The clauses for EEXI, EU ETS and CII have now all been completed, the latest addition being Guidance Notes for the CII clause published on December 7th.
Work will continue in the BIMCO Sub-Committee to address clauses applicable to other charters and contracts, but the immediate focus now is on the need to implement the clauses in time charters – both those that are on foot into 2023 and beyond, as well as new time charters.
We provide an overview of these clauses, particularly the CII clause; as well as give a flavour of the challenges to come as we see them.
EEXI – Our impression is that the efforts to obtain International Energy Efficiency Certificates (IEEC) are well underway for most vessels. To the extent modifications have been needed, Engine Power Limitation has been the favoured solution and this seems to have been achieved without any great challenges. We would remind owners that using the EEXI clause as a basis for the required work is recommended not only for good order and convenience, but also to ensure that the new maximum speed and corresponding consumption has replaced the warranties in an existing charter party.
EU ETS – The seemingly never ending “trilogue” taking place among the EU Parliament, EU Council and EU Commission appears to have resulted in agreement on how shipping should be treated. Insofar as timing is concerned, the regime for shipping will be effective from 2024 and will apply to vessels exceeding 5000 gt. The EU Emissions Scheme will apply to 100% of intra-EU voyages and 50% of international voyages to/from the EU. However, the allowances payable for the resulting carbon emissions will only be phased in at a rate of 40% in 2024, 70% in 2025 and finally 100% in 2026. It should also be noted that allowances will also be payable for methane emissions from 2026.
CII –The importance of the revolution embodied in the Marpol Carbon Intensity Regulations (CII) cannot be overstated. From 1 January 2023 vessel operations in the time charter context will embark on a new path with increasingly stringent efficiency requirements along with challenges that must be understood and embraced by both owners and charterers. The IMO CII regulations are notoriously complicated, but there is no alternative other than to come to terms with the demands imposed on the industry. The mutual goal thrust upon owners and charterers is to reduce shipping’s carbon emissions within the designed framework.
Although the global need to reduce CO2 emissions in shipping, as in other industries is obvious; the IMO approach is both convoluted and demanding. Instead of simply requiring vessels to limit emissions by proceeding at lower speeds, the regulations will take owners and charterers on a roller coaster ride which will require vigilance, cooperation, and accommodation. Like shipbuilders and engineers, operators of ships will need to educate themselves and recognise that the building blocks of their trade will change already in January. If parties fail to understand the mechanics of CII, they will be doomed to run into difficulties. To put it simply, the Marpol Carbon Intensity Regulations will be unforgiving.
The first task for vessel owners will be to convince charterers of existing (and new) charters that the BIMCO CII clause is the best way to regulate the respective responsibilities. If charterers do not agree, there is a risk that trading under existing charters will continue more or less as before. If so, compliance with the regulations will be virtually impossible and may result in stricter legislation or greater consequences to ensure and enforce compliance. Assuming charterers accept the clause, the main challenge will be to ensure that vessels operate in a manner that satisfies the Agreed CII (rating)- the underlying premise being that the rating scale from A-E will in fact matter in the marketplace.
As one will understand, from January 1 2023 and every year thereafter including 2026 (for now), the CII of vessels will be under attack, not from pirates, but from the human tendency to operate business as usual in the hope that things eventually work out. In this regard, CII has some surprises in store for the unwary. An example is the harsh impact of extended port calls due to congestion, i.e. no distance is sailed which has a devestating effect on CII. One is reminded of the adage, “A ship in the harbour is safe, but that is not what ships are built for”. However inspirational, even that time honoured quote is only partially true – a ship stuck in port is certainly not “safe” from a CII perspective. But yes, vessels are meant to sail the seven seas (preferably on long voyages) – but like it or not – at much slower speeds than charterers would prefer.
Although CII has triggered a fair amount of disagreement, there appear to be two areas of agreement: The IMO regulations do have inadequacies requiring further “correction factors” and the BIMCO clause is much too complicated! While this is fair comment, it must be understood that the clause is the “offspring” of an extremely complicated regulation, which at its core leaves owners and charterers with conflicting interests. Charterers want trading flexibility, while owners wish to protect the Agreed CII and avoid having their ship undervalued in the marketplace – as if it were a derated refrigerator. A simpler variant of the clause could have been drafted, but it would have concealed the complexity of the task owners and charterers are facing.
As a participant in the BIMCO sub-committee, I believe a good faith effort has been made to design a clause that makes it possible for owners and charterers to operate vessels fairly within the parameters of the Marpol Intensity Regulations while pursuing the underlying goal of reducing carbon emissions.
Notwithstanding the relief associated with the publication of the clause, there will inevitably be tough negotiations ahead between owners and charterers. In this connection it is vital that both owners and charterers make a serious investment to understand the building blocks and moving parts in the CII clause. This will allow both parties to negotiate on the same terms, while avoiding pitfalls that should have been understood – some less obvious than others. The recently published BIMCO Guidance Notes should be the first point of reference – see link.
Once the clause has been accepted/agreed, that is when the real work begins. The continual exchange of data and information will provide a basis for informed action, along with a need for much tighter cooperation between personnel in the technical, chartering and operation departments. A vessel’s emissions will be measured in real time and a running evaluation of CII will be possible by way of CP Attained CII. When the trajectory of the CII gets out of out of line it will be necessary for those involved to deal with the sharp end of the clause – namely subclause (g). The hope is that the parties will treat that moment and each other with respect and mutual understanding. At the end of the day, we are all in this together!
At Nordisk we stand ready to assist as the decarbonisation revolution makes its way into your charter parties.