Decarbonisation and Shipping
In 2018 the International Maritime Organisation (‘IMO’) adopted the Initial IMO Strategy on Reduction of GHG Emissions on Ships as a roadmap for regulating shipping reducing its environmental impact, particularly as regards carbon emissions, by 2050.
The ambitions of the IMO’s Initial Strategy are:
by 2030 to reduce the carbon intensity of international shipping by 40% compared with 2008 levels and, by 2050 to reduce carbon intensity by 70%, and
by 2050, to reduce greenhouse gas emissions from shipping by at least 50% (compared with 2008 levels) and to phase them out as soon as possible.
These ambitions are to be reached through short, medium and long term measures. Short term measures include amending and expanding existing IMO instruments to improve ship efficiency at the design stage and through the ship's life in operational as well as technical terms. The medium and long term measures will start to be discussed at IMO level from 2023 onwards and concern a focus on new fuels and technologies as well as market based measure such as emission trading schemes, environmental levies and off-setting schemes.
In addition to international regulation through the IMO, shipping will also be exposed to multiple other sources of regulation, including EU regulation, national regulation, the law of the flag as well as any additional duties imposed by contractual agreement.
IMO Initial Strategy – SEEMP, EEDI, EEXI and CII
The majority of the regulatory changes which form the short term element of the Initial Strategy are being brought in through amendments to Marpol Annex VI.
SEEMP and the initial phases of EEDI are already in force and EEXI and CII are due to come into force in January 2023. Taken together, the regulations concern the energy efficiency of new and existing ships and benchmark improvements both in the design of new ships and continually over a ships operational life.
Ship Energy Efficiency Management Plan (‘SEEMP’)
Marpol Annex VI Regulations on Energy Efficiency for Ships (the ‘SEEMP Regulations’) were adopted at MEPC 62 and came into force on 1 January 2013.
These regulations apply to existing and newly built vessels and set out the various energy efficiency measures which ship's must comply with.
SEEMP – application to existing ships
The SEEMP Regulations require that all ships have a Ship Energy Efficiency Management Plan for improving the energy efficiency a ship through operational means, such as by optimising vessel speed, increasing the frequency of hull or propeller cleaning or by making different route choices to reach a destination or pass through heavy weather.
Each ship’s plan is specific to that ship and will take account of factors particular to it, such as cargoes carried, routes sailed, dry docking schedule, as well as broader corporate or fleet level strategies for improving efficiency.
The IMO has developed a monitoring tool, the Energy Efficiency Operational Index (‘EEOI’) to assist ship owners and operators in assessing the potential impact of any management changes.
SEEMP – application to new ships
The SEEMP Regulations require new vessels to comply with the Energy Efficiency Design Index (‘EEDI’) which sets minimum energy efficiency improvements at the design stage.
The EEDI applies to most ship types and requires improvement in energy efficiency by reference to grams of CO2 emitted per tonne mile. The improvements in CO2 emissions are updated in phases such that CO2 emissions are progressively reduced.
In the first phase (1 January 2015 to 31 December 2019) a 10% reduction of CO2 grammes per tonne mile below the applicable reference line was to be achieved. The second phase, which will run to 31 December 2024, seeks a further 10% reduction of CO2 per tonne mile. MEPC75 decided that for certain vessels, the third phased 10% reduction will commence on 1 April 2022, rather than 1 January 2025.
The EEDI does not prescribe how CO2 is to be reduced, leaving ship designers and builders free to innovate through the technical development of all components of the ship which contribute to fuel efficiency.
Energy Efficiency Existing Ship Index (EEXI) / Carbon Intensity Indicator (CII)
At MEPC 76 in June 2021, further amendments to Chapter 4, Marpol Annex VI were adopted which provide for the establishment of an Energy Efficiency Existing Ship Index (EEXI) and a Carbon Intensity Indicator (CII). These new measures are aimed at gradually reducing the ship’s carbon intensity, addressing how the ship is retrofitted and equipped and how it operates, continuing the IMO’s approach to improving ship efficiency through the adoption of both technical and operational measures.
Now that the EEXI and CII have been adopted by the IMO, they will come into force as new regulations with effect from 1 January 2023.
Energy Efficiency Existing Ship Index (EEXI)
The EEXI will apply to existing ships of and over 400 gross tonnes and require those ships to achieve a certain level of energy efficiency for their size and type compared to an industry baseline.
Each ship will be given a target level of efficiency, known as the Required EEXI, which will be calculated on the basis of a percentage reduction from the baseline used in the EEDI measure. Each ship will then need to calculate its estimated efficiency level, based on information relating to the equipment and running of the ship collated in a ship specific technical file. This value is known as the Attained EEXI. If the ship’s Attained EEXI does not meet or exceed the Required EEXI the ship will be required to take corrective action.
The EEXI is a goal-based energy efficiency measure, which means that, provided the Required EEXI is met, Owners are able to select what they consider to be the most appropriate energy efficiency improvement methods for their specific ships. This is similar to the approach adopted by the IMO in relation to the reduction of global sulphur oxide emissions, pursuant to the IMO 2020 Sulphur Regulations, whereby owners could choose between either burning low sulphur fuel, or retrofitting their ships with scrubbers, to achieve compliance.
As the EEXI relates to technical features of the ship, options for improving efficiency include (i) engine power limitation (i.e. reducing the installed power of the ship’s engine) (ii) changing the ship’s fuel (e.g. diesel fuel to LNG) or (iii) installing energy efficiency technologies (e.g. rotor sails, hull modifications or propulsion improving devices).
From 1 January 2023 the ship’s technical file, containing relevant information on the calculation of the EEXI and the underlying documentation used to produce the calculation, will be approved by the ship’s classification society and a new International Energy Efficiency Certificate (IEEC) will be issued on the ship’s first International Air Pollution Prevention (IAPP) survey or Initial Energy Efficiency (IEE) survey.
Carbon Intensity Indicator (CII)
Regulations concerning the Carbon Intensity Indicator (CII) will apply, also from 1 January 2023, to new and existing ships of and over 5000 gross tonnes. Pursuant to these amendments, ships will be required to calculate their actual annual operational CII. This will then be compared to required value so as to give the ship an annual CII rating ranging from A–E (where A is the most efficient and E is the least efficient) showing how efficiently the ship operated during the previous year. Year on year, greater efficiency will be required such that ships will need to engage in a process of continuous improvement in order to hold their rating over time.
There will be a minimum standard and ships will be required to achieve a rating of C or better. Any ship that receives a D rating for three consecutive years, or an E rating, will be required to implement corrective actions to increase its rating to C or above. For ships subject to the CII measure, the SEEMP will need to be enhanced to include a methodology and plans for monitoring and calculating the CII and evaluating the position and making improvements. Corrective actions taken to improve the ship’s rating must also be documented in the ship’s SEEMP. For ships with higher efficiency ratings, A or B, the IMO is encouraging ports and other stakeholders to offer discounted tariffs, so as to act as an incentive for ships to improve their efficiency above the required minimum standard and to attain the higher ratings.
Technical guidelines on calculating the CII,have been issued by the IMO and it intends to review the effectiveness of the measure from January 2026 onwards.
Emissions Trading Schemes (‘ETS’)
The IMO has not yet started to discuss emission trading schemes, these are part of the medium to long term measures identified in the Initial Strategy.
By contrast the EU has brought forward proposals to add maritime to the EU Emission Trading Scheme from 1 January 2023. China and North America have also indicated that they intend to devise similar schemes.
On 14 July 2021, the European Commission published a package of proposals aimed at reducing the EU’s net greenhouse gas emissions by 55% by 2030, compared with 1990 levels. Included in the ‘Fit for 55’ package was a revised set of proposals for including carbon dioxide emissions from maritime transport which replaces the previous proposal published in September 2020.
The Fit for 55 proposal in relation to maritime transport’s inclusion in the existing EU Emissions Trading Scheme is a new directive which amends:
- Directive 2003/87/EC (the ETS Directive), which is the piece of EU legislation which governs the EU ETS; and
- Regulation 2015/75 (the MRV Regulation), which is the piece of EU legislation which governs the system of monitoring, reporting and verification of carbon dioxide emissions from ships, that was phased into operation from 2017 onwards.
What does the new proposed directive do?
It will apply to:
- ships above 5,000 gross tonnage, performing voyages with the purpose of transporting passengers or cargo for commercial purposes, but excluding warships, naval auxiliaries, fish-catching or fish-processing ships, wooden ships of a primitive build, ships not propelled by mechanical means, or government ships used for non-commercial purposes; and
- carbon dioxide emissions released into the atmosphere by those ships.
And it will require the surrender of allowances to cover:-
- 50% of the emissions from ships performing voyages which enter or depart the EU;
- 100% of the emissions from ships performing voyages between ports in the EU and from ships at berth in a port within the EU.
What is the implementation schedule?
It is presently proposed that it will be mandatory to surrender allowances in respect of carbon dioxide emissions produced in the year 2023, and beyond, on a phased basis as follows:
- 20 % of verified emissions reported for 2023;
- 45 % of verified emissions reported for 2024;
- 70 % of verified emissions reported for 2025;
- 100 % of verified emissions reported for 2026 and each year thereafter.
Who will be responsible for compliance?
The proposed directive requires compliance from a “shipping company” which is defined as:
“the shipowner or any other organisation or person, such as the manager or the bareboat charterer, that has assumed the responsibility for the operation of the ship from the shipowner and that, on assuming such responsibility, has agreed to take over all the duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention, set out in Annex I to Regulation (EC) No 336/2006 of the European Parliament and of the Council [the ISM Code].”
What are the penalties for non-compliance?
- Publication of names of shipping companies who fail to comply with their obligations to surrender allowances;
- Payment of excess emissions penalty of EUR 100 per tonne of carbon dioxide emitted beyond the allowances surrendered. It is intended for the penalty to be index linked.
- Where a shipping company has failed to comply with the obligation to surrender allowances for two or more consecutive years, there is the possibility of expulsion from the EU for the shipping company or refusal of entry to ports in the EU.
The penalties for non-compliance, particularly those which relate to expulsion or refusal of entry are powerful incentives to encourage compliance alongside the threat of financial penalties.
Entities which come within the revised definition of a “shipping company” (owners, managers, bareboat charterers or other entity with responsibility for the ISM code) should review their contractual commitments with a view to bringing them in line with the obligations that are likely to be imposed by the EU from 2023.
Impact of decarbonisation regulations on charterparties and other contracts of carriage
Compliance with MARPOL falls primarily on owners’ shoulders, but the practical realities of upgrading ships’ equipment, and thereafter continuously improving efficiency and altering the operation of the ship to reduce emissions, will need to be worked out with charterers’ input, especially where long term time charters are in place.
Parties will need to consider how these schemes, particularly EEXI, CII and the EU ETS (as well as any further regional/ local regulation of carbon emissions which may come into force) sit with existing charterparty regimes and may need to negotiate and agree modified clauses in relation to the implementation of emissions reducing technologies and practices, the CII rating the ship achieves, and any changes to that rating – especially negative ones, which may impact the future tradability of the ship, and the extent of further measures owners may need to take to restore the ship to the required minimum rating.
BIMCO has recently published its EEXI Transition Clause for Time Charter Parties 2021 which is intended for existing or new charters to allocate risk and responsibility where technical modifications are required, with work ongoing on draft clauses to address CII regulations and the EU ETS.
We are grateful to Beth Bradley and Rachel Hoyland of Hill Dickinson (www.hilldickinson.com) for writing this article.
Further updates will be published as and when there are developments within the carbon emissions regime.