Shipping and Emission Requirements – Decarbonization

Global shipping accounts for approximately 3% of the world’s CO2 emissions. This is not a particularly large share, but when total emissions are broken down by individual sectors, the figures for each sector are small. It is therefore not surprising that shipping will also be subject to future regulations aimed at reducing emissions. Without changes, shipping emissions are projected to increase by 30% from current levels by 2050. Both the IMO and the European Commission are working on measures aimed at reducing emissions, and there is reason to expect that current and proposed requirements will become stricter over time. For many ships, the regulations will require operational measures and adjustments to time-based provisions that account for the need for ship modifications affecting speed and fuel consumption.

The regulations will take effect immediately for all dry cargo and tanker vessels over 5,000 gross tons, i.e., the vast majority of Norwegian shipping companies engaged in deep-sea shipping. The measures will affect approximately 75% of the global fleet, requiring physical modifications and potentially impacting cargo capacity, speed, and fuel consumption. Commercially, the changes are particularly significant for long-term chartered vessels, and shipowners should consider adjustments to both existing and new time charter agreements.

To date, measures have focused on propulsion and efficiency requirements for newbuilds under the EEDI (Energy Efficiency Design Index) regulations for new ships. The EEDI regulations are IMO regulations and form part of the MARPOL Annex VI regulations, which entered into force on January 1, 2013. The next step in this development involves energy efficiency and reporting requirements for existing ships in the form of MARPOL’s EEXI (Energy Efficiency Existing Ship Index) and CII (Carbon Intensity Indicator) regulations. The EEXI and CII regulations have been adopted and will take effect on January 1, 2023. The regulations apply to all existing seagoing cargo vessels over 400 (EEXI) and 5,000 (CII) gross tons. Offshore and fishing vessels are exempt from the regulations. Violations of the EEXI and CII regulations may result in fines and detention in port.

Under the EEXI regulations, the actual energy efficiency of each vessel must be calculated. The result obtained is compared to a reference value for the specific ship type. If the calculated EEXI exceeds the reference value, measures must be implemented to bring the vessel’s energy efficiency within the ship-specific reference value. The measures will focus on the consumption side in the form of:

• Reduction in propulsion system performance, i.e., "Engine Power Limitation" (EPL)
• Reduction in shaft power, i.e., "Shaft Power Limitation" (SHAPOLI)
• Changes in fuel composition or other modifications to the propulsion system

The measures must be implemented by the annual class inspection following January 1, 2023. The measures may result in reduced speed and fuel consumption. The changes will affect the speed and fuel consumption provisions in existing and future charter parties, and BIMCO has therefore drafted a transitional clause. The BIMCO clause grants the shipowner the right to make EPL and SHAPOLI modifications in lieu of the charter party’s original speed and fuel consumption figures. The vessel will, as usual, be off-hire during the time required to carry out the modifications. For other changes, the BIMCO clause is subject to the charterer’s consent.

The regulations are modeled after the EEXI to measure CO2 emissions per unit of cargo and nautical mile. The measured ton-mile efficiency is compared to a required CII, where the vessel is assigned a grade on a scale from A to E. The minimum requirement over time is a grade of C. The shipowner has a reporting obligation for each individual ship in the fleet. The measures required, i.e., any physical changes to improve the result, will be very similar to those applicable to EEXI. The regulations have also led to trials with new fuel types such as ammonia and methanol. Current and new charter parties should include a provision allowing the shipowner to impose restrictions on speed and fuel consumption, as well as make necessary modifications. BIMCO has recently introduced a TC clause that addresses the shipowner’s needs.

It is only a matter of time before the EU introduces its own rules for vessels carrying cargo to and from EU ports. In June 2022, the Commission adopted a revised proposal to include greenhouse gas emissions from shipping subject to the emissions trading scheme into the EU Emissions Trading System. The rules are proposed to take effect in 2024 and will apply to ships over 5,000 gross tons. The proposed regulation distinguishes between voyages within the EU, where the requirements will apply at 100%, and voyages to and from EU ports, where the requirements are reduced to 50%. Starting in 2027, there will be a further tightening of the rules, which will apply to ships over 400 gross tons, with 100% compliance for voyages within or to and from EU ports. It is not clear who will be held responsible, but the proposal is based on the operational shipowner concept in the ISM Code. Charter parties with a duration extending beyond January 1, 2024, should include an ETS clause governing procurement and cost allocation. BIMCO has introduced an ETSA clause that should be considered for inclusion in charter parties with a duration extending beyond January 1, 2024.

New regulations have been proposed that aim to reduce the greenhouse gas content of marine fuel by 2% as of January 1, 2025, rising to a 75% reduction by January 1, 2050. As with the EU ETS, the requirements are proposed to be implemented at 100% within the EU and at 50% for voyages to and from the EU.

Regulations governing the "monitoring, reporting, and verification" of emissions are already in effect within the EU. The requirements apply to ships over 5,000 gross tons.

The European Commission is preparing additional measures ranging from renewable fuels to fees and taxes. There are strong indications that the EU will go further than the measures currently proposed through the IMO. There is therefore little doubt that the Commission will introduce new measures, presumably also in those sectors of shipping that are not currently covered, cf.:

“This set of measures reflects our goal to reduce greenhouse gas emissions by addressing the various barriers to the decarbonization of the sector (technological barriers, economic barriers, etc.). We are approaching this from two complementary angles: first, improving energy efficiency (i.e., using less fuel) and, second, increasing the use of renewable and low-carbon fuels (i.e., using cleaner fuels). These measures will help create a virtuous cycle for such cleaner fuels, as they simultaneously boost fuel demand, distribution, and supply.”

Will the current measures result in reduced emissions? With global trade demand for ton-miles remaining unchanged or increasing, a reduction in ton-mile capacity will have to be offset by more vessels. A real reduction in emissions will likely require new types of propulsion solutions. Here, as elsewhere, being the first to act may prove costly.

Svend A. Lerring

Lawyer

Phone: 920 11 363