Sailing Towards Sustainability: 

In the face of a global climate crisis, industries worldwide are under increasing pressure to reduce their carbon footprint, and the shipping industry is no exception. The International Maritime Organization (IMO) and the European Union (EU) have introduced a multitude of measures, creating a complex landscape that ships must navigate to comply with Energy Efficiency Design Index (EEDI), Energy Efficiency Existing Ship Index (EEXI), Carbon Intensity Indicator (CII), decarbonization, and EU Emissions Trading System (EU ETS) requirements. The number of regulations and their coverage has grown to the point where it has become increasingly challenging to understand what each regulation addresses, which regions they pertain to, and who has instituted them.

Especially with significant changes on the horizon, such as the upcoming January 2024 implementation of the EU ETS, this article will provide a summary of the most recent regulations and their scopes. In the subsequent articles in our series, we will delve into the specifics of these regulations, discuss their implications for contracts, and explore potential disputes.

 

IMO Regulations

The International Maritime Organization (IMO) implemented its first set of global measures to enhance energy efficiency in ships on July 15, 2011. Subsequent actions included further regulations, the 2018 adoption of the Initial IMO Greenhouse Gas (GHG) strategy, and the 2023 Revision of the GHG Reduction Strategy. In July 2023, IMO Member States endorsed the 2023 IMO Strategy, aiming for net-zero greenhouse gas emissions from international shipping by around 2050.

The strategy commits to promoting alternative zero and near-zero GHG fuels by 2030, with interim goals of reducing carbon intensity by at least 40% by 2030 compared to 2008. The obligations for EEXI and CII certification started on January 1, 2023. Consequently, the inaugural annual reporting is scheduled for 2023, and the initial ratings will be assigned in 2024.

Ships are now required to calculate their EEXI and establish an annual operational carbon intensity indicator and rating, reflecting their energy efficiency. The strategy encourages the adoption of low-carbon fuels, with the ultimate goal of reducing emissions and advancing sustainable practices in the shipping industry.

 

Energy Efficiency Existing Ship Index (EEXI):

The EEXI is a one-time classification assessing a ship's energy efficiency based on its design, construction, and technical features. It sets a minimum standard for the global fleet, covering existing ships of 400 gross tons and above under MARPOL Annex VI. New builds need to comply before their initial survey.

While EEXI compliance does not mandate technical modifications, practical implementation often involves measures like Engine Power Limitation (EPL) or Shaft Power Limitation (SHAPOLI). The effectiveness of EEXI measures will be reviewed by January 1, 2026, with potential amendments based on real-world data. EEXI compliance involves achieving an individual ship's calculated "attained EEXI" equal to or below the required standard for its type.

 

Carbon Intensity Indicator (CII):

CII serves as an ongoing annual mandatory measure under MARPOL Annex VI, assessing a ship's carbon intensity concerning cargo, distance, and emissions. IMO's phased approach involves a yearly 2% reduction in carbon intensity limits, compelling continuous efforts by owners and managers to enhance a vessel's operational efficiency. Ratings range from A to E, with lower ratings necessitating corrective action plans. The calculations rely on data reported through the IMO Data Collection System (DCS) since 2018.

Owners must monitor operational data for CII compliance, with a Ship Energy Efficiency Management Plan (SEEMP) Part III required by December 31, 2022, and a Statement of Compliance from January 1, 2024. Regular audits of SEEMP Part III/CII compliance are mandatory every six months. Vessels consistently rated 'D' for three years or 'E' for a single year must update their SEEMP Part III with a corrective action plan, aiming to achieve a 'C' or above rating. This plan requires verification by the Flag State or Classification Societies.

 

European Union (EU) Initiatives:

The EU, in its "Fit for 55" package, aims to cut emissions by at least 55% by 2030 and achieve climate neutrality by 2050. The EU Emissions Trading System (EU ETS), effective from January 2024, imposes a "cap and trade" principle on emissions. Additionally, there are other adjustments such as: FuelEU Maritime encourages the use of sustainable fuels, with financial penalties for noncompliance, Energy Taxation Directive (ETD) and Alternative Fuels Infrastructure (AFI) target narrower aspects, amending excise duty rates and requiring ports to provide infrastructure for shore-side electricity supply.

 

EU ETS:

The EU Emissions Trading System, initially established in 2005 to address greenhouse gas emissions, has undergone a transformative expansion. Originally focused on energy-intensive sectors, recent negotiations and agreements have broadened its scope to include the shipping industry. In December 2022, political negotiators achieved a provisional agreement to extend the EU ETS to cover shipping. This extension was formally adopted and published in the Official Journal of the European Union on May 16, 2023.

From 2024 onward, the ETS will encompass shipping activities within the European Economic Area (EEA), necessitating ship operators to monitor, report, and surrender allowances for emitted CO2. The updated law introduces a vessel-based carbon pricing approach within the EU ETS, irrespective of cargo. This shift includes an extraterritorial application, meaning that emissions from voyages between EU and non-EU ports will be subject to the EU ETS. Shipping companies are obliged to purchase allowances for various scenarios, such as 50% of emissions for voyages between EU and non-EU ports and 100% for those within EU ports.

Regardless of flag or of the owner’s jurisdiction, commercial vessels over 5,000 gross tons or more calling at EU ports are now under the EU ETS. Exemptions are outlined for offshore and specific ice-class vessels, with potential future expansions. Specific exclusions apply to certain vessel types, including military and fishing vessel. Also there are temporary exemptions until 2030 for specific passenger and ro-pax ships on small islands. Similar exemptions exist for ferries between Member States without a land border and voyages between outermost regions.

The entity accountable for adhering to the EU ETS is referred to as the "Shipping Company." Its obligations encompass the annual monitoring, registration, and reporting of validated emissions to the overseeing authority. Additionally, the Shipping Company is mandated to submit the necessary EU Allowances to the competent authority. The phased implementation for shipping starts in 2024, with companies required to submit allowances for a percentage of their verified emissions. This percentage increases annually, reaching 100% from 2026 onwards. Starting from January 1, 2026, the ETS regulations will expand to include emissions of nitrous oxide and methane.

 

Conclusion:

As ships navigate the seas, they face a dual challenge of complying with existing IMO regulations like EEXI and CII while preparing for upcoming EU measures. The synergy between technical enhancements and operational adjustments will be pivotal in achieving the overarching goals of reducing carbon intensity and fostering sustainable shipping practices. However, despite the undoubted environmental benefits and necessity of these changes, the sector remains embroiled in ongoing debates surrounding the implementation costs, penalties, and associated responsibilities.

Particularly with significant changes on the horizon, such as the imminent implementation of the EU ETS in January 2024, this article serves to provide a comprehensive overview of the recent regulations and their scopes. In the forthcoming installments of our series, we will delve into the specifics of these regulations, explore their implications for maritime sector contracts, and address potential disputes.