Our correspondent Paul Bartlett takes the listener through how the new regulations from IMO and EU will impact operations.
In this podcast, we will examine the significance of 2024 in the light of these new regulations. Although their full impact has not been felt so far, they will alter day-to-day ship management and require an unprecedented level of ship performance monitoring, verification, and reporting, known as MRV.
The regulations are:
- The IMO’s Carbon Intensity Indicator (CII) system
- The European Union Emissions Trading System, EU ETS
- FuelEU Maritime
Listen now in the player above or the app of your choice to find out what you need to know
Episode notes
The regulations, some of which are regional, are affecting many ship operators, notably those trading to or from, or within, the European Union (EU). In fact, recent analysis by a Norwegian data analyst, OceanScore, has revealed that major container lines based in Asia will have to pay billions of euros over the coming years to met European Union emissions regulations.
Millions of words have already been written about the new emissions-related requirements but let us start with the IMO’s carbon intensity indicator, CII, which applies to subject vessels wherever they may be in the world.
Ship operators with vessels under approved classification arrangements will certainly have comprehensive compliance frameworks relating to CII already in place. The deadline for reporting data for 2023 is March 31st, just a few weeks away, and this date will continue to be the deadline every year from now on.
However, many shipowner and operators located in other parts of the world may not be familiar with the new EU regulations. But if their ships could call at an EU port at any time in the future, they should be aware of the new requirements.
Some experts believe that other regions of the world could well adopt similar regulatory frameworks. The concern is that if there is no coordination, shipowners, operators and managers could face a patchwork of different measures in various parts of the world, creating a major headache in terms of efficient ship operation.
The CII is intended to measure a ship’s energy efficiency in grams of carbon dioxide per cargo carrying capacity and nautical mile. The formula has come under close scrutiny and certainly doesn’t work for some ship types and their deployments.
As of the end of March this year, qualifying ships will have a CII rating ranging from A at the top, to E at the bottom. Ships in categories A, B, or C will be acceptable but those falling into D for three consecutive years, or E for one year, will have to have a corrective action plan in place as part of their Ship Energy Efficiency Management Plan. This will have to be verified before the necessary Statement of Compliance can be issued.
There are complex legal issues relating to the ship’s contract of employment. A ship’s CII relates to the manner in which it is deployed. But, subject to charter arrangements, this responsibility could lie with the shipowner, ship manager, or charterer. The former would, of course, be concerned about preserving a good CII rating whereas, for the latter, the issue could be of little relevance.
The IMO has come up with a range of ‘correction factors’ which are applied to the CII formulae for some ship types. However, critics of the system insist that there are still various ship types and trading arrangements for which the CII is not suitable and for which there are still no correction factors. Feeder container ships are one example because they operate on short voyages, are unlikely to be full most of the time; and spend a lot of time in port.
Another important feature of the CII is that it will be reviewed next year, in 2025. Its requirements will tighten from 2026, meaning that ships initially rated in the first three acceptable categories – A, B, or C – could fall into D, or even E, later this decade.
This issue is particularly important for many owners but one particular sector is vulnerable. Experts on LNG carriers, for example, believe that many existing vessels, notably steam turbine units and those powered by relatively inefficient four-stroke engines, will fall into categories D or E at the outset.
Turning now to the EU Emissions Trading System
Since the beginning of 2024, shipping has been included in the EU Emissions Trading System (EU ETS) and this has significant implications for shipowners, managers, and charterers whose vessels trade within the bloc, or to or from the region on international voyages.
Together with FuelEU Maritime, of which more in a minute, this is the first time that companies engaged in maritime transport will have to pay a price for carbon emissions. It has wide implications for ship design and operation, as well as the commercial framework and legal obligations of shipowners and charterers.
However, some argue that there is already a built-in flaw to the EU ETS framework because it is based on a tank-to-wake (T-t-W) measure of carbon intensity, rather than a well-to-wake (W-t-W) assessment. This is primarily because the ETS, already in place for other industrial sectors, has not been implemented on ‘well-to-use’ basis.
There is a strong possibility that the EU ETS for shipping will adopt a W-t-W carbon intensity assessment when it is reviewed in 2026. But critics argue that many first movers, using a T-t-W measure of carbon intensity, will suddenly find themselves handicapped by the new measuring system at that time.
That is because the T-t-W measure takes no account of a particular fuel’s production process. So black methanol produced from coal or natural gas, for example, is considered the same as green methanol. In fact, according to analysis undertaken by the Green Marine Methanol Consortium, fossil methanol has a carbon intensity more than ten times that of green methanol and higher even than shipping’s conventional fuels, heavy fuel oil or marine gasoil.
The EU ETS also opens up a whole range of new issues for shipping lawyers. Charterparty law is already exceedingly complex but new clauses will be required in various forms of employment contract to set out which party is liable for the new requirements and responsibilities, and when.
It also presents a major challenge and a new requirement for ship managers and operators. For those with ships subject to the new regulations, they must ensure that they have robust monitoring, reporting, verification (MRV) systems to track carbon dioxide emissions. The MRV requirement, in place since 2018, was updated in June 2023 so that by 2027, the system will be extended to cover methane and nitrous oxide emissions.
The regulation applies to cargo and passenger ships of 5,000 gross tons and above. Since the beginning of January, operators of these ships are required to track vessel emissions under the MRV system and these will form the basis of the EU Allowances that will be required by September 2025.
EU Allowances are available from the European Energy Exchange and initially, ship operators will have to buy sufficient allowances to offset 40% of their tank-to-wake carbon dioxide emissions. This means that companies already trading within or to and from the bloc, must already have MRV systems in place, operating on a 24/7 basis.
For offshore vessels and general cargo ships between 400 and 5,000 gross tons, MRV will be required from 2025 and the appropriate EU Allowances must have been acquired by September 2026. However, so far, the term ‘offshore vessels’ has not been defined.
Companies that fail to acquire and surrender allowances covering their emissions profile will incur penalties and an allowance debt.
At the outset, shipowners or their designated representative will have to buy sufficient allowances to cover 50% of voyages to and from the EEA (EU plus Iceland and Norway) and 100% of voyages within the bloc. The system will have three phases: 40% of reported emissions will have to be covered by Allowances in September 2025; 70% in September 2026; and 100% from 2027.
The new regulations pose a major challenge for all shipowners and operators, but they may be particularly daunting for owners of small fleets with modest shoreside resources and little spare capacity in terms of human resources. However, new digital systems have already been developed to assist with ETS management and compliance.
Using big data and machine learning, many thousands of voyages and many different types of ships, software is now available that can automatically calculate emissions for a particular voyage or combination of voyages.
Once the relevant voyage data have been fed in to the system, the length of voyages can be calculated in nautical miles, duration, and fuel requirement. Carbon dioxide emissions and ETS liabilities can then be established. Total ETS costs can then be calculated in a currency of choice based on end-of-day carbon prices. A continuous track of CII performance is another feature of some of these systems.
FuelEU Maritime
Fuel EU Maritime is a regulation designed to support shipping industry decarbonisation and enters force on January 1st, 2025. It aims to increase the share of renewable and low-carbon fuels used by shipping in the EU and the European Economic Area (EEA).
The regulation sets well-to-wake greenhouse gas (GHG) emission intensity requirements for ships trading in the EU from next year. Marine fuels will be assigned emission factors calculated on their GHG intensity. Ship operators will therefore have to ensure that GHG intensity, measured per energy unit, is below a certain level. There will be a financial penalty for every quantum of energy used above this level.
The regulation will also require container ship and cruise vessels to use shore power in certain EU ports from 2030. This will apply to ships on a berth in a Trans-European Transport Network port for more than two hours.
The GHG intensity requirement will apply to 100% of energy used on voyages and port calls within the EU, and 50% of energy used on voyages to and from the bloc. To avoid bypassing the regulations, container ships calling at transhipment ports outside the EU or EEA, but less than 300 nautical miles from an EU or EEA port, will also need to include 50% of the energy for the voyage to that port, as well as the short transhipment voyage.
FuelEU will incentivise the use of renewable fuels, notably those of non-biological origin (RFNBO) by issuing ‘rewards’ for their take-up. This is intended to compensate for their likely higher production costs and purchase prices. However, if the reward scheme fails to prove sufficiently successful, a mandatory minimum volume of RFNBOs will be introduced.
Once again, it should be stressed that although the two systems – EU ETS and FuelEU Maritime – will operate in tandem, the fact that the assessment of carbon intensity uses a different metric creates a fundamental problem. This is because some alternative fuels that appear to perform well in carbon intensity on a tank-to-wake basis are actually more carbon-intensive when measured on a lifecycle assessment or well-to-wake framework.
Well, I hope that this short podcast has highlighted some of the issues facing shipowners, managers and charterers. However, I must stress that the new regulations raise many issues in both operational and commercial terms. Close liaison with experts in leading law firms and classification societies is highly recommended.
