Shipping and the Decarbonization Trend: in Search of a Balance

Combating climate change and reducing harmful emissions are becoming an increasing global priority in all spheres.

In the international scene, efforts to reduce greenhouse gas emissions were first brought together in the 1992 United Nations Framework Convention on Climate Change (UNFCCC), to which almost all nations in the world are parties. Under the UNFCCC, industrialized countries agreed to reduce greenhouse gas emissions as much as possible and to support climate change activities in developing countries.

Following the UNFCCC, the Kyoto Protocol was adopted in 1997. It imposes obligations on developed countries to reduce emissions of six greenhouse gases and allows for various mechanisms to reduce emissions, including the use of international greenhouse gas emissions trading.

In 2015 parties to the UNFCCC also adopted the Paris Agreement on Climate Change, which requires member countries to take action to keep global average temperatures from rising above the established limits and to achieve zero emissions as early as the second half of this century.

1. International shipping initiatives

Shipping accounts for around 2–3% of the world’s carbon dioxide (CO2) emissions. The International Maritime Organization (IMO) has, among other international initiatives, also set itself the goal of contributing to the fight against climate change by tackling greenhouse gas emissions from shipping.

At the 62nd session of its Marine Environment Protection Committee (MEPC) the International Maritime Organization adopted the Regulations for the Prevention of Air Pollution from Ships (Annex VI of MARPOL 73/78). These were the first Regulations ever to set standards for CO2 emissions in any sector of the world. The Regulations apply to existing and newly built ships and set out the various energy efficiency measures they must comply with.

In April 2018, at the 72nd session of the IMO Marine Environment Protection Committee adopted an Initial Strategy to reduce greenhouse gas emissions from ship, under the following plan: to reduce the carbon intensity of international shipping by 40% by 2030 compared to 2008 levels, and to reduce it by 70% by 2050, as well as to reduce greenhouse gas emissions from shipping by at least 50% by 2050 (again, compared to 2008 levels) and to eliminate them as soon as possible.

In June 2021, the IMO Marine Environment Protection Committee adopted amendments to Annex VI of MARPOL 73/78, which combine technical and operational approaches to improve the energy efficiency of ships and also provide an important basis for future measures to reduce greenhouse gas emissions. The amendments also concern a ban on the use and transportation of fuel oil in Arctic waters, which will take effect on July 1, 2024. This ban will apply to the use and transportation of heavy fuel with a density higher than 900 kg/cubic metres at 15 degrees and a kinematic viscosity of 180 mm2/s at 50 degrees. But it will not affect ships intended to prevent and eliminate oil spills, search and rescue ships, and, until July 1, 2029, ships that fly the flag of countries with an Arctic coast, if such ships operate within territorial waters of the flag country.

The new measures will require all ships to calculate their Energy Efficiency Existing Ship Index (EEXI), using technical means to improve their energy efficiency and to determine the annual Carbon Intensity Indicator (CII) and its rating. Carbon Intensity is estimated by greenhouse gas emissions in relation to the amount of cargo transported over the corresponding distance.

The achieved actual annual indicator CII should be documented for comparison with the CII target. This will determine the ship’s carbon intensity rating (A, B, C, D, E, where A is the highest efficiency rating and E is the lowest one). Administrations, port authorities and other parties involved, as appropriate, are allowed to introduce incentives for ships with A or B rating, which is also a strong signal to the market and the financial sector.

A ship rated D or E for three consecutive years must submit a corrective action plan to show how the required index (C or better) will be achieved.

The amendments to Annex VI of MARPOL 73/78 are expected to enter into force on November 1, 2022, with EEXI and CII certification requirements from January 1, 2023. This means that the first annual CII indicator reporting will be completed in 2023 and the first rating will be assigned to ships as early as 2024.

In September 2021 the International Chamber of Shipping (ICS) also proposed a levy on carbon emissions from ships ahead of the November meetings of the IMO Marine Environment Protection Committee and the United Nations Climate Change Conference.

IMO’s medium-term measures will undoubtedly require a high degree of innovation and lead to the global adoption of new fuel types and new technologies. These include, above all, programmes to introduce the use of low- and zero-carbon fuels, the development of additional operational efficiency measures and market mechanisms, such as emissions trading, an emissions fee or environmental tax and emissions offsets. Such measures are mostly economic and are used to manipulate the market to move towards desirable non-polluting behaviour.

However, the IMO does not plan to consider such measures until 2023. Meanwhile, the European Union (EU) also has ambitious goals to reduce greenhouse gas emissions. And EU has recently moved far in this direction by voting to apply significant market-based measures to shipping in the EU by including emissions from shipping in the EU Emissions Trading Scheme (EU ETS).

2. “EU Emissions Trading Scheme” (EU ETS)

On July 14, 2021, the EU Commission published a proposal to include emissions from shipping in the EU Emissions Trading Scheme, which amends Directive 2003/87/EC (regulating the Emissions Trading Scheme itself) and EU Regulation 2015/75 (regulating the monitoring, reporting and verification of ships carbon dioxide emissions from 2017).

Funds from the sale of emission allowances, together with fines against companies that exceed such allowances, will go to the EU Commission. Currently, 50% of these proceeds are expected to go to the Maritime Decarbonisation Fund, set up speci fically to support decarbonisation of the maritime sector. Another 50% will go to support the broader EU climate strategy and its recovery after COVID-19.

The new directive will apply to ships of more than 5,000 gross tonnage engaged in voyages for the carriage of passengers or goods for commercial purposes and the emission of carbon dioxide into the atmosphere by such ships. Exceptions are warships, naval auxiliaries, fishing or fish processing ships, wooden ships of primitive construction, non-motorised ships or government ships used for non-commercial purposes. The Directive provides for the obligation of these ships to pay:

• 50% of emissions from ships entering or exiting the EU;

• 100% emissions from ships voyaging between ports within the EU and from ships berthed at a port within the EU.

It is now proposed that the purchase of carbon dioxide emissions credits produced in 2023 and thereafter be phased in mandatory according to the following schedule: 20% verified emissions for 2023; 45% verified emissions for 2024; 70% verified emissions for 2025; 100% verified emissions for 2026 and each year thereafter.

Responsible for implementing the directive will be the "shipping company", which is defined as "the shipowner or any other organization or person, such as manager or bareboat charterer, which has taken over the responsibility for the operation of the ship from the shipowner and which, having assumed such responsibility, has agreed to take over all the obligations contained in the International Management Code for the Safe Operation of Ships and for Pollution Prevention (International Safety Management (ISM) Code) set out in Annex I to Regulation (EC) No. 336/2006 of the European Parliament and of the Council".

The following liability is prescribed for failure to comply with the directive:

a. Publication of names of shipping companies that do not meet their obligations;

b. Payment of an excess emissions fine of €100 per tonne of carbon dioxide emitted in excess of the permits issued;

c. Possibility of detaining a ship in the EU or refusing a ship to enter EU ports.

Thus, bodies falling under the above definition of “shipping company” (owners, managers, bareboat charterers or other organizations responsible for compliance with the requirements of the ISM Code) may be responsible for compliance with the emission limits and should therefore pay particular attention to their contractual obligations in order to bring them in line with the new requirements likely to apply in the EU from 2023. In particular, regulate the questions of liability for compliance with the directive, its distribution and the consequences of its occurrence directly in the charter.

3. Initiatives in Russia

It is no secret that international initiatives must also be translated into national laws. While international regulation is relatively coherent, the individual national laws that give effect to such regulation often allow for confusion regarding the requirements imposed, which may differ from state to state. For example, the IMO Regulations, aimed at reducing sulphur emissions from shipping, prescribe a clear and universally applicable maximum sulphur content of marine fuel of 0.5% from 2020. However, as the implementation of this rule has been left to the discretion of individual states, some states strictly enforce the rule, while others do not. For example, an exception was made at the EEC level. Until December 31, 2023, the production and release of marine fuel with a maximum sulphur content of 1.5% is allowed for ships involved in inland water transport.

In November 2020, the Government of the Russian Federation adopted a roadmap, action plan within the framework of business climate transformation, which, in relation to maritime transport, enshrined the need to develop legislative changes to stimulate the use of environmentally friendly technologies in the field of merchant shipping and navigation.

At the moment we are talking about administrative and economic incentives for the use of new technologies in shipbuilding and shipping. For example, the determination of the port dues amount depending on the “environmental friendliness” of the ship, which will depend on the fuel used by the ship, the possibility of using electricity from onshore power sources when the ship is in the sea port, full compliance with all international and national standards in the field of environmental protection against pollution from ships, high energy efficiency indicators in accordance with the previously mentioned international methodologies, etc.

Also at the legislative level it is proposed to provide preferences for “green” ships both in distribution of state support measures in shipbuilding (salvage grant, subsidizing of ship construction loan interest rate, subsidizing of leasing payments for newly built ships, etc.) and in determination of priority of ships entering seaports and priority of their mooring, as it is now applied to liner ships.

The Ministry of Industry and Trade has already drafted this law. It is planned that amendments to the Federal Law on Sea Ports and the Merchant Shipping Code of the Russian Federation will come into force in 2023.

4. Conclusion

Given that regulation regarding decarbonisation in shipping is still in its infancy, there is some tendency to hold back the introduction of new technologies and methods until shipowners and marine operators can clearly see which ones will be widely used and prove their reliability and effectiveness.

Meanwhile, it is quite clear that fleet modernization and the use of new fuels in the very near future will play a crucial role in moving the industry towards achieving the goals set by IMO.

According to Magda Kopczynska, Director for Water Transport at the European Commission, “Technology and infrastructure for new fuels must be ready for widespread deployment in the shipping market by 2030 if the sector is to meet the IMO’s 2050 goals”. This will require active cooperation with energy companies, ports, shipping companies and cargo owners.

The list of fuels under development includes primarily hydrogen, ammonia, methanol and nuclear fuel. Danish shipping company Maersk plans to launch a methanol-based ship as early as 2023. Wallenius Wilhelmsen company is working on a wind power ship option by 2025.

In Russia, major shipping companies are joining efforts to convert maritime transport to liquefied natural gas as bunker fuel as part of “green” initiatives in the Arctic. In addition, the options of international use of the Northern Sea Route as one of the measures to reduce greenhouse gas emissions (shorter route length = lower emissions) are being actively explored.

But whatever the future holds, it is clear that growing greenhouse gas reduction standards and the industry’s move towards “green” shipping must be embraced with particular care by shipowners and operators today and prejudge their future decisions, not only to protect future investments and achieve financial efficiency, but also to achieve efficiency at sea. ■