Latest Developments in the IMO’s Energy Efficiency Existing Ship Index and Carbon Intensity Index

In June 2021, the International Maritime Organization (IMO) introduced new regulations under amendments to MARPOL ANNEX VI in order to meet its aims of cutting carbon intensity emissions in the shipping industry by at least 40% by 2030, working towards 70% by 2050 (based on the comparable 2008 levels). The amended regulations incorporate the new Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Index (CII), which are measures to target improving the technical and operational efficiency of ships. The amended regulations are due to come into force on 1 November 2022, with the requirements for EEXI and CII certification coming into effect from 1 January 2023.

EEXI measures a vessel’s CO2 emissions against the amount of transport work undertaken, based on its design parameters. The index will apply to all cargo and cruise ships over 400 GT which were built prior to 2013. This is a logical extension of the existing requirements applicable to newbuild vessels under the Energy Efficiency Design Index (EEDI) – EEXI means that owners can no longer sidestep the IMO’s carbon efficiency requirements by simply operating an older fleet.

Excluded from the EEXI requirements are ships not propelled by mechanical means, and platforms including FPSOs, FSUs and drilling rigs, regardless of their propulsion.

The EEXI requirements will kick in (in practical terms) at the time of a vessel’s next survey for the International Air Pollution Prevention Certificate (IAPP) falling after 1 January 2023. Each vessel will be required to calculate its existing EEXI value (its ”attained” EEXI) prior to the survey to ascertain whether it is compliant compared with the applicable ”required” EEXI value for that vessel. If the ”attained” EEXI is greater than the ”required” EEXI, certain countermeasures and solutions will need to be implemented in order to achieve compliance. EEXI compliance will become a condition to a vessel obtaining its International Energy Efficiency Certificate (IEEC). The IEEC is a statutory certificate which lasts for the lifetime of a vessel and is issued by the vessel flag state. An EEXI Technical File will need to be submitted prior to the IAPP survey and approved by either the flag state or a Recognised Organisation (classification societies) for the vessel to obtain a new IEEC. Inspecting a vessel IEEC would form part of a normal inspection (by, for example, a port authority) and failure to maintain an IEEC could jeopardise a vessel’s ability to trade internationally.

EEXI is a threshold certification and there are no strict requirements as to how it can be achieved prior to the survey. The ”required” EEXI values applicable to different types of vessels are set for a five year period (after which these values will be reviewed again by the IMO as part of its incremental reduction plan). The EEXI certificate does not need to be renewed each year, though a vessel’s ”attained” EEXI will need to be recalculated when the ”required” EEXI values are next adjusted (which is due to be 2025). The most common methods adopted to meet the applicable ”required” EEXI are reducing the vessel’s speed or incorporating technical measures such as installation of engine power limitation (EPL) or shaft power limitation (ShaPoLi) and other on-board energy efficiency technologies or hydrodynamic improvements.

MARPOL certificates are statutory for ships registered in one of the 158 contracting states and are mandatory for ships seeking to trade with MARPOL party nations. Port authorities are more likely to start requesting evidence of a valid IEEC after January 2023. If the vessel does not have an IEEC, the port could then decline the vessel entry and the vessel may then be in breach of its chartering obligations if it is not able to proceed to port. Failure to obtain an IEEC may be viewed as a breach of the IMO’s regulations and consequently render the vessel not seaworthy under the (i) charter and (ii) any of the charterer’s cargo carrying contracts with third parties. In turn, the vessel being deemed unseaworthy could seriously impair the operator’s ability to obtain adequate insurance coverage which and then give rise to potential issues under the vessel’s financing given that lenders would normally rely on the vessel’s insurances as part of a standard security package.

While meeting the required EEXI is a one-time certification based on a vessel’s technical parameters, the CII by comparison is a framework providing for an ongoing scale of compliance requirements that apply to the operation of a vessel. The CII measures a vessel’s operational efficiency when transporting passengers and cargo – it is a carbon intensity indicator expressed in grams of CO2 emitted per nautical mile. The CII will apply to all cargo and cruise vessels of 5000 GT and above. From January 2023, CII data will form part of the data collection process under the existing IMO Data Collection System (the DCS) which is already applicable to vessels of 5000 GT and above for the purpose of disclosing annual fuel oil consumption.

From the data submitted each year, a vessel will be given a performance rating on a scale of A to E (a CII Rating) to measure the vessel’s performance over that past year. The rating will be recorded in the vessel’s mandatory Ship Energy Efficiency Management Plan (SEEMP). A vessel will be required to develop and implement a corrective plan if it gets a D rating for three consecutive years or an E rating in any one year. Failure to submit the corrective plan to be incorporated into the SEEMP will mean that the Vessel’s statement of compliance will not be issued (Regulation 6(8) of amended MARPOL Annex VI).

The CII rating is determined by comparing a ship’s operational carbon intensity performance with the average performance of other ships of the same type. Each rating band has a threshold value and that value is required to reduce by at least 40% by 2030 and by 70% by 2050 as compared with the value in 2008 (in line with the IMO’s overall emission reduction targets). In order to achieve this overall reduction, the threshold for each band will incrementally reduce each year, so vessels will need to continually reduce their carbon intensity in order to maintain the same rating (of at least a C) year on year to maintain their ability to operate internationally.

Decreasing a vessel’s carbon intensity can be achieved by the methods mentioned above appliable to EEXI compliance. In addition or alternatively, operational measures could be introduced such as changes in fuel type/usage and route optimisation. The year on year obligation to continually reduce carbon intensity means that operators will most likely need to monitor and adopt a combination of strategies over time. A balance will need to be struck between ensuring CII compliance, cost efficiency / capital expenditure and the vessel’s contractual obligations under charterparties.

Maintaining annual CII compliance (and, when ”required” EEXI thresholds are adjusted each 5 years, EEXI compliance) needs to be considered against the vessel’s employment obligations under a charterparty. Speed reduction or slow steaming measures could result in a breach of the vessel’s requirement to proceed with utmost dispatch, given that this will have a knock-on effect on the charterer’s counterparties under, for example, bills of lading. Similarly, the implementation of speed reduction/power limitation or reducing cargo capacity may leave the owner in breach of the vessel’s speed, performance and cargo capacity warranties. Prolonging voyages or adjusting routes could also give rise to claims of wrongful deviation, resulting in the vessel being deemed off-hire or the jeopardising of the vessel’s insurance coverage.

At present, there is certainly scope for a range of potential contractual claims against the owner as a result of steps taken to ensure a vessel’s compliance with CII. There will need to be a significant level cooperation between parties in order to (i) realistically amend the charterparty to re-balance the contractual rights given to the charterer and (ii) ensure that the way in which the vessel is operated while under the charterer’s control does not result in the vessel failing to maintain its CII rating on the next annual submission of data to the IMO. If a vessel’s CII rating were to suffer, the owner may then need to take corrective measures, and it may be difficult to demonstrate that the non-compliance was attributable (whole or in part) to the charterer’s operational practices.

As EEXI relates to a vessel’s technical parameters, the assumption is that the owner would primarily be responsible for ensuring the vessel has achieved its required EEXI in time for the 2023 survey deadline. In December 2021, BIMCO published the EEXI Transition Clause for Time Charterparties (the ”EEXI Clause”). The EEXI Clause requires the owner to make EEXI Modifications (meaning any physical or technical modifications required to bring the vessel in compliance with the EEXI) to the vessel prior to 1 January 2023. The EEXI Clause expressly covers the owner’s right to take the vessel out of service for EPL or ShaPoLi installation and stipulates that the cost of such EPL/ShaPoLi modifications and any actual loss of time due to the installation will be for the account of the owner.

Following EPL/ShaPoLi modifications, the owner would notify the charterer of the vessel’s estimated new speed and consumption figures. If the estimated new speed and consumption figures are less than those under the existing charterparty performance warranties, the EEXI Clause provides that the new estimates will replace the figures in the existing warranties. There is also a corresponding obligation on the charterer not to operate the vessel at a speed which would exceed the vessel’s new maximum speed.

The EEXI Clause clearly anticipates that the most widely adopted method for attaining EEXI compliance will be installation of EPL/ShaPoLi. The guidance notes to the EEXI Clause also state that (i) in most cases, it is expected that modifications could be carried out during service without appreciable loss of time to the charterer and (ii) the rationale for allocating the costs solely to the owner is based on the understanding that the owner will choose the type of modifications to be made, as it would be inappropriate for the charterer to have a say.

The EEXI Clause does not expressly cover non EPL/ShaPoLi modifications, such as engine fuel modifications, and the current position under the EEXI Clause requires the charterer’s prior consent for any non EPL/ShaPoLi modifications. For many vessels, EPL/ShaPoLi modifications will be sufficient to meet EEXI compliance and will contribute to reducing the CII but EPL/ShaPoLi modifications alone will not be enough to meet a vessel’s continually reducing CII targets. If, at this stage, an owner were looking to implement more substantial modifications ahead of January 2023 to tackle both EEXI and longer term CII reduction, the EEXI Clause falls short. Given that the CII is an ongoing obligation that relates to the vessel’s operation, a charterer’s and/or manager’s role will also be key to implementing the vessel’s carbon reduction measures. BIMCO is due to publish a CII clause in May 2022 and it will be interesting to see how additional technical and operational modifications will be addressed and how the burden of maintaining compliance is allocated between the parties.

As indicated by the elapsed time between publication dates for each of the BIMCO EEXI and CII clauses, the primary focus amongst stakeholders at present appears to be achieving EEXI compliance, particularly for those vessels with IAPP surveys falling shortly after 1 January 2023. For CII, further guidance is required on (i) how a vessel’s attained operational CII should be calculated in the SEEMP (ii) the exact penalties which will be enforced if a vessel with a D or E rating does not submit and/or comply with a corrective plan (other than not receiving a Statement of Compliance), so it is not yet clear what the preferred course of action will be in the longer term.

Vessel operators are also having to consider impending measures under the proposed extension of the EU Emissions Trading System (the Maritime EU ETS) to cover the maritime sector. The Maritime EU ETS which was put forward by the European Commission in July 2021 under its ”Fit for 55” package, which aims to achieve a 55% reduction in carbon emissions by 2030 (based on comparable 1990 levels), with a progression to being carbon neutral by 2050. It is expected that the Maritime EU ETS will be implemented from 2023 and will be applicable to all vessels of 5000 GT and above which call at EU ports. The party responsible for the operation of the vessel under the ISM Code will be liable for its CO2 emissions and that party will be required to ”buy” allowances for emissions. If a vessel operator exceeds its annual allowance, it will incur a fine. Similarly, ”Fit for 55” also put forward the FuelEU Maritime programme, which would implement incremental targets for greenhouse gas reduction starting from 2025, to be achieved through the following measures: (i) implementing mandatory EU standards on the carbon content of marine fuels used by vessels calling at EU ports, (ii) mandatory use of biofuels, including marine fuels which have been bought outside the EU and (iii) placing legal responsibility for compliance with new fuel standards on vessel operators.

The different sets of international regulations put forward by the EU and the IMO, each with its own timeline for achieving reduction targets, allocation of responsibility for compliance (whether it is the owner, charterer or manager) and cost implications has created an overlap of inconsistent obligations which vessel operators are having to interpret and prepare for.

One solution which may become the preferred option (in the longer term), for those vessels where it would be economically practicable, is a switch to LNG fuelling. In data reported by industry coalition SEA-LNG in February 2022, it was found that an LNG fuelled vessel immediately rated two CII grades higher than its identical counterpart fuelled with traditional oil-based marine fuel. It reported that LNG fuelling can be the difference between a vessel having a ‘moderate’ C rating and having a ‘major superior’ A rating on the IMO scale, so LNG fuelling would allow a vessel to keep operating as normal until after 2030. Further, an LNG fuelled vessel could improve its CII rating over time to keep pace with the reduction factor beyond 2050 by blending in carbon-neutral bioLNG in the short to medium term, or zero-carbon renewable synthetic LNG in the longer term. It was reported that for every ten per cent increase in these fuels blended with traditional LNG, a vessel would gain two years of additional CII compliance. However, conversion to LNG fuelling may not be a viable option for older vessels. Obtaining financing to cover the cost of conversion for a vessel further towards the end of its operational life may be more difficult and could therefore lead premature decommissioning of older vessels in favour of newbuild replacements. According to Clarkson’s October 2021 data, LNG fuelled vessels represent more than thirty percent of the newbuild orderbook, so the uptake in LNG conversion for existing vessels (depending on their age) could follow suit as a result of the CII.

While the demand for LNG bunkers and LNG fuelled newbuild vessels increases, the current LNG carrying fleet presents a problem. It has been estimated that around two thirds of the existing LNG fleet will not be able to meet the CII requirements from the outset in 2023. Even if these older generation LNG vessels can be modified to achieve compliance, they may still fall back into these lower categories a few years later. Meanwhile, the orderbook for LNG shipyards is reportedly full until 2025. Increased LNG trading combined with limited LNG shipbuilding capacity could prove to be a serious roadblock to LNG fuelling being a widespread solution for CII compliance.

It is recognised that it is not just in the interest of owners to ensure that CII and EEXI requirements are met and that longer term solutions need to be formulated with input from multiple industry stakeholders, as envisaged by the IMO in the regulations. Port authorities, administrations and other relevant stakeholders are being encouraged under the CII framework to provide incentives to vessels rated A or B, which may then impact a charterer’s assessment when selecting a vessel. From a long term charterer’s perspective, a vessel with a more favourable CII rating will be less susceptible to operational disruption required to accommodate further CII modifications. Owners of higher rated vessels may then be able to charge higher charter rates than those with poor CII ratings.

Financial institutions bound by internal policies and, in particular, institutions which have signed up to carbon reduction initiatives such as the Poseidon Principles, will most likely give more weight to the CII rating when reassessing their investments and any funding for conversion or retrofitting. In the same February 2022 report referred to above, SEA-LNG stated that analysis shows LNG fuelled vessels can benefit from an additional seven plus years of emissions compliance for the purpose of gaining preferable asset financing versus conventionally fuelled vessels. There is also evidence of greater support from fuelling partners, as seen by the collaboration between Shell and MSC in MSC’s move to LNG based fuelling in its newbuild vessels, with the longer term aim for the partnership being development of net-zero emission flexible fuel concepts. Similarly, TotalEnergies has partnered with EveRé, Elengy and CMA CGM to study the feasibility of creating France’s first production unit for bioLNG.

There is clearly an abundance of potential issues raised by the impending EEXI and CII requirements. Initial EEXI compliance and the contractual position under vessel charterparties will need to be addressed imminently. In the longer term, cooperation amongst parties across the industry will be the only way to develop workable solutions in order keep pace with the IMO’s targets and effectively reduce marine carbon emissions for good.