling and marine growth is regularly cleaned.
2023 decarbonisation - new rules, new challenges
Whilst the shipping industry has been aware of the incoming regulations for some time, they have not arrived in 2023 without their problems.
The CII regulations have come with their critics, who argue that they could end up causing more carbon emissions rather than less. Critics argue that because the CII formula uses distance as a denominator, longer voyages help achieve a better rating. The consequence of that could be that less efficient vessels will perform longer voyages (emitting more carbon) whereas more efficient vessels will be used on shorter voyages. It is also argued that vessels carrying more cargo will be penalised with a bad CII rating, whereas the goal should be increasing fleet productivity by carrying more cargo and reducing empty legs.
The biggest challenge is likely to be difficulties which arise between owners and charterers, and the tension which might exist in various circumstance between the implementation of these restrictions on the vessel’s performance and the desire to maximise the vessel’s financial return. The obligation to comply with the regulations falls on the vessel owners. However, they will need the freedom within their charter contracts to ensure that they do so – that might not be possible if, for example, they have warranted the vessel’s speed or have an obligation to sail with utmost despatch but are required to effect engine or shaft power output limitations on the vessel. Charters will therefore require clauses which will give them such liberty to do what is necessary to comply with the IMO regulations. In November 2022, they published a CII Operations Clause for time charterparties which largely provided for this – given that as the charterers give the employment orders, they are responsible under this clause for compliance with CII and may be required to issue alternative employment orders to the vessel.
Moreover, the methods described above to achieve the required CII ratings will often be contrary to the best way, financially, a vessel can be utilised. Slower steaming is contrary to a time charterers’ requirements who wants the vessel to move as quickly as possible between ports with as much cargo as possible to maximise their return for every day that they pay hire. Equally, slower steaming does not help an owner under a voyage charter who wants to minimise the voyage times and maximise their financial return by completing their voyage and moving to the next fixture, or if they must wait at a port, earn demurrage.
2023 will see the start of the next phase of the IMO action plan to achieve the reduction of GHG by 50% by 2050 by expanding the design efficiencies to all existing vessels and applying carbon reduction factors to vessels – no mean feat considering the size of the worldwide fleet which remains responsible for over 80% of the world’s trade. But the size of that fleet also means that shipping accounts for approximately 3% of the world’s total emissions – approximately equivalent to Japan. Decarbonisation therefore rightly remains at the top of the IMO’s agenda – although many argue that these actions are not the right ones or not enough. But they are now here with us and owners and charterers will be required to work together to ensure that vessels are compliant, which will come at a cost and with that tensions. We are however only really at the beginning of a long road which is sure to see a number of other initiatives, amongst the many already in place, to help achieve the IMO’s goal.