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Podcast - Regulatory update with Paul Bartlett

International shipping’s environmental performance is under intense scrutiny and in this episode of the Maritime Podcast Seatrade Maritime News correspondent Paul Bartlett examines the pressures the industry faces.

The requirement for the industry to reduce greenhouse gas emissions took centre stage at the IMO’s recent MEPC 76 meeting, and decarbonisation may be the number one priority right now. But there are a range of other regulatory initiatives that owners and operators need to monitor.

Paul Bartlett discusses these issues in detail in this regulatory update episode of the Maritime Podcast and you can listen now in the player above or the app of  you choice below.

Learn more about the Maritime Online Series, register for free for upcoming sessions covering finance, decarbonisation and digitalisation, and view the agenda

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Regulatory update with Paul Bartlett

Shipowners and operators face a challenging future as maritime regulations tighten on various fronts. In this podcast, we will take a brief look at decarbonisation and the outcomes from MEPC 76.

There are, of course, many issues which require focus, but the most important right now is shipping’s decarbonisation journey, initially between now and 2030 but then, until the middle of the century and beyond.

In the short to medium term, the carbon profile of the existing world fleet – which, by the way, transport well over 90% of the world’s trade – is the chief concern. And specifically, the outcomes from the latest virtual meeting of the IMO’s Marine Environment Protection Committee, which closed on June 17.

The shipping industry faces a range of significant uncertainties, possibly more than at any time in its long history. Uncertainty is uncomfortable for people in business and the world’s principal stakeholders in the maritime sphere are no exception. The most important uncertainty surrounds the choice of shipping’s principal fuel of the future, and this is proving to be a constraint on the industry’s decarbonisation journey. Nobody wants to spend many millions of dollars on an asset that could be stranded within ten years or so.

However, global shipping is a remarkably resilient business and there ae many initiatives and opportunities on the road ahead. Along the way, the shipping industry will certainly demonstrate its ingenuity and determination.

EEXI

So, let’s take at look at the outcomes of the MEPC 76 relating to the decarbonisation of existing commercial vessels, discussed in detail at the virtual meeting recently. The two main indices relating to ships in the existing world fleet – the energy efficiency existing ship index, an enhanced Ship Energy Efficiency Management Plan, and the carbon intensity indicator – were the main discussion points. The EEXI is an asset-specific one-time assessment of a ship’s energy status, closely related to the energy efficiency design index – EEDI – on which the design of new ships has been based since 2013.

The EEXI will apply to commercial vessels of more than 400 gross tons and will focus on existing ships built before the introduction of EEDI, or in the first few years thereafter. The assessment will need to be carried out in time for the first annual renewal of a ship’s International Air Pollution Prevention Certificate after January 1st, 2023. The IMO has set out carbon reduction targets for existing ship types and sizes, with requirements to raise carbon efficiency, particularly for older vessels. Many thousands of ships will be affected although vessels built recently are likely to be unaffected. Estimates vary but classification society DNV has suggested that as many as 30,000 vessels could be affected by the EEXI requirement.

There are various options – engine power limitation – EPL – is probably the most straightforward. Reduced power, potentially less speed, but a power reserve still available in case it’s needed. However, the basis on which the EPL is calculated has changed. It will now be estimated on the basis of 83% of a ship engine’s maximum continuous rating, rather than 75%. Although this will make EPL a more demanding carbon-reducing strategy than was originally envisaged, it is still likely to provide the simplest compliance strategy.

However, there are other possibilities, including changes to a ship’s hull or propeller, or a combination of the two. Other possibilities include hull appendages including bulbs, ducts, fins and other adjustments to improve water flow around the bow and stern.

The carbon intensity indicator, which will also enter force at the beginning of 2023, is a different metric and relates to the operation of ships, rather than their design. And, unlike the EEXI, it is not a one-off assessment but instead, will tighten steadily between 2023 and 2030. The figure for each ship is calculated on the basis of annual fuel consumption and fuel carbon intensity divided by annual distance and ship capacity. This figure is then multiplied by a ‘correction factor’.

The carbon intensity indicator will assign one of five ratings to ships of more than 5,000 gross tons. Categories A, B and C are acceptable; D and E are not. Owners of ships in Category D can have three consecutive years with this rating before remedial action is required; ships in Category E will require immediate attention.  

These correction factors for the years from 2023 to 2026 have already been set out by the IMO and range from 5% in 2023 to 11% in 2026. However, carbon reduction requirements between 2026 and 2030 have not been decided yet but will be set out by the end of 2025. However, they are expected to tighten significantly during the second half of the decade. The lack of a clear path all the way between now and 2030 is seen as another challenge for ship operators.

There are still many issues to clarify and we cannot even start to cover the intricacies of how to calculate ships’ carbon performance from 2008 to today. Determining ship performance on certain key dates is a major challenge. It is immensely complicated and there are different proposals on the table. The IMO’s 2030 and 2050 carbon reduction ambitions have been set out using 2008 as a base year for comparison purposes. So, for example, a 40% reduction in carbon dioxide output per capacity mile is required by 2030 but there are still questions around how to calculate what has been achieved already, bearing in mind that for many of the relevant years, ships did not have data collection systems.

So, what happens if ships fail to meet the IMO targets? Well, so far, there is no penalty, at least in a regulatory context, However, before the laggards in the business breathe a sigh of relief, experts believe that there are significant commercial implications. Some charterers, for example, have already indicated that they will aim to fix ships in categories A and B. And financial institutions, particularly those who have aligned their portfolios with the Poseidon Principles initiative and other green funding standards, are likely to take a dim view of owners and operators who fail to take a proactive approach to CII compliance. In any case, the IMO is thought likely to consider possible strategies to encourage compliance at future meetings, although what form this could take is not yet clear.

So, the upshot of the latest MEPC meeting is that doing nothing is not an option. Ships’ energy efficiency will have to be assessed and corrective action taken, if necessary, and is most likely to affect older ships built before the energy efficiency design index was introduced in 2013. And, as far as carbon intensity is concerned, unless ships are likely to be recycled within the next three or four years, annual CII correction factors should be carefully considered.

The inclusion of shipping in the European Union’s Emissions Trading Scheme has been under discussion for some time, but it is very complicated. Unlike shore-based industrial facilities and power plants, ships are mobile assets and many operate around the world. In the tramp trades, ships can go virtually anywhere at a moment’s notice.

In mid July, the EU is due to release details of how shipping may fit into its existing emissions trading structure. At this stage, it is not possible to predict what may come out. It will follow a lengthy period of consultation with the great and the good of shipping, but soundings so far suggest that those affected will not have an easy time.

Ships that will be caught up in the Emissions Trading Scheme are likely to include coastal vessels trading within EU waters, and inter-country trades within the EU bloc, such as ferries and cargo vessels on fixed itineraries. What is not yet clear, however, is how ships trading in and out of the bloc, either owned or not by European corporations, will be affected. Will there be exemptions for vessels deployed on international routes. So far, however, sources do not think this is likely.

This is despite the fact that shipping’s main representative bodies have warned that an EU emissions trading scheme will materially damage companies that trade in and out of the bloc while regional operators could well be hit by significantly higher operating costs. The implications are far-reaching. The costs of the emissions trading scheme, in terms of ship operation, cannot be absorbed by owners and operators. Costs will ultimately by passed on to consumers. This has significant societal implications as well as possibly negative implications for ports within the bloc.

On a global scale, and depending on what the EU reveals in mid-July, the move could lead to the introduction of similar schemes in other regions, leading to a global patchwork of regulations and presenting a huge challenge to ship operators whose vessels trade on global routes. Furthermore, if this outcome proved to be the case, the overall cost of sea transport would rise significantly.

A further concern is where would the money go. Would it end up in central coffers to be used in a range of initiatives without benefit to shipping? Or would it be channelled into the massive research and development drive that is required by global shipping for development of the carbon-free fuels of the future?

These are specifics that relate to ship operation. There is, for example, the Ballast Water Convention and the requirement for ships without systems so far to install them over the next three years. Classification society, ClassNK, estimates that 2022 is likely to be the peak year for installations.

There are many systems already installed, but some are not in use and none work effectively in all water conditions. High turbidity in some Chinese waters, for example, risk non-compliance at a subsequent port. This could require ballast water exchange at sea or, in a worst case, detention and delay at the next port of call.

There are moves to alleviate some of these issues, however. One ballast water manufacturer recently launched what is believed to be the sector’s first digital ballast water application, enabling ‘heat mapping’ or ports, advance compliance, and potential assurance of no inspections or delays. However, the industry still has a long way to go on the ballast water journey.

Other water-related issues should also be monitored. These include the treatment of grey and black water, for example, which experts believe is an area that needs attention urgently. Even so-called grey water from ships is usually far more concentrated than grey water ashore because the latter is diluted by run-off from land, buildings etc. Also grey water on ships often contains elements of food waste and other organic matter which grey water on land does not.

Meanwhile scrubber discharge water is another subject to watch, as a growing number of countries ban open loop scrubber discharges in their waters.

At MEPC 76, amendments to the International Convention on the Control of Harmful Antifouling Systems on Ships were adopted. These require ship operators to stop using coatings containing cybutryne from the beginning of January 2023, and to remove or seal such systems with an appropriate barrier at the next scheduled renewal of the antifouling system, but no later than 60 months after the last application.

Recycling

Shipping’s decarbonisation generally, and the IMO’s requirements for existing ships could well lead to many older vessels heading for recycling yards sooner than they otherwise might have done. As I mentioned, there are no specific sanctions so far for not complying with the IMO’s new metrics for existing ships, but the commercial implications could still have a significant impact.

However, the current regulatory regime on ship recycling is unsatisfactory for many owners, notably those who are based in Europe or others whose vessels depart on their final voyage from a port within the European Union. These owners are bound by the European Union’s Ship Recycling Regulation which requires vessels to be recycled at facilities approved under the EU’s own inspection regime.

This differs from the IMO’s Hong Kong Convention under which many recycling facilities, notably on the Indian subcontinent, home to most of the world’s recycling businesses, have been approved by leading classification societies. In fact, no recycling facility on the Indian subcontinent, including a significant number of modern yards in India, has been approved under the EU regulations so far.

A range of yards in Europe have been approved, although there is virtually no market for scrap steel or other recycled materials from ships in this region, and there is no significant labour benefit. One important exception is Turkey which has recycled many older end-of-life cruise ships during the cruise crash resulting from Covid 19. Turkey has its own ship recycling zone in an industrial park at Aliaga, about 50 kilometres north of Izmir on the Aegean coast. 

Critics of the EU’s position on recycling claim that its failure to validate recycling facilities in India, Bangladesh and Pakistan is partly because there is no satisfactory downstream disposal capability for hazardous or toxic materials. Others point out that this is not the responsibility of the facilities themselves and should therefore not be held against them.

A further issue is the method in which ships are prepared for recycling. Lobby groups claim that the ‘beaching’ method, used extensively in subcontinent yards is not safe, despite there being no evidence for this and there being no alternative for the demolition of many large vessels. Turkish recycling facilities use the ‘landing’ method whereby the vessel’s bow is grounded while the stern is still afloat. 

They also point out that recycling yards provide a significant source of scrap steel for which there is healthy demand in each of the three countries, as well a market for other materials. Recycling activity also provides a is a valuable source of employment and education for many workers, both directly and indirectly, and has raised living standards across a number of poor regions.

There have already been a number of cases where European owners have run into problems with end-of-life ship recycling strategies. But, until there is a common regulatory framework for the sector, owners will continue to face major ship disposal challenges.

So that’s it for today, everyone. I hope you have found this regulatory round-up useful. If you would like to find out more about EEXI and CII and their implications for shipowners and operators, please may I draw your attention to an upcoming webinar which will focus on regulatory issues and specifically the IMO’s requirements for existing vessels.

More details on this can be found at the website: www.maritimeonlineseries.com

Thank you for your attention and please stay safe!

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