Green shipping – increased emissions control
Over the last years "green shipping" has been a buzz word and substantial attention has been given to emissions from the shipping industry. On the path to reducing emission of greenhouse from the shipping industry, several steps have been taken by international organisations to encourage reduction of greenhouse gases from ships. Companies involved in the industry will have to take new regulation into account when planning for the design, building and operation of ships going forward. Below you'll find a brief overview of some of the recent developments in IMO and EU in relation to emissions control from ships.
The International Maritime Organization (IMO) has over the last years worked towards making international shipping greener, introducing a greenhouse gas strategy towards 2050, with the goal of reducing carbon intensity with 40 % within 2030 and with a further 50 % up to 2050.
An initial step from IMO was to introduce requirements for new vessels, the Energy Efficient Design Index (EEDI). The EEDI was implemented as a new chapter 4 to the International Convention for the prevention of Pollution from Ships (MARPOL) Annex VI in 2011. The EEDI requirements applies to all new ships above 400 GT. The aim of the EEDI was and is promoting the use of the more energy efficient, and thereby less polluting, equipment and engines. The EEDI is mainly a technical tool to minimize pollution from various vessel types by setting minimum energy efficiency level per capacity mile (e.g. tonne per mile) for different ship types and size segments. From the introduction of the EEDI ship designs have to meet the reference level for their ship type, which will be tightened every five years. A specific figure (in grams of CO2 per capacity mile) for an individual ship design is provided based on the technical design parameters for a given ship. It is worth emphasizing that the EEDI is a performance-based mechanism – as long as the required energy efficiency level is met, it is up to the designers and builders to choose the technical solution to comply with the regulation.
In June 2021 a new step was taken by IMO on the path towards reaching the goals set out in the greenhouse gas strategy. A similar regime as the EEDI was extended to existing ships when the IMO's Marine Environment Protection Committee adopted amendments to MARPOL Annex VI introducing an energy efficiency existing ship index (EEXI). The amendments will enter into force on 1 January 2023 and will apply to all existing ships above 400 GT. As part of the new EEXI regime, all ships will have to calculate their EEXI. The EEXI is to be calculated at its first survey after the amendments to MARPOL Annex VI enters into force. This index will show the ship's energy efficiency compared to a baseline. A required reduction factor, as for the EEDI, will then be applicable for future performance. In addition, ships over 5,000 GT have to determine their annual operational carbon intensity indicator (CII). While the EEXI relates to how the vessel is equipped and retrofitted, the CII relates the operation of the ship.
The ship's CII will determine the annual reduction factor needed to ensure continuous improvement in reduction of emissions under MARPOL Annex VI as further specified in the 2021 Guidelines issued by IMO to the EEXI. The ship's actual performance for a year will then be verified against the required annual CII (as reduced with the reduction factor). Based on the verification, the ship will be given a rating, from A to E, where A is best. A statement of compliance will be issued to ships complying with the annual carbon intensity rating to the ship. Under the MARPOL Annex VI amendments, ships that are rated D for three consecutive years or E in one single year will not be given a statement of compliance unless a corrective action plan, to show how the required index (at level C or above) is to be achieved is developed and reflected in the ship's energy efficiency management plan (SEEMP). MARPOL Annex VI as amended encourage administrations, port authorities and other stakeholders to provide incentives to ships rated A or B. The rules as amended, does however, not include a detailed set of sanctions for ships with low ratings or sanctions in the event of non-compliance. It should be noted that IMO will review the EEXI regime before 1 January 2026 where the need for enhancement of enforcement mechanism as well as the need for reinforced corrective actions or other means of remedy is to be assessed.
Another international body focusing on reducing emissions from the shipping industry is the European Union. Increased scrutiny and assessment of emissions from the shipping industry has resulted in EU launching climate mitigation and adaption criteria for shipping, which was included in the EU Taxonomy Climate Delegated Act adopted in April 2021 on sustainable financing. A further result of the EUs goal to reduce emissions of greenhouse gasses from the shipping industry has been an effort to include the maritime transport sector in the EU's cap and trade of emissions system, the so-called Emissions Trading System (ETS). The latest step to include shipping in the ETS system came in July 2021, when the European Commission launched a climate plan and adopted a series of legislative proposals for obtaining climate neutrality in the EU by 2050, which includes an intermediate target of at least 55 % net reduction in greenhouse gas emissions by 2030 (referred to as the "Fit for 55 package"). The proposals will have to be negotiated with the EU parliament and EU member states before they can be adopted. As a consequence, there may be substantial changes in the suggested regulation before it will enter into force. It will nevertheless be wise for companies involved in the shipping industry to get acquainted with the proposals.
As part of the EU plan, shipping will gradually be included in the ETS from 2023 and phased in over a three-year period. The intention is to include vessels over 5,000 GT regardless of flag for all emissions for intra EU-voyages as well as 50 % of emissions from voyages starting or ending outside the EU. When shipping is included in the ETS, shipping companies will need to buy emission allowances from a pool of limited allowances for emitting CO2. At the end of a year, an assessment will be made of the company's emissions from ships for the preceding year. If the company have more allowances than their actual emissions, they can sell these to other companies or carry them over to next year. If the company does not have sufficient allowances to cover their emissions, a fine will be applicable. If the company fails to have sufficient allowances for two consecutive years, there is a risk of their vessels being denied entry to EU ports until the fine is paid.
In addition to including shipping in the ETS, the Fit for 55 package also included he FuelEU Maritime Initiative, setting a maximum limit on the greenhouse gas content of energy used by ships calling at European ports. As for the ETS, the intention is to include vessels over 5,000 GT in the scheme. The aim of this initiative is to stimulate the uptake of sustainable maritime fuels and zero-emission technologies. There are indications in the initiative that vessel owners will be allowed to pool vessels together and assess compliance with the limits of greenhouse gas content of fuel for all vessels in the pool. It is not clear from the initiative how this will be regulated and whether different owners can trade any excess greenhouse gas content to other owners. As for the ETS, non-compliance with the limits of greenhouse gas content of fuel may be sanctioned with penalties. As a further step in the direction of reducing emissions of greenhouse gases from the shipping industry linked to ships' fuel consumption is a requirement for containerships and passengerships at EEA ports to use onshore power only for their energy needs while at berth. This onshore power requirement is envisaged to become applicable in 2030 and will require rather substantial development in shoreside infrastructure.
Another part of the Fit for 55 package that will have an impact on the shipping industry is the suggested tax system for energy products. Bunkers have until now been exempt from taxes. However, in the proposed revision of the Energy Taxation Directive, the taxation of energy products is aligned with EU energy and climate policies, introducing tax on fossil fuels used in the intra-EU maritime sector. The intention is to phase in taxes on bunkers over a 10-year period from 2023. It is worth noting that the proposed changes in the tax regime are limited to some maritime bunker products only and does not extend to alternative fuels seen as more sustainable, e.g., ammonia and advanced biofuels.
Planning for the future
Interestingly both the proposal to include shipping in ETS and the proposal for FuelEU Maritime recognises the "polluter pays" principle and indicates that shipping companies could hold the entity that is responsible for a ship's emission or the greenhouse gas intensity of the fuels accountable for the compliance costs. The basis for holding another entity responsible will primarily be by contractual means, typically a possibility for a vessel owner under a time charterparty to hold the charterer responsible for the choice of fuel, route and speed of the ship. This last point illustrates the importance for parties engaged in the shipping industry to plan for the future when they enter into contracts. Both international bodies as well as local authorities have shown an interest in reducing emissions from ships, leaving it rather likely that new regulation with incentives, fuel requirements, limitation or taxes on emissions from ships will come into force. Parties should plan for the new regulation and make sure that the cost of complying with regulation is properly assessed and addressed in their contracts.