Shipping and emissions requirements – decarbonisation

IMO and the EU

Global shipping accounts for approximately 3% of the world's CO2 emissions. This is not a particularly large proportion, but if you break down the total emissions into individual sectors, they all become small. It is therefore not unexpected that shipping will also be subject to future regulations with the aim of reducing emissions. Without changes, shipping emissions are estimated to increase by 30% from today's level and up to 2050. Both the IMO and the EU Commission are working on measures with the aim of reducing emissions and there is reason to expect that the current and announced requirements will become stricter over time. For many ships, the rules will require measures on the operational side and a regulation in the time charter parties that takes into account the needs for modifications to the ships with an impact on speed and consumption.

The regulations will have immediate effect for all dry cargo and tankers 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 world fleet, requiring physical changes and with possible effects on cargo capacity, speed and consumption. Commercially, the changes are of particular importance for long-term chartered ships and shipowners should consider changes to both existing and new time charter parties.

MARPOL

So far, the measures have focused on requirements for progress and efficiency for newbuildings under the EEDI (Energy Efficiency Design Index) rules for new ships. The EEDI rules are IMO rules and part of the MARPOL Annex VI rules that entered into force on 1 January 2013. The next step in the development is requirements for energy efficiency and reporting for existing ships in the form of MARPOL rules EEXI (Energy Efficiency Existing Ship Index) and CII (Carbon Intensity Indicator). The EEXI and CII rules have been adopted and will enter into force on 1 January 2023. The regulations apply to all existing ocean-going cargo vessels over 400 (EEXI) and 5,000 (CII) gross tonnage. Offshore and fishing vessels are exempt from the regulations. Violations of the EEXI and CII rules may result in fines and detention in port.

EEXI

Under the EEXI rules, an actual energy efficiency must be calculated for each vessel. The result achieved is measured against a reference value for the individual ship type. If the achieved EEXI is above the reference value, measures must be taken to bring the vessel's energy efficiency within the ship-specific reference value. The measures will be directed towards the consumption side in the form of:

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

The measures must be implemented by the annual class inspection after 1 January 2023. The impact of the measures may be reduced speed and consumption. The changes will have an impact on the speed and consumption provisions in existing and future charter parties and in this regard BIMCO has prepared a transitional clause. The BIMCO clause gives the shipowner the right to make EPL and SHAPOLI modifications to replace the charter party's original speed and consumption figures. The vessel will normally be off-hire during the time it takes to carry out the modifications. For other changes, the BIMCO clause is made conditional on the charterer's consent.

CII

The regulations are based on the same criteria as EEXI to measure CO2 emissions per unit of cargo and nautical mile. The measured tonne-mile efficiency is compared to a required CII where the vessel is assigned a grade on a scale of A to E. The minimum requirement over time is grade C. The shipowner has a reporting obligation for each individual ship in the fleet. The measures, i.e. any physical changes to improve the result, will be very similar to those that apply to EEXI. The regulations have also resulted in trials with new fuel types such as ammonia and methanol. Current and new charter parties should contain a regulation that gives the shipowner the opportunity to make speed and consumption restrictions as well as necessary modifications. BIMCO has recently launched a TC clause that takes into account the shipowner's needs.

European Commission

Quota trading

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 that would incorporate greenhouse gas emissions from shipping into the EU emissions trading scheme. The rules are proposed to be implemented in 2024 and will apply to ships over 5,000 gross tons. The proposed regulation distinguishes between shipping within the EU, where the requirements will apply at 100%, and shipping to and from EU ports, where the requirements are reduced to 50%. From 2027, there will be further tightening where the rules will apply to ships over 400 gross tons and at 100% where shipping within or to and from EU ports is equated. Who will be responsible is not clear, but the proposal is based on the operational shipowner concept of the ISM rules. Charter parties with a duration beyond 1 January 2024 should have an ETS clause that regulates procurement and cost allocation. BIMCO has launched an ETSA clause that should be considered for inclusion in charter parties with a duration after 1 January 2024.

FuelEU Maritime

A new set of regulations has been proposed that aims to reduce the share of greenhouse gases in maritime fuel by 2% from 1 January 2025, rising to a reduction of 75% by 1 January 2050. In the same way as for the EU ETS, the requirements are proposed to be introduced at 100% within the EU and at 50% for shipping in and out of the EU.

EU MRV

A regulation for "Monitoring, reporting and verification" of emissions is already in force within the EU. The requirements apply to ships over 5,000 gross tons.

EU development goals

The EU Commission is preparing additional instruments ranging from renewable fuels to fees and taxes. There is much evidence that the EU will go further than the measures that have so far been launched through the IMO. There is therefore little doubt that the Commission will come up with new measures, probably also within those parts of shipping that are not currently covered, cf.:

"This basket of measures reflects our goal to cut greenhouse gas emissions by addressing the various barriers to the decarbonisation of the sector (technological barriers, economic barriers, etc.). We are approaching this through two complementary angles: first, the improvement of energy efficiency (ie using less fuel) and, second, the greater use of renewable and low-carbon fuels (ie using cleaner fuels). These measures will allow the creation of a virtuous ecosystem for such cleaner fuels, as it boosts at the same time fuel demand, distribution, and supply.”

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

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