Shipping Industry Faces Chaos as Decarbonization Regulations Trigger Upheaval

From the beginning of 2023, the daily operation of ships and some of the industry’s long-established business models will face unprecedented upheaval as IMO decarbonization regulations enter force, reports LR.

What’s changing?

From the start of 2023, all goods and passenger vessels over 5,000 GT need to have a Ship Energy Efficiency Management Plan (SEEMP) Part III document on board, together with a Confirmation of Compliance (CoC). It helps organizations calculate the Carbon Intensity Indicator (CII), a dynamic metric that will produce a rating for each ship, which will be first reported in 2024 using the data gathered over 2023.

Vessels will be rated for their use of carbon from A to E. Ships in categories D and E will require owners to take remedial action by way of updates and revisions to their vessels. From January 1, this dynamic document must be available on board and kept current for the rest of this decade,

Not all owners have squared up to the challenges that lie ahead. A significant number of vessels, including large numbers of some ship types, are likely to be poorly rated. Even if they are initially rated in one of the three acceptable categories – A, B, or C – they could easily slip into D or E later in the decade. A substantial number of LNG carriers, for example, are likely to be rated D or E from the outset (see article 3 in this issue).

Although there are no specific sanctions yet for non-compliance, the market itself will identify laggards and poor performers. When there are options to choose from, the owners of such ships could find themselves at the back of the chartering queue.

While there may be no official penalties for ships rated D or E, Lloyd’s Register’s (LR) Singapore-based Brijesh Tewari, Lead Maritime Decarbonisation Consultant, recommends that owners run no risks. He points out that the CoC, which must be kept on board at all times, confirms the validity of the SEEMP Part III. If not current, a conscientious port state control inspector could in principle detain the vessel.

Contractual issues

The formula and makeup of the CII are likely to disrupt several long-established principles and precedents in charter party contracts. There are already signs of discord but, so far, everyone is hoping that owners and their customers will focus on the need for a collaborative approach to sorting out issues.

CII has critics in the industry. Some say it is too broad a gauge of ships’ carbon intensity because it fails to take account of ship operations – vessels that make frequent port calls, for example, and are therefore subject to external factors such as congestion and waiting times that are outside a ship operator’s control.

Some also criticize the make-up of the CII itself – grams of carbon dioxide emitted per cargo-carrying capacity and nautical mile. They cite the example of long ballast hauls that could be used to increase the denominator below the line. And, in any case, many vessel types rarely ship cargoes equivalent to their full capacity.

Some vessel types, such as reefer ships, have been allocated correction factors – in the case of reefers, to offset fuel used in keeping cargoes cold. But other ship types – such as feeder container ships, for example – have no similar factors in place.

Nick Gross, LR’s Global Containership Segment Director, believes feeder ships will find it hard to match the CII rating of bigger container ships covering longer distances. Feeders make short voyages, he points out, spend a disproportionate amount of time in port, work lots of cargo, and are subject to port congestion, waiting time, and so on.

New CII clause

In November, BIMCO issued a CII clause for possible inclusion in new time charter contracts and perhaps as an amendment to existing contracts, subject to both parties agreement. However, many chartering groups were unimpressed, claiming that the clause was one-sided in favour of shipowners and operators.

Certainly, marine lawyers are already prepared for a significant volume of contract-related work as a result of the new regulations. Speaking on a no-names basis, one prominent specialist in charter party law said recently that good cooperation between owners and their customers might well facilitate a collaborative and successful approach to CII adoption.

But shipping is a notably litigious business and a significant number of owner-charterer relationships are more combative than cooperative. Furthermore, if one party is dissatisfied with existing contractual arrangements – perhaps because of developments in the market – taking a strong legal stance could provide a route to early termination of a deal.

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Source: LR

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