‘Not at the cost of tomorrow’, is the motto running through the minds of our local governments and corporates.
We are no doubt all aware of the huge shift towards green shipping, decarbonisation, and efficient supply chains in the shipping industry, but with international regulation only set to increase it is time to get into the detail.
- In 2020, the International Maritime Organisation (“IMO”) agreed to push forward with their existing greenhouse gas targets and the Marine Environmental Protection Committee (“MEPC”) resolved to make an existing target legally binding for all signatories, namely to reduce the carbon intensity of shipping by at least 40% compared with 2008 levels by 2030. The aim is, to achieve 50%, if not full, decarbonisation by 2050. This brings the shipping industry in line with the rest of the world’s goals and introduces a carbon reduction plan that is consistent with the Paris Agreement. We have 8 years to go and a lot of changes to make.
- In 2021, the ‘Clydebank Declaration’ was one of the many initiatives launched following the United Nations Climate Change Conference COP 26 in Glasgow (UK). Signatory countries agreed to support the establishment of six ‘zero-emission maritime routes’ by 2025.
- In 2022, one key focus for the shipping industry has been the preparation for the IMO’s new technical regulations; the Energy Efficiency Existing Ship Index (EEX) and the Carbon Intensity Indicator (CII) which were adopted by the MEPC as amendments to Annex VI of the International Convention for the Preventing of Pollution from Ships (“MARPOL”). We discuss this in further detail below.
- In 2023, we are expecting to see an ever-increasing focus on alternative marine fuels and renewable transportation largely stemming from the discussions at COP 27 which is set to take place between 6 and 18 November this year in Egypt. The IMO is hosting a side event in collaboration with UNCITAD, IRENA and the World Bank on 10 November 2022, to discuss and explore new opportunities for developing states to engage with renewable marine fuel production.
To put things into perspective, international shipping is thought to account for around 3% of global carbon emissions; so with 80% of world trade thought to be transported by ships (of which two-thirds is carried by the liner shipping industry (reported by the World Shipping Council), there is no doubt the liner industry and each component to it, ports, container handling equipment, container cranes and other machinery are key industry players in the race to ‘Net Zero’; which, amongst other things, involves an assessment of supply chain emissions (scope 3 emissions).
The inherent difference in regulatory obligations across international jurisdictions makes the shipping industry unique and difficult to regulate but a unanimous drive to protect our planet is thought to bring some equilibrium into the industry; backed by mandatory IMO regulation.
The IMO’s EEXI and CII Regulations
On 1 November 2022, the IMO’s new mandatory technical ship regulations will come into force leaving vessels with a short span of only two months until the certification takes effect from 1 January 2023 – the changes are therefore, well underway. For the container market, freight forwarders, and the extended supply chain that may not be so acquainted with these new rules; the amendments are a combination of technical and operational measures focused on a vessel’s design and operational efficiency. Accountability falls on the respective owners and charterers but may in turn have an impact on the containers and cargo equipment utilised:
- EEXI: will apply to all vessels above 400 GT falling within MARPOL Annex VI. The vessels will be required to adhere to a one-time certification which applies from the first scheduled survey completed on or after 1 January 2023. The idea is to achieve efficient propulsion, the use of alternative fuels, engine power limitation and other energy saving devices.
- CII: will apply to all vessels above 5000 GT falling within the scope of MARPOL Annex VI and it will regulate the operational carbon intensity of a vessel. This means it is measured by how many emissions it releases versus its cargo carrying capacity. Each vessel will be rated A, B, C, D or E with C being the minimum rating and each rating will become more and more stringent as we approach 2030.
As 2023 is now fast approaching we are in the “teething period” where owners and charterers settle into the new realms of efficiency and iron out any possible disputes as regards (1) a vessels time ‘off-hire’ (to ensure EEXI compliance) and (2) the burden of ongoing carbon compliance (under the CII obligations). How this will unfold in 2023, we do not yet know, but the focus will be on compliance with the CII operational measures and the contractual arrangement between owners and charterers.
The CII efficiency assessment will be measured by the grams of carbon emitted as compared to the cargo-carrying capacity of the vessel per nautical mile. So for the liner industry where container ships have been getting bigger in size since they began operating in secure liner services, a high efficiency rating might be more achievable. It is already thought that the carbon intensity of the container industry has decreased due to upsizing vessels and route deployment based on an alliance strategy. If that is correct, the CII regulations might have a knock on effect on containerised trade flows and we may expect to see an increased demand for mega-container deployment. This is promising news as we have recently experienced carriers engaging with smaller vessels. The use of multiple smaller vessels increases emissions and may not be so feasible under the CII regulations; ‘not at the cost of tomorrow’, we might add.
The interrelationship of an owner’s obligation to proceed with utmost despatch, achieve a high carbon efficiency rating, and follow a charterer’s employment orders under a time charter party is thought to raise some issues. For the liner trade however, which is formed on a sophisticated network of scheduled services and long-standing alliances, there might be less scope for dispute; albeit possible that, if, for example, a trade is thought to deliver a low CII rating due to overloading (increased fuel), increased length of port stay, fast steaming, and increased distance travelled, some established trade alliances might be forced to adapt. It is also possible that the slot market might experience uncertainty as carriers optimise efficiency. All in all, if Annex VI of MARPOL applies, container vessels are likely to be affected and the knock-on effects might flow down to increased delays and demurrage in ports whilst the CII ratings are managed.
Moving forward, it is clear the IMO are taking remarkable steps to mandate and set out a carbon reduction pathway but whether this is enough to meet a 50% reduction by 2050 is yet to unfold. We are eagerly awaiting the outcome of COP 27; which we anticipate will bring at the very least a non-binding agreement to set more ambitious targets. Perhaps the most influential steps will be those taken by the owners, carriers, ports, terminals and cargo handlers themselves. Maersk are already setting a precedent as they prepare to launch the world’s first ever carbon neutral liner vessel in 2023.
Jessica is a solicitor of England and Wales. As part of the LA Marine team, Jessica is based on the south coast of England and works with ship owners, charterers, freight-forwarders, operators and their respective insurers on a regular basis. If you would like to get in touch with Jessica you may contact her via email on Jessica.Slater@la-law.com
Assisted by Ali Yumkaya, Paralegal.