Shipping Emissions Regulations – Will the Polluter Pay?

The global freight industry faces both downward (regulatory) and upward (consumer) pressures to reduce carbon emissions. We look at some of these pressures in this briefing and consider what their impact may be.

Down pressure:

Two IMO schemes, the Energy Efficiency Index for Existing Ships (EEXI) and the Carbon Intensity Indicator (CII), have just entered into force (1 November 2022) via amendments to the Annex VI of MARPOL, and must be respected by the vessels concerned from 1 January 2023.

The EEXI regime concerns the technical design of ships and aims to improve the energy efficiency of the world fleet. It is comparable to the Energy Efficiency Design Index (EEDI) which has been in effect since 2013, although the EEDI only applies to new ships, while the EEXI applies to existing ships. It will apply to any vessel over 400 GT subject to certain categories of exemption1. The EEXI scheme works by comparing a vessel’s so-called “EEXI reached” with its “EEXI required”. The required EEXI is a reference measure of energy efficiency which is determined by the type, capacity and means of propulsion of each vessel; the EEXI achieved is the estimated energy efficiency of the individual ship concerned, calculated with reference to the technical guidelines.

Where the EEXI achieved by a relevant vessel is demonstrated to be less energy efficient than the required EEXI, the vessel shall take action to meet the required EEXI. This will entail technical changes to the ship’s design, such as limiting engine/shaft power, bow or propeller upgrades, or using more energy efficient alternative fuels, of course. that the regulations do not prescribe the modification to be deployed in each individual case – it simply defines the energy efficiency criterion to be met. Compliance with the scheme will be reflected in the vessel’s International Energy Efficiency Certificate (IEEC).

While the EEXI regime is a technical measure, the CII regime relates to the operational energy efficiency of ships over 5,000 GT. As part of an enhanced Ship Energy Efficiency Management Plan (SEEMP), shipowners will need to monitor the amount of carbon dioxide emitted by each vessel against the operational mileage it undertakes each year. Depending on the efficiency of its operations, as calculated in accordance with the regulations, the vessel will be assigned a CII rating on a scale from A (upper major) to E (lower). The midpoint of a CII rating of C (moderate) is the minimum required rating or “CII required”, and vessels that achieve a CII rating of D (lower minor) for three consecutive years, or a CII rating of E ( below) for any year will be required to develop a corrective action plan to improve performance under the CII scheme, to be defined in the SEEMP. Beyond this corrective plan, it is currently unclear how the regime will be applied in practice, as this will ultimately be decided by each of the MARPOL signatory states, via the flag state administration and /or port State control and/or subject to further instructions from IMO.

A ship’s ability to reduce its carbon intensity under the CII regime can be achieved through a variety of operational and technical measures, including optimizing the ship’s speed and route, or limiting the weather conditions in which the ship carries goods. These measures in particular could be difficult for vessels operating on short sea routes covering limited distances and spending a relatively high proportion of their time in port. Compliance with the CII regime can also cause significant problems under traditional shipping contracts, as discussed elsewhere.

International maritime transport also appears likely to come under the umbrella of the EU’s Emissions Trading Scheme (ETS), as part of its “FIT for 55” package, although the legislative text is still under discussion and that several areas of uncertainty remain. The general idea of ​​the EU ETS is that the emissions of all participants in the system are capped, with a finite number of “allowances” (rights to emit a specific amount of emissions) available for purchase and sale. exchange on an open market. Once maritime transport is included in the EU ETS, sufficient allowances to cover the monitored, reported and verified emissions of each vessel concerned will have to be purchased on the market and handed over to the competent authorities, failing which the vessel will be able to subject to sanctions or even potential refusal of entry into the ports of the Member States. Ultimately, the EU ETS aims to incentivize participants to invest in reducing their carbon output, both to avoid penalties and with the aim of having excess allowances to trade in the market.

Up pressure:

Much of the push to reduce carbon emissions is not necessarily driven by regulation, but by consumers. To this end, it is not uncommon to see shippers and carriers establish their own objectives which often exceed the regulatory objectives.

Cargo Owners for Zero Emission Vessels (coZEV), a collective of (currently) 19 global brands, including Unilever, Amazon and IKEA, has pledged its ocean freight carbon footprint to reach net zero by 2040 container line has set the same objective for its entire group: to achieve carbon neutrality by 2040, relying mainly on the transition to the use of green fuels to power its fleet. This target exceeds the IMO’s target of reducing carbon emissions in international shipping by at least 50% by 2050 compared to 2008.

As early as 2003, we also saw collaborations between container carriers, freight forwarders and shippers in, for example, the Clean Cargo Working Group, a membership space dedicated to accurately measuring carbon emissions with the cargo industry container shipping, allowing its members to accurately track their emissions. and thus allowing them to chart their path to net zero.

It must also be said that consumers (and investors) hold companies accountable if they fail to meet their own environmental, social and governance (ESG) commitments or engage in so-called “greenwashing”. There have been several recent instances of this. Taking an example from the wider logistics market, in 2020 the UK Advertising Standards Authority (ASA) received a complaint about a marketing campaign launched by Ryanair which featured text stating “the lowest fares low in Europe, the lowest emission airline” and indicated that it had “low CO2 emissions”. ASA concluded that the claims in the ad campaign were misleading and breached a number of rules in the CAP Code and BCAP Code (UK Advertising Codes which set out rules for advertisers, agencies and media owners). The ASA later banned the advertisements on the grounds that the airline had failed to substantiate its environmental claims.

Market response:

Meeting the targets or regulations you have set for yourself will ultimately impact freight costs throughout the supply chain, from shipowners to shippers and ultimately to end consumers.

Various container lines have stated that a consequence of CII compliance will be slower container lines (because slower ships are more energy efficient). This will result in carriers employing more container ships on the services in order to meet the same global freight demands – between 5% and 18% more capacity will be required depending on who you ask. Carriers are prepared for this. The order book of some of the main container lines represents between 14 and 43% of the size of their respective current fleet. One wonders if an increase in fleet size is the outcome the IMO was looking for when it first designed the CII (although the size of the fleet would no doubt have increased regardless of the CII scheme, carriers looking to make the most of the high freight rates that the shipping industry has enjoyed in recent years).

In the short term, the cost impact of increasing fleet size may be offset by compensating market conditions (those of falling freight rates in line with falling consumer demand). Unless carriers are able to convince shippers of a real cost increase to serve existing freight volumes, there may not be any appreciable increase in freight rates as a result upcoming changes. In a tough market for carriers, it will be interesting to see where the negotiations stand to ensure regulatory compliance in order to achieve significant reductions in carbon emissions.