Decarbonising shipping is essential, expensive, and complicated. Regulation is key to achieving the task, and which regulation prevails will determine shipping companies' strategies for decades to come
This is the second article in our series dedicated to the impact of shipping on the environment. It explores the issue of decarbonisation, in other words the reduction of Green House Gas (GHG) emissions from ships, in an effort to combat climate change. It reviews relevant IMO and EU legal frameworks, identifying strengths and weaknesses, and highlighting implications for shipping companies.
Decarbonisation is not exclusive to shipping. It is a much wider topic that currently dictates global policies and shapes national economies. One needs only mention the Paris Agreement of 2015, and recent announcements by the world's largest economies including China, the US, and Japan, pledging carbon neutrality in the second half of the current century, these pledges bearing financial implications far and wide.
Nonetheless, decarbonisation is highly relevant to shipping. The shipping industry's annual GHG emissions total more than one billion tons, which is more than any single country's emissions but for the world's top five emitters. Shipping therefore contributes to climate change, which in turn is associated with melting sea ice, wiping out coral reefs, attacking marine life and undermining the ocean, both as an important ecosystem and as a climate regulator.
The International Maritime Organization (IMO) adopted an Initial Strategy in 2018 on reducing GHG emissions from ships during the 72nd session of the Marine Environment Protection Committee (MEPC). This strategy came after IMO measures already adopted under MARPOL to reduce GHG emissions through the Energy Efficiency Design Index (EEDI) mandatory for new ships (or existing ships having undergone a major conversion), and the Ship Energy Efficiency Management Plan (SEEMP), which applies to all ships, both over 400 Gross Tonnage (GT).
EEDI & SEEMP
The EEDI is an index which sets a minimum energy efficiency level (measured in grams of CO2 emissions) per capacity distance (measured in tonne-mile), and depends on the type and size of the ship. It is a par for ship energy efficiency applied worldwide, irrespective of where the ship is built or operated, and its Flag State. As it is a performance-based mechanism, how this level is attained is left open to the industry. The EEDI calculation is made based on Regulation 21 MARPOL Annex VI.
The SEEMP on the other hand is a plan and does not set a par, but rather aims at energy-related operational efficiency. It incorporates best practice for fuel-efficient ship operation, such as improved voyage planning, frequent propeller cleaning, and waste heat recovery systems. Under Regulation 22 MARPOL Annex VI, the SEEMP may form part of the ship's Safety Management System (SMS).
IMO Initial Strategy 2018
The Initial Strategy 2018 sets goals, and identifies candidate measures. Paragraph 1.4 of the Initial Strategy 2018 introduces its prospective revision in 2023, which is widely seen as the earliest date any form of relevant mandatory IMO regulation may emerge. Paragraph 1.5 draws a direct link to the Paris Agreement, though the latter does not include international shipping per se.
The goals set in the Initial Strategy 2018 appear in Paragraph 3 under 'levels of ambition'. These are summarised below:
- To review and aim to strengthen the EEDI requirements for ships;
- To reduce CO2 emissions on average across international shipping, by at least 40% by 2030, pursuing efforts towards 70% by 2050, compared to 2008; and
- To peak GHG emissions from international shipping a.s.a.p. and to reduce the total annual GHG emissions by at least 50% by 2050 compared to 2008.
On the first goal, draft amendments to MARPOL Annex VI were approved by MEPC 75 in November 2020, bringing EEDI phase 3 requirements forward to 2022 from 2025 (now these need to be adopted at MEPC 76 in June 2021).
The candidate measures are divided in short, medium, and long-term measures. Short term translates to between 2018 and 2023, medium term translates to between 2023 and 2030, and long term translates to beyond 2030.
Short-term candidate measures offer a mix of technical, operational, and policy-orientated solutions. Some of these include:
- Further improvement of EEDI and SEEMP;
- Speed optimisation and speed reduction analysis;
- Port development including power supply from renewable sources and alternative fuel supply;
- Research into alternative fuels and marine propulsion; and
- Incentives to develop and use new technologies.
Mid to long-term candidate measures are predictably less detailed, and include further enhancement of operational/technical measures, further policy adjustments, introduction of new/innovative emission reduction mechanisms, development and provision of zero-carbon or fossil-free fuels, and development of a feedback mechanism.
Non-IMO Measures: EU MRV Regulation & EU ETS
The EU 'Monitoring Reporting and Verification of Carbon Dioxide Emissions from Maritime Transport' (MRV) Regulation (EU) 2015/757 'lays down rules for the accurate monitoring, reporting and verification of carbon dioxide (CO2) emissions and of other relevant information from ships arriving at, within or departing from ports under the jurisdiction of a Member State, in order to promote the reduction of CO2 emissions from maritime transport in a cost effective manner' (article 1).
In 16 September 2020, the EU Parliament voted in favour of a draft amendment to the EU MRV. Under this draft amendment, which now needs to be approved by the EU Council, shipping is included in the EU Emissions Trading System (ETS).
The EU ETS is the world's first and biggest carbon market, and works on a 'cap and trade' principle. A cap is set on the total amount of GHG emissions, and that cap is reduced over time so that total emissions fall. Within the cap, companies receive or buy emission allowances, which they can trade.
The draft amendment applies to ships over 5,000 GT, such ships representing 90% of total EU shipping emissions. Specifically under new Recital 4(b):
'. For the maritime sector to contribute fully to the economy-wide effort to reach the Union's climate-neutrality objective as well as the 2030 targets . it is also necessary to extend the EU Emissions Trading System (EU ETS) to cover the maritime transport sector'. (our emphasis)
Moreover, as explained under Amendment 16 to Recital 7:
'It is important that, irrespective of any global measures, the Union remains able to be ambitious and demonstrates climate leadership by maintaining or adopting more stringent measures within the Union'. (our emphasis)
The scope of the regulation includes all intra-Union voyages, all incoming voyages from the last non-Union port to the first Union port of call and all outgoing voyages from an Union port to the next non-Union port of call (Recital 14 of existing EU MRV Regulation).
Amendment 17 to Recital 8, which makes extensive reference to the IMO Initial Strategy 2018, declares 'It is therefore appropriate to include the core elements of the IMO Initial Strategy in Union law'. This materializes under new article 12(a) para 1 whereby 'Companies shall linearly reduce the annual CO2 emissions per transport work by at least 40% by 2030 as an average across all ships under their responsibility'. (our emphasis)
Moreover under para 2 'Where, in a given year, a company fails to comply with the annual reduction referred to in paragraph 1, the Commission shall impose a financial penalty, which shall be effective, proportionate, dissuasive and compatible with a market-based trading emission system, such as the EU ETS'. (our emphasis)
Prima facie, therefore, the draft amendment seems to place the burden for compliance with the 40% CO2 reduction and any associated fines within the EU ETS on charterers.
The draft amendment further establishes an Ocean Fund under article 3(gc), which is to receive at least 50% of the revenues generated by the auctioning of EU ETS allowances, in order to 'improve the energy efficiency of ships and support investment in innovative technologies and infrastructure to decarbonise the maritime transport sector'. Furthermore, 'maritime transport companies may pay an annual membership contribution to the Fund in accordance with their total emissions'.
The EU Commission on the other hand would rather not combine the EU ETS and the EU MRV, and is set to roll out its own proposal for inclusion in the EU ETS during 2021, building on the European Green Deal. Moreover, the Commission will need to decide whether owners or charterers bear the associated cost of compliance. Either the Commission's or Parliament's approach will be subject to approval by the EU Council, which represents EU Governments, and the ensuing negotiations are not expected to conclude until 2022. Moreover, the Commission considers reviewing legislation that could increase shore-side electricity (SSE) supply to ships in ports (Alternative Fuels Infrastructure Directive, Energy Taxation Directive), by mandating SSE infrastructure in cruise and cargo terminals, and exempting SSE from local taxes for a transitional period.
Decarbonising shipping is a complicated matter, with an estimated cost up to $1.65 trillion by 2050. Shipping centres on large, long-life assets and a steady stream of energy-dense fuels required to satisfy the industry's annual 12 exajoules (1018) demand.
A recent Lloyd's survey on decarbonisation published in January considered the expectations of owners and various other stakeholders on which marine fuels will be used in 2030 and in 2050. These expectations were similar for owners/non-owners, but varied dramatically between the two dates. In 2030, 20% of owners and 22% of non-owners went for Liquefied Natural Gas (LNG), while 20% of owners and 17% of non-owners favoured current marine fuels with carbon offsetting. By 2050, these figures dropped drastically to 7% and 8% (LNG) and 5% (current fuel and carbon offsetting), with ammonia favoured by 20% of both groups, hydrogen by 19% of owners and 16% of non-owners, and batteries by 15% and 19% respectively.
Another important outcome of the survey was that mandatory regulation constitutes the single biggest incentive causing owners and operators to begin, accelerate, and intensify decarbonisation activities. It is widely felt in the industry that owing to the international nature of shipping, global regulation is a prerequisite to achieving meaningful change, and to creating a level playing field. The IMO is the appropriate forum to achieve such regulatory consensus, and the IMO Initial Strategy 2018 is a step in the right direction. However, critics point out that the strategy lags far behind the target for GHG neutrality by 2050 promoted by many countries under the Paris Agreement. Moreover, some point out that given its size and procedures, the IMO is simply too slow to react, and a robust regulatory framework will take considerable time to be agreed upon and implemented.
On the other hand, the EU MRV amendment, if adopted by the EU Council, is already in place and will be legally binding in the EU, therefore mandating the 40% CO2 reduction by 2030, and the inclusion to the EU ETS. However, various groups such as the European Community Shipowners' Association (ECSA), the International Chamber of Shipping (ICS), BIMCO, as well as countries such as Greece, South Korea and Japan, have opposed the push for EU ETS inclusion. Their principal arguments against the EU ETS are that it creates an uneven playing field, and supports the principle that "whoever pays can continue to pollute". China's stance is also eagerly anticipated, China having previously blocked a similar push in aviation by threatening to hold back $60bn of orders from Airbus.
If the EU ETS inclusion goes through, shipping companies may need to revise their strategies. Much will depend on cost/benefit analysis, tailored to specific ship types/sizes, of buying emission allowances and investing in longer-term solutions such as hydrogen and ammonia, or investing in available shorter-term solutions such as LNG. Moreover, a successful EU ETS push may influence other countries to adopt their own market-based measures, and may even urge the IMO to promote a global carbon shipping market. Should this combined uncertainty persist, one expects low levels in newbuilding activity, shipping companies remaining hesitant to commit in expectation of incoming regulation.
Decarbonising shipping is a necessary, complex and costly enterprise. Regulation is widely seen as a prerequisite and the single biggest incentive to accomplishing the task. The IMO has so far adopted energy efficiency and operational measures such as the EEDI and SEEMP, and published an Initial Strategy containing candidate measures not yet legally binding. The EU wants to go further by legally mandating a 40% in CO2 by 2030, and the inclusion of shipping in the EU carbon market, a move opposed by several influential groups and countries. Whether global or local regulation ultimately prevails is crucial to both the short and long-term strategy of shipping companies.
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