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Vessel Rating and Carbon Trading; Big Regulatory Changes on the Horizon for Shipping

The International Maritime Organization (IMO) and the EU parliament have taken big steps towards changing environmental regulations in the shipping industry. These changes are likely to impact the bottom line of shipowners as the EU Parliament voted in September to include the shipping industry in their CO2 emissions trading system. Following that decision, the IMO proposed their own regulatory changes aimed at increasing environmental transparency in the industry.

An IMO working group, convened in October, has drafted amendments to MARPOL which would require that all ships of 5 000 GT or more be assigned a “carbon intensity indicator (CII)” rating, between A – E, corresponding to their “operational carbon emissions intensity”. The CII is essentially a measure of how clean-burning a given vessel is, with cleaner vessels assigned an A ranking whereas the least efficient vessels will be assigned an E rating. The assigned rating will be based on the data that the relevant vessels are required to report via the IMO’s Fuel Oil Data Collection System (DCS).

These ratings are likely to make the charter market much more competitive for the cleanest vessels while driving poor performers from the market. For vessels with a persistent rating of D or E, the amendment would require owners to submit a corrective action plan for how the ship will reduce their emissions in order to achieve at least a C rating. Port authorities and other stakeholders are being encouraged to offer incentives to vessels which achieve an A or B rating,. Once a vessel has been rated the amendment also requires that the vessel’s operational carbon intensity improve by a given factor annually in order to remain within their rating level.

The amendments were drafted during the session, held between 19 – 23rd of October, of the IMO’s Intersessional Working Group on Reduction of GHG Emissions from Ships (ISWG-GHG 7) and will be presented to the Marine Environmental Protection Committee (MEPC) during their upcoming session, slated to be held between 16 – 20th November. If approved, the amendments would still need to be formally adopted at the next MEPC session which will be held in 2021. The International Chamber of Shipping (ICS) whose membership represents many stakeholders in the industry released a statement in support of the amendments and the organization “is confident that the package […] will be formally agreed by the IMO”.

The proposed measures are part of a larger movement towards greater environmental transparency within the shipping industry. The Sea Cargo Charter is one initiative which aims to address the demands for transparency and requires signatories to assess and disclose publicly whether “chartering activities are in line with adopted climate goals”. The charter was officially launched on October 07th and has attracted some of the biggest shippers globally, including ADM, Anglo American, Bunge and Cargill as signatories.

The move to make vessel’s carbon emissions performance public will surely be welcomed by at least some charterers as pressure has mounted on shippers themselves to reduce the environmental impact of their activities. If the rating system is successfully implement it will make it far easier for charterers to discriminate against dirtier-burning vessels and is sure to increase pressure on owners to take whatever steps available to improve their vessel’s rating.

EU Parliament floor
Image Credit: Eva Van Wassenhove via Flickr

 

The ISWG’s proposal follows close behind another regulatory shakeup in the industry. In mid-September the EU governing body voted to include the shipping industry in their CO2 emissions trading regime. Prior to this decision, the shipping sector was the only sector which was not required by the EU to cut their emissions. Under the proposed system shipowners who conduct voyages within Europe or whose voyages begin or end at an EU port will be required to purchase carbon permits covering their vessel’s CO2 output. While the details have yet to be solidified and are pending negotiations with EU member states, once adopted this regime will surely have major implications for both the carbon trading market and the shipping industry. Currently the EU’s CO2 credits are trading at between $23-25/tonne of CO2 however the costs of these credits could be poised to skyrocket once the shipping industry enters the market.

Both the MARPOL amendments and the EU carbon trading scheme are expected to enter into force in 2023. If both measures enter into force as expected shipowners with older or less CO2 efficient vessels could be hit doubly hard as they may find their operating costs increased because of the expense of CO2 credits while also finding their vessels is burdened with an unfavorable CII rating and thus made less competitive on the charter market. While shipowners/charterers still have plenty of time to prepare for these changes there are actions which can be taken today to try and minimize vessel CO2 consumption. Route optimization allows an owner or charterer to conserve fuel and reduce emissions and is likely to be of increasing importance as the marginal cost of CO2 emissions rises over the next few years.

If you’d like to inquire about what TNM can do to assess and minimize the carbon emissions from your shipping activities we’d love to hear from you! Our expert operations team provides not only routing and performance monitoring services but also helps reduce your carbon footprint. Partner with us to take advantage of the soon to be launched next generation of route optimization solution which will help you improve margins while keeping the planet green.