How incoming regulations will drive the market over the short and medium term.
The regulatory landscape is evolving towards net zero 2050 with short- and medium-term targets designed to guide the journey. Ship owners are looking at a complex regulatory picture that doesn’t leave a lot of wiggle room.
The backdrop to this picture is the IMO’s revised GHG reduction strategy goals, which now aim to reduce the carbon intensity of international shipping to net zero by, or around, 2050. This is accompanied by step goals: 10-20% absolute reduction by 2030, and 70%-80% absolute reduction by 2040, striving for 80%. Additionally, the need to ensure alternative, low-, and, near- zero (ALZ) carbon fuels of 5-10% by 2030, remains imperative to support the journey. Introduction of a global market-based measure on carbon remains under discussion with an impact assessment on GDP to be part of any formulation.
Against this MEPC backdrop, there is a host of supporting measures and regional regulations which are often more ambitious and more demanding. It is on these that ship owners and managers must focus their attention. Owners will need to navigate the increasing complexity of international regulations through IMO and regional requirements such as EU ETS and Fuel EU Maritime. They must work with other stakeholders in the maritime ecosystem such as charterers, financiers, and ports and terminals to collaboratively bend the emissions curve towards the interim targets and through to 2050.
Short-term basket of measures: EEXI, EEDI, and CII
The key measures supporting the IMO’s short-term decarbonisation goals are the Energy Efficiency Design Index (EEDI), Energy Efficiency Existing Vessel Index (EEXI), and the Carbon Intensity Indicator (CII), which is housed within the Ship’s Energy Efficiency Management Plan (SEEMP).
The EEDI sets energy efficiency design standards for ships built from 2013 onwards, while EEXI performs the same function for pre-2013 existing vessels including those built during 2013-2023 EEDI phases which don’t attain required EEXI. The CII meanwhile encourages annual intensity reductions based on operational performance (it currently carries through to 2026 and will likely be revised by the IMO once it reaches that date – one potential change to CII is separating transit from in-port/anchor operations and ballast vs laden legs including % of capacity carried, which would make CII a more meaningful metric).
Failing to comply with EEDI and EEXI requirements will result in a removal of licences to operate. Enforcement of CII non-compliance is somewhat weaker as vessels rated D over a three-year period, or E for one year need to develop an action plan for improvement to be housed in the vessels SEEMP. There may also be commercial risks to operators that are not actively seeking to improve their environmental performance reflected in CII as first movers and fast followers strengthen their stipulates on vessel environmental design and performance.
FuelEU Maritime
EU maritime transport moves 77% of external trade and 35% of all trade by value among the EU countries, while around 9% of the traffic is estimated to be between ports within the same EU country (domestic voyages).
The EU's new maritime decarbonisation legislation comes into force in January 2025 and requires vessels trading in the EU or the European Economic Area (EEA) to reduce the yearly average GHG intensity of energy used on board, measured as GHG emissions per energy unit (gCO2e/MJ), to be equal or below a certain level – depending on vessel type.
The GHG emissions are calculated from a well-to-wake perspective, including emissions related to extraction, cultivation, production, and transportation of the fuel, (well-to-tank) in addition to emissions from energy used on board the ship (tank-to-wake).
The GHG intensity requirement applies to 100% of energy used on voyages and port calls within the EU or EEA, and 50% of energy used on voyages into or out of the EU or EEA.
Ships that have a higher GHG intensity than the set limits must pay a penalty corresponding to its compliance deficit, measured as the difference between the required and actual GHG intensity, multiplied by energy use.
The penalty is progressively increased if the ship has a compliance deficit for two or more consecutive reporting periods.
The proposal also sets fuel standards for ships and introduces a requirement for the most polluting ship types to use onshore electricity when at berth. It puts the responsibility for compliance on the shipping company.
Emissions trading schemes
The EU Emissions Trading Scheme sets a decreasing CO2 emissions cap, reducing the number of allocated allowances every year. The price of allowance sold on the market increases as the CO2 emissions cap is lowered, incentivising companies to reduce their CO2 emissions as it becomes cheaper to pollute less than to buy allowances.
The Commission has extended the scope of the EU’s Emissions Trading System to cover CO2 emissions from vessels above 5,000 gross tonnes, regardless of the flag they fly, from January 2024 onwards. It would include all emissions from ships calling at an EU port for voyages within the EU, and 50% of the emissions from voyages starting or ending outside the EU. The share of emissions that must be covered by allowances gradually increases each year:
- 2025: 40% of emissions reported for 2024 must be covered by emission allowances
- 2026: 70% of emissions reported for 2025. Emissions to include CH4 and N20.
- 2027 and beyond: 100% of reported emissions. Offshore ships will also be included.
To avoid evasive behaviour, there are additional rules for container ships stopping in ‘neighbouring container transhipment ports’ outside the EU or EEA whose share of transhipment of containers exceeds 65% of its total container traffic during the most recent 12-month period for which data is available; is less than 300 nautical miles from a port under the jurisdiction of an EU Member State; or is within a country that does not effectively apply measures equivalent to the ETS for that port.
In any of these instances, the ship must include 50% of the energy for the voyage to that port as well, rather than only the short leg from the transhipment port. The EU will provide a list of transhipment ports. Currently Tanger Med (Morocco) and East Port Said (Egypt) are identified as such ports. This list will be revised every two years.
Fuel standards
In 2020, the IMO introduced fuel standards aimed at reducing the emissions of sulphur oxide from ships. The IMO 2020 rule puts a sulphur limit of 0.5% m/m (mass by mass) on marine fuels, a significant reduction from the previous limit of 3.5%. This has a direct impact on air quality and its impact on human health for those coastal communities, as well as acid rain and its impact on oceanic and terrestrial
Carbon levies
While the IMO did not implement carbon levies as part of the MEPC 80 and 81 sessions, we think it’s likely that they will be adopted in the coming years. One proposal, put forward by Pacific Island nations at this year’s session, would apply a $100 per-tonne-of-CO2 fee to all international shipping voyages.
At RightShip, we support this measure in principle, and measures like it. Fuel levies incentivise the switch to cleaner fuels and technologies, and, crucially, bridge the price gap between low-/zero-carbon and high-carbon fuels. They offer a level playing field by offering clarity on who the polluter is in a given instance (sometimes the ship owner and sometimes the charterer). This rewards efficient vessels, penalises pollution in a measured way, and generates revenue to accelerate further decarbonisation.
We strongly advocate for well-considered fuel levies over other measures that may be unclear, complicated, and create unintended consequences.
RightShip’s GHG Rating
RightShip’s GHG Rating rates the emissions output potential of commercial vessels on a scale from A (most efficient) to E (least efficient). It calculates and compares a vessel’s design efficiency against peer vessels of similar size and type applying a speed-corrected methodology.
Since its introduction in 2012, RightShip’s GHG Rating has become a universally adopted metric in the shipping industry, with more than 50,000 vessels having received an official GHG Rating to date. It enables stakeholders across the supply chain – including charterers, ship owners, ports and terminals, insurers, finance institutions, and more – to make more informed decisions about vessels and select ships that are consistent with their environmental requirements.
This is because the rating calculates and compares the emissions of vessels of similar size and type. This means that a charterer aiming to reduce CO2 footprint can choose the vessel with the most fuel-efficient design. Banks and insurers can benchmark vessels in the same way. And a ship owner looking to buy a vessel in the secondary market can measure their target efficiency against the alternatives.
On December 6th, 2023, RightShip updated its GHG Rating to reflect the changing regulatory, commercial, and environmental landscape. The most significant changes were the incorporation of the IMO’s Energy Efficiency Existing Ship Index (EEXI), alongside RightShip’s Existing Vessel Design Index (EVDI) and the IMO’s Energy Efficiency Design Index (EEDI) measures. To incorporate the more complex EEXI formulae (75% MCR without EPL, 83% MCR with EPL), and remove the influence of power limitations which have been shown to have a minimal impact on real world emissions reductions RightShip has move to an approach that compares vessels within peer groups at a common speed.
This has required a shift in how RightShip defines a vessel’s theoretical CO2 emissions. The old methodology rated a vessel based on engine power, using characteristics of the ship at build, like capacity, engine power, and fuel consumption. This is a strong methodology, but it doesn’t allow for the efficiency variables introduced by engine power limitation (EPL).
The new GHG Rating methodology moves to a speed-corrected methodology. This approach evaluates all vessels within a peer group at a common speed and focuses on the emissions in the range of a vessel’s operating speeds, applying a speed cap for calculating the speed-corrected intensity.
Vessels can have their GHG Ratings upgraded by enhancing design factors which have a measurable impact on efficiency, primarily through the addition of energy saving devices (ESDs).
GHG, future fuels, and energy efficiency
Alternative fuels are the future. But until they become established and readily available, and until vessels are ready to utilise them, energy saving devices (ESDs) are the best way to maximise a ship’s energy efficiency. ESDs are an essential step on the way to a net-zero maritime industry, as they will help ship owners reduce emissions in the short and medium term, as the industry anticipates new technologies. Proactive owners and managers can select and install the appropriate technology to their fleet (providing savings in the near term as the cost of carbon increases) and provide learnings for optimum efficient vessels ahead of the fuel transition where fuels are less energy dense and potentially more expensive. In this world the need for optimum efficiency becomes apparent.
