Keeping track of current changes in maritime emissions regulations is a challenging task. With so many initiatives and new norms being implemented, trying to provide frameworks to capture and report on emissions, makes the topic extremely complex for operators, shipowners, and commodity manufacturers.
Besides, while there is not a single common practice across the industry to measure and track shipping emissions, the subject is gaining more importance as the rules are becoming stricter. Soon there will be financial penalties for unaccounted emissions, following the revision of the International Maritime Organization’s strategy and the expansion of shipping to the EU Emissions trading system.
More than only tracking, reducing shipping emissions is a hot topic, and the impact of financial and environmental regulations on maritime commercial decisions is huge. In this sense, this article will explore the recent updates on emissions regulations, and what that means for charterers in the bulk shipping industry.
The IMO Strategy Review for Greenhouse Gas Emissions
In 2018, the International Maritime Organization (IMO) settled that the shipping industry’s emissions had to be cut in half by 2050, going to zero carbon waste up until 2030. This considered emissions of direct fuel combustion and use on board a vessel, following Scope 1 of the GHG (Greenhouse Gas) Protocol.
This strategy was reviewed in July 2023, in what is being called the IMO Strategy on Reduction of GHG Emissions from Ships. It sets out new targets, with a 20% reduction in GHG emissions by 2030, the adoption of zero or near-zero GHG emissions technologies, fuels, and energy sources by 2030, and an aim for a 70% reduction in emissions by 2040.
Besides, this new strategy accounts for emissions on the entire lifecycle related to the production and use of marine fuels, starting from the raw material acquisition, to fuel production, bunkering, all the way to storage and fuel to energy conversion on board (well to wake):
Shipping Finally Enters the EU Trading System
Another big update for the maritime transport industry is that from January 2024 onwards CO2 emissions from all large ships (5,000 gross tonnage and above) entering EU ports will be covered in the EU’s Emissions Trading System (EU ETS).
The EU ETS is a legislative framework that sets a limit on the total amount of greenhouse gases that can be emitted in all European Union countries. The framework covers emissions from 10,000 installations in the energy sector and manufacturing industry around the continent, helping bring emissions down and generating revenues to finance the EU’s green transition.
The system will cover half of the emissions from voyages starting or ending outside of the EU and 100% of emissions that occur between two EU ports. What this means is that shipping companies will have to use EU ETS emission allowances for each tonne of reported CO2 (or equivalent) emissions that exceed the allowed cap, aiming to improve energy efficiency and incentivize low-carbon solutions.
The Carbon Intensity and Energy Efficiency Indexes
2023 was the kick-off for IMO’s guidelines regarding the energy efficiency of new and existing ships, with the goal of reducing their greenhouse gas emissions in the short term. Starting on January 2023 it became mandatory for all ships to measure and report their energy efficiency index (EEXI) and annual operational carbon intensity indicator (CII).
The Energy Efficiency Existing Ships Index (EEXI) is a one-time certification that ensures the corresponding ship meets a minimum energy efficiency standard, according to its type and size. The index must be calculated for ships of 400 gt and above, comparing existing ships against a baseline of new (and carbon-intensity compliant) ships being built today.
In parallel, ships also have a Carbon Intensity Indicator based on fuel consumption from ships of 5,000 gross tonnage and above. Based on a ship’s CII, its carbon intensity will be rated: poorly rated ships will be regularly audited and have to implement a plan of corrective actions, whereas incentives will be provided to the best-rated ones.
However, it’s important to note that although the EEXI and the CII are inter-connected, they are separate requirements – The first is a one-time certification, while the latter is an ongoing operational requirement that measures carbon dioxide (CO2) emissions per unit of ‘transport work’.
What Does This Mean for Charterers?
While shipowners are the ones primarily responsible for ensuring their vessels comply with emissions regulations, the effects can cascade down to charterers due to economic and operational factors:
- Freight Cost Implications
Regulations leading to the use of specific fuels or ship adjustments may be passed on to charterers via higher freight costs. But while the EEXI and other carbon reduction measures don’t require technical modifications to ships, for many ships, technical modifications may be the only realistic way to attain the required certifications and to be under the emissions limit, impacting the commercial operation of the vessel.
Besides, the inclusion of shipping in the EU trading system means the added cost of emissions can be significant on a voyage level. Charterers, especially those in time charter arrangements, might have to bear these costs directly or indirectly.
- Time and Bareboat Charters’ Responsibility
According to a recent guideline published by Maritime Association BIMCO, the entity paying for the actual amount of fuel used during a voyage should account for its emissions. This idea has also been suggested by the EU Parliament before, stating as responsible “the shipowner or any other organization or person such as the manager; the time charterer or the bareboat charterer, which has assumed the responsibility for the commercial operation of the ship from the shipowner and is responsible for paying for fuel consumed by the ship;”
This means that charterers would be responsible for monitoring, reporting, and paying emissions for ships operating on time and bareboat chartering models, where the charterers provide and pay for the fuel consumed during the charter period. As BIMCO states, “During the charter, the charterers provide and pay for the actual amount of fuel used. On redelivery, the owners take over and pay the charterers for the fuel remaining on board. Using the guiding principle, the responsibility for accounting and reporting for scope 1 emissions rests therefore with the time charterer.”
- Operational Impact
Being compliant with the CII regulations means that emissions will play an extremely important role in voyage planning and fuel consumption. This could mean longer transit times as shipowners may opt for slow steaming, trying to improve the ship’s carbon intensity indicator.
Beyond reducing engine power, the cost of implementing and maintaining technical modifications on a ship might be shared between the shipowner and the charterer depending on the charter party agreement, significantly increasing costs. This could also lead to less vessel availability, as keeping technically compliant means more time in maintenance and increased inspections.
Keeping Track of Shipping Emissions Data
Emissions regulation keeps changing, and it’s becoming increasingly clear that having access to appropriate data when planning voyages and negotiating freight arrangements will not only cut substantial amounts of unnecessary costs but be an integral part of the industry. As regulations tighten, the integration of emissions data into operational decisions, and contractual negotiations becomes essential.
When unstructured, vessel emission data is often inaccurate as 80% of the global fleet are non-digital vessels with manual reporting. Dealing with fragmented and out-of-date data sets means lacking a clear understanding of a voyage’s operational performance, making it impossible to calculate its environmental impact
We’ve seen how this is a decisive factor for the whole shipping value chain: Charterers, alongside shipowners, must embrace collaborative approaches to account for the impacts of these regulations. The industry has reached a point where environmental responsibility is as critical as operational efficiency, as these things are now interconnected.
In this scenario, using a shipping management platform that can track voyage information becomes essential to accurately monitoring shipping emissions across ship charters. Talk to our team to understand how Voyager is supporting several Fortune 50 companies on their demurrage and emissions reporting challenges.