The world unites to swiftly and strictly limit carbon emissions from ocean shipping. Only the cleanest new ships are built, limiting future capacity. Dirty old ships are rapidly scrapped. Cargo shippers and trade-dependent nations willingly pay the cost of decarbonization. Freight rates and shipowner stock returns are boosted for decades to come …
Anyone who still believes this fantasy should pay closer attention to the fierce battle underway at the International Maritime Organization (IMO) in London. The situation is now in full-on “making the sausage” mode.
A closed-door IMO intersessional working group finalized short-term draft measures to reduce shipping carbon emissions on Friday. Environmental-group critics immediately pounced, loudly deriding the agreement. They characterized it as a watered-down, unenforceable mishmash that will not reduce shipping’s carbon emissions nearly enough.
It’s not just environmentalists. According to Simon Bergulf, director of regulatory affairs at Maersk, the world’s largest container line, the outcome was a “disappointment” and if the “direction is not changed, there is a real risk of not fulfilling the IMO strategy [on carbon emissions].”
But John Bradshaw, technical director of the International Chamber of Shipping (ICS), said that last week’s agreement has more enforceability than critics realize.
“Some people have described it as toothless,” Bradshaw said in an interview with FreightWaves on Tuesday. “Actually, it’s not. Despite all the negative publicity, I think it was a significant step forward.”
What IMO failure could mean for market
If the IMO effort to negotiate global CO2 reductions for shipping collapses, shipowners and investors could face the following scenario:
There will be no global carbon regulation strong enough to alter the business practices of international shipping. Instead, there will be regional regulation, likely starting with the EU. Patchwork regional levies will equate to more costs and complications for ship operators. Regional rules will render certain trades unviable for cargo shippers.
Private businesses will also drive decarbonization: owners, charterers and banks facing pressure from their own stakeholders to pursue environmental, social and governance (ESG) goals. But these pro-ESG players will compete with market participants who use lower-cost, higher-carbon-emitting ships because there will be no global regulatory regime to stop them.
Owners will not scrap older ships as fast as they otherwise would because they can still operate outside of regional regimes. On the newbuilding front, owners will shake off their fear of future IMO regulation of ship design and fuel use and pull the trigger on new orders.
What the IMO working group decided
Last week’s agreement was designed to help cut shipping carbon emissions by 40% versus 2008 levels by 2030. For shipping investors focused on the supply-demand balance and future rates, the key issue is how the new agreement could induce incremental scrapping.
What exactly happened? The complicated answer involves a a large number of acronyms.
The final package included a requirement to reduce carbon intensity on the technical (hardware) side via an Energy Efficiency Existing Ship Index (EEXI) and to reduce carbon intensity on the operational side via a Carbon Intensity Indicator (CII). Operators would record the CII as part of a vessel’s Ship Energy Efficiency Management Plan (SEEMP), which is overseen via the International Safety Management (ISM) Code.
The CII would score operations from high of “A” to a low of “E.” A ship rated “D” for three straight years or “E” for one year would have to submit a corrective action plan. A proposal calling for more serious consequences for ship operators with failing CII scores — such as revoking a vessel’s statement of compliance — was rejected.
The working group’s agreement will be up for approval at the IMO Marine Environment Protection Committee (MEPC) meeting on Nov. 16-20. That virtual meeting will be public and is expected to be highly contentious.
If the agreement is approved in November, it will be put forward for adoption at the next MEPC meeting, likely in mid-2021. The goal is to begin global enforcement as of 2023.
Critics sound off
A joint statement by environmental groups with observer status at the IMO session lamented that “hopes for bold action” were “dashed” by last week’s decisions.
They said that EEXI stringency was reduced during the working-group negotiations. They also noted that there is no carbon-intensity definition yet for the CII. Furthermore, they maintained that the CII rule “can be easily gamed … by ensuring one compliant year every three years,” and in any event, there are no enforcement penalties.
“All clauses that would create consequences for noncompliance … have been removed,” the environmental groups lamented.
FreightWaves was told by someone with knowledge of the negotiations that enforcement penalties were effectively removed by the chairperson, who imposed that solution after participants failed to come to an agreement.
The compliance-enforcement decision would be reviewed by the end of 2025. FreightWaves was told that even if stricter noncompliance penalties were adopted during that review, they wouldn’t enter force until 2028.
Bergulf of Maersk also highlighted the enforcement issue. “The lack of enforcement mechanism of the ‘short-term’ measure is disappointing. … The development of enforcement mechanisms should not be a mere afterthought.”
EEXI rule should accelerate scrapping
FreightWaves asked Bradshaw about each of these criticisms. Regarding accusations of a watered-down EEXI, he conceded “there was some horse-trading.”
Nevertheless, he stressed how this new mechanism will affect older ships.
The EEXI is a variant of the Energy Efficiency Design Index (EEDI), which is already applied to newly constructed ships. The EEXI will apply to ships on the water not covered by EEDI.
“With the EEXI, it’s a very binary question: Either a ship will satisfy the required EEXI value or it won’t get the necessary certificate [to operate],” said Bradshaw. “That will have very robust enforcement from Day One.”
Owners would have to meet the threshold by a ship’s first intermediate renewal survey after the 2023 enforcement date.
“It depends on how the survey cycles fall but some ships are not going to have very much time to get the EEXI certificate,” he said. “With pre-EEDI ships, we’re looking at ships built over 10 years ago. For a ship of that age to be told to improve technical efficiency by 15%, that’s not an insignificant challenge. Some of these ships are going to be more than 20 years old. They will face a very difficult challenge to get the necessary EEXI certificate.”
The key takeaway for investors: If this rule is adopted, which appears likely, the scrapping pace should increase, a positive for the supply-demand balance and freight rates.
ICS responds to operational-rule critics
Asked about the removal of enforcement procedures for the CII protocol on operational efficiency, Bradshaw responded, “People don’t realize the significance of the SEEMP” — referring to the efficiency-management plan that incorporates the CII measure. The SEEMP is audited by flag states under the ISM Code.
“If the [SEEMP] plan isn’t implemented, that can result in punitive measures against the ship,” he maintained. “A lot of people at last week’s meeting were environmentalists, for obvious reasons, and I don’t think many of them really understand the ISM Code. We think that has been lost in the debate.”
On why ICS does not want SII enforcement to initially include the strictest measures, he responded, “Nobody knows what the [carbon intensity] metric should be and there is the issue of normalizing for external factors.
“If you’ve got a ship that operates in the North Atlantic trades, for four or five months of the year, every year, that ship is going to have very poor operational efficiency, not because of how it’s managed, but because of the reality of the North Atlantic winter season. So far, nobody has been able to address how to normalize [the CII] for these external conditions.
“That’s why we proposed a phased implementation, which was what was agreed last week. Do the CIIs for three years. Understand the calculation. Understand how to address some of these external factors. Then consider where we go next.”
Failure or necessarily measured step?
An article in Forbes characterized the working-group decisions as a failure. Environmental group Transport & Environment described progress as “stalling.”
FreightWaves asked Bradshaw whether the ICS backing of the compromise — which is weaker than many had hoped — opens the door to the very regional regulation the ICS has argued against. If the global solution is too weak, doesn’t that inherently compel the EU and others to take matters into their own hands?
“We’re absolutely against regionalization. That’s clear,” he answered. “But the IMO is a global organization. That means to get an agreement, we have to secure the engagement of a majority of the member states. What some of the high-ambition countries wanted was just not acceptable to many member states — including many of the very significant, key member states.
“Many of those member states have made a very significant journey that culminated last week. Many of them in the past were seen as conservative or resistant to change. And they supported the agreement last week and made massive steps forward. Have they advanced as far as, for example, European member states would have liked them to? Probably not.
“Some of the states were unhappy because it didn’t go far enough. Other member states were not happy because they thought they went too far in making concessions.
“Overall, it was the best compromise we were ever going to get. And if there was no compromise last week, there would have been no agreement. We would have missed the 2023 target for enforcement.” Click for more FreightWaves/American Shipper articles by Greg Miller
MORE ON SHIPPING DECARBONIZATION: Can green shipping lick ‘herding cats’ dilemma? See story here. Shipping decarbonization hinges on owners of cargo not ships: see story here. Shipping unveils blueprint for collecting future carbon tax: see story here.