Reducing international shipping’s carbon intensity through the IMO’s EEXI and CII

The proposed measures seek to regulate both the design and operational efficiency of relevant vessels and present numerous commercial and legal challenges for all the main stakeholders in the physical transport chain. This HFW article focuses on the important issues that are likely to arise under charterparties, and the steps that parties should consider taking now.

At a glance:

• The IMO’s Regulations are expected to come into force on 1 January 2023, but careful planning, understanding and action is required now by the main stakeholders in the physical transport chain.
• The EEXI targets for energy-efficient ship design will apply to all existing ships above 400GT.
• The proposed CII Rating scale from A-E will apply to all vessels above 5,000GT.
• In many cases, technical modifications to a vessel may be seen as the only realistic way to achieve compliance with the EEXI.
• The CII regime has the potential to cut through traditional rights and obligations of parties to commercial contracts – most notably time charterparties – and this is likely to lead to disputes.
• Ensuring compliance and allocating risk and cost is likely to require bespoke solutions and substantive amendments to contracts, especially time charterparties.

In line with the IMO’s Initial GHG Strategy, the Marine Environment Protection Committee (MEPC) has approved draft regulations aimed at reducing GHG emissions from the global shipping industry by at least 40% by 2030 (compared to 2008 levels) (the Regulations).

The Regulations represent amendments to Chapter 4 of MARPOL Annex VI, and apply on an individual vessel basis (as opposed to applying across fleets of vessels). It is expected that they will be formally adopted at MEPC 76 in June 2021, and will come into force on 1 January 2023.

The Regulations come at a time when a number of regional measures to reduce GHG emissions from maritime transport are also being discussed. For example, the EU has confirmed its intention to include shipping within its Emissions Trading System (see our previous article on this here), and China has likewise indicated that shipping may soon be covered under its national carbon trading scheme. The US has also indicated that it may be leaning towards a carbon tariff system of some nature.

The IMO’s approach, however, more directly monitors and incentivises the improvement of a vessel’s energy efficiency and reduction of carbon intensity by focusing on both its technical design and operations. In this regard, the Regulations go beyond simply imposing a tax on GHG emissions, although recent proposals from the Marshall Islands and the Solomon Islands to the IMO have again raised the possibility of a separate global levy.

Whilst the entry into force of the Regulations are just shy of two years away, careful planning, understanding and action is required now by the main stakeholders in the physical transport chain. In this article, we explain why.

There are two key elements to the Regulations:

1. Energy Efficiency Existing Ship Index (EEXI)

2. Carbon Intensity Indicator (CII)

To read about what they are and how to comply use this link to continue to read or download the briefing here.