As of January 1, 2023, regulations for the new IMO initiative to curb ship-born carbon emissions went into effect. We are now almost six months into the regulatory period and carriers across the globe are calculating and reporting figures related to energy efficiency and carbon emissions. The regulations take a two-pronged approach: The Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Indicator (CII). The latter involves a rating system by which if a ship is deemed to have an inferior performance level, corrective actions may be required to be implemented to improve the vessel’s efficiency. For Charterers and Owners whose business is often predicated upon Contracts of Affreightment (COA), the uncertainty of those corrective actions can create issues when drafting COA clauses.
According to the IMO, the EEXI is an index that compares a ship’s energy efficiency performance to a baseline of comparable ships. As explained by classification society DNV, the emissions “are calculated based on the installed power of the main engine, the corresponding specific fuel oil consumption of the main engine and auxiliary engines and a conversion factor between the fuel and the corresponding CO2 mass.” Basis the EEXI comparison to baseline, a ship is then given a CII rating on a scale from A to E, with A being “major superior” and E being “inferior.” Ships with a poor CII rating (D or E) may be required to institute corrective actions to improve a ship’s EEXI score and raise the CII rating.
The extent of what corrective actions can be instituted to improve emissions and efficiency is evolving. Early indications of potential actions include hull cleaning to reduce drag, reduction in speed/voyage optimization, use of lower energy onboard utilities and possible utilization of alternative power supplies generated by solar and/or wind sources. Reporting of CII scores basis 2023 EEXI data will commence no later than March 2024. Vessels who have consistent D and E ratings will be required to implement corrective actions.
Basis same, this presents an issue on how Charterers and Owners drafting COAs in the present account for any delays or losses that may result from a low CII score in the future. COAs provide the opportunity to mitigate risk and maximize ship utilization for partners who ship on established trade routes. The introduction of potential corrective actions needing to be implemented during the life of a COA presents unique challenges on how to account for these actions and who bears responsibility.
How then do contracting parties allocate the risk to account for possible voyage delays as a result of compliance with CII regulations? The answer, as with most new scenarios, can be found within compromise and a mutual understanding of the new shipping landscape. Charterers and Owners have to accept their role in the process and understand that the burden cannot solely be placed on the other party. Ideally, Emissions Clauses will be drafted in the spirit of this mutual responsibility and have language that “holds harmless” both parties for their role in adapting to the new emissions regulations.
In the ever-evolving landscape of global shipping, change begets uncertainty – the type of uncertainty that COAs attempt to mitigate. It is paramount that those facilitating the drafting of these first-generation emissions clauses have both a thorough understanding of the regulatory landscape and the experience to anticipate the potential consequences of this newfound landscape. Looking ahead, a potential consequence of the pressure of emissions reporting for Charterers could be a push towards only accepting vessels with a certain CII score (i.e. only ships with “B” rating or above). It is therefore not hard to envision the effects on markets if vessel rating becomes a perquisite for fixing. Again, another reason for why experience and a thorough understanding of the regulations is of the utmost importance in the drafting of emissions clauses.
By Jacob J. Wisniewski
Head of Demurrage, Legal Counsel
Quincannon Associates