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IMO has a new plan to reduce shipping’s carbon emissions; will it be enough?

Global shipping accounts for about 3% of the world's annual carbon emissions, and pressure is intensifying on the industry to reduce that pollution to contribute to the international goal of net-zero carbon emissions by 2050.

To date, the shipping industry, led by the International Maritime Organization (IMO), has lagged behind the electric power, vehicle, and oil and natural gas industries in committing to emissions reductions, as well as in achieving them, according to experts.

Even amendments to international regulations announced at the IMO's Maritime Environment Protection Committee's 76th meeting (MEPC 76) on 17 June were seen as inadequate by environmental and climate activists.

"There's no doubt that shipping is approaching a pivotal moment on the road to decarbonization," Nick Austin, a partner in Reed Smith's Transportation Industry Group, said during a June webinar sponsored by the law firm.

The IMO had set a target of halving emissions from shipping by 2050 from 2008 levels, but it failed to set an interim target during MEPC 76.

While MEPC 76 ended with an agreement on a timeline to pass long-term rules that tackle fossil fuel use, the consensus is that the short-term measures do not move the industry sufficiently towards net zero. This perception is likely to spur governments, with the EU in the lead, to pass legislation that imposes emissions cuts on the shipping industry, whether through direct mandates or via carbon taxes.

Two new data requirements

The IMO's adopted revision of an international treaty (MARPOL Annex VI) requires increased data reporting and modest emissions reductions through two measures. At MEPC 76, Argentina became the 100th country to ratify the treaty.

The measures apply to all cargo and cruise vessels above a specific gross tonnage trading internationally and registered in a treaty-signatory country. They enter into force on 1 November 2022, and will be reviewed for effectiveness in 2026.

The first measure is a carbon intensity (CI) reduction requirement. Shipowners must calculate a Carbon Intensity Indicator (CII) for each ship annually, taking into account cargo actually carried, and they must also craft a plan to cut the CI to reach annual ship-specific targets. Authorities in the country where the ship is registered, aka the flag state, will compare a ship's reported CII to its target, produce a rating, and require a corrective plan if a ship's rating is too low.

This CI measure is expected to achieve a reduction fleet-wide in compliant ships of about 11% from 2019 levels by 2026. The IMO says this is aligned with its 2018 initial GHG strategy targeting a sector-wide carbon intensity reduction of 40% between 2008 and 2030 on its way to a 50% GHG emissions cut by 2040.

A second new measure, the Energy Efficiency Ship Index (EEXI), updates existing energy efficiency engineering obligations for shipowners. Its scope is larger than the current energy efficiency rule (Energy Efficiency Design Index) for new ships because EEXI also targets technology improvements for existing ships. Owners must now also ensure their ships are surveyed annually by classification societies using the EEXI.

Shipowners and operators have until 1 January 2023 to investigate the options to reduce fuel consumption by their ships' engines ahead of the first annual EEXI and CII reports due that year.

Fossil fuel efficiency technology wins

Both measures will bring about changes for the shipping sector, said IHS Markit's Maritime Consulting Principal Krispen Atkinson. "EEXI will be a headache for many—there had been talk around the industry that this could lead to a surge in ships being retired when it is enforced," he said.

Some of that concern has been eased, however, because the IMO has allowed Engine Power Limitation (EPL) to be one of the methods of complying. EPL, a mechanical adjustment to engines, is likely to be performed on ships that use traditional high-sulfur fuel oil (HSFO) with an emissions-cutting technology called scrubbing. Scrubbers have become one way to comply with the IMO's new limit on emissions of sulfur, which went into effect on 1 January 2020 (use of ultra-low sulfur bunker fuel and LNG are other options).

Shipowners and operators can use EPL to meet EEXI targets, or they can take up the common practice of slowing down to reduce fuel costs known as "slow steaming," Atkinson said. In slow steaming, which was introduced by container ship operator Maersk during the 2008-09 global recession, ship speeds are reduced to 12-19 knots from typical ocean-going speeds of 20-24 knots. A study by the IMO found that emissions in 2008-12 were reduced by about 13% by slow steaming vessels

But for operators who have already wrung out the benefits of slow steaming, the next tranche of emissions cuts to meet a new CII will be a challenge.

Atkinson warned that the carbon intensity measure will have a bigger impact than the EEXI. "Some may find it a struggle to hit these targets," he said.

Tristan Smith, associate professor at UCL Energy Institute and Director of UMAS maritime consultancy, highlighted the same issue on CII. "It is very hard to estimate how companies will comply. They may slow steam, but the [costs] are high, which disincentivizes this, and incentivizes more attention elsewhere on finding the reductions," he said.

Other fuel-saving devices, even sails, could become popular in the short-term as a means of reaching the CII target, said Atkinson.

At the same time as the use of EPL might dampen demand for HSFO, it could also perpetuate its use during a transition period. "What EPL may have done is inadvertently bump up high-sulfur fuel oil and very-low-sulfur fuel oil demand for a few more years, as contenders for scrappage may serve in the fleet longer, before being replaced by a more economical or alternatively fueled replacement," said Atkinson.

Smith agreed that the current carbon intensity goals can be met while using fossil fuels. "I would support the suggestion that the existing tech can get to 11%. We estimate that existing mature tech can get to a 31% carbon intensity improvement by 2030, without any change in fuel carbon intensity," he said.

But if the IMO increases carbon intensity targets as planned, ship owners eventually may look beyond the current "conventional" fuel choices, with ammonia at the top of the list, said Austin. "A consensus is beginning to build on ammonia as the most cost-effective deepsea fuel," he said.

Operators have little at-sea experience with ammonia, especially on longer sea voyages. He predicted data will emerge in about two years, giving the industry a better understanding of ammonia's potential.

Slow progress towards zero-carbon technology

Criticism of the MEPC 76 plan's failure to invest in truly zero-carbon ship fuels like ammonia is coming even from within the shipping industry itself.

The International Bunker Industry Association (IBIA), which sent representatives to the IMO meetings that produced the new plan, said the IMO made "no progress on two different proposals aimed, respectively, at funding research into low-carbon alternatives and [incentivizing] a move away from fossil fuels."

MEPC 76 conferees discussed but did not act upon a proposal for a mandatory fee of $2/mt on fuel oil to accelerate in-house R&D for low- and zero-carbon technologies. Further discussion was suspended until MEPC 77, which will occur in November.

The attendees did hold initial talks on a market-based mechanism, such as a carbon tax of $100/mt CO2-equivalent on bunker fuel. They deferred that decision to the next MEPC meeting as well, over questions about the level of the tax and use of the funds.

Maersk, which last week said it ordered a feeder vessel with the ability to run on methanol and continues to invest in green hydrogen as ship fuel, has come out strongly in favor of a market-based mechanism. Maersk's Simon Bergulf, director of regulatory affairs, wrote a post on social media to encourage talks on a carbon price in the autumn.

What the conferees did agree to do under the new CI plan is to rate ships based on their actual fuel consumption, the emitted CO2, and the distance travelled—and to make those ratings increasingly stringent as the current decade progresses. The revised EEXI is applicable for all new vessels and for existing vessels above 400 gross tons.

Some details were left unaddressed, and conferees have put them on the November agenda. These include the definition of energy-efficiency technologies; the use of in-service sea trials to determine the reference ship speed; and the consideration of boil-off gas for LNG carriers.

Shipping targets still not Paris-aligned

Others outside and inside the industry have called the targets too low to meet Paris Agreement aims.

Norway-based shipping emissions advisor Siglar noted that despite the IMO's 11% 2026 CI reduction goal, the group has not identified how it will close the large gap to reach a 40% GHG reduction just four years later. "The introduction of EEXI and CII are useful new measures, but the targets lack sufficient ambition to bring us much closer to meeting the Paris Climate Agreement goals," wrote Geir Olafsen, chief development officer of Siglar, in a blog.

Cost is clearly an issue of concern, especially for an industry seeking to rebound from the economic downturn of the COVID-19 pandemic. Austin said one study found that reaching the 40% reduction target will cost $500 billion.

Looking specifically at the EEXI, the International Council on Clean Transportation (ICCT) published a paper in November saying the EPL effectively "codifies," but does not improve on, energy efficiency gains through slow steaming of container ships, oil tankers, and bulk carriers responsible for half of international shipping's CO2 emissions. The ships already operate more slowly than EPL requires, ICCT said.

The ICCT's Marine Program Lead Bryan Comer wrote in a blog in May that to be Paris-Agreement-aligned, a 6%-7% CI annual reduction in carbon intensity would be required, far more than the approximately 2% annual reductions anticipated under the plan.

Others in the shipping industry, notably Lars Robert Pedersen, deputy secretary general of shipping association BIMCO, critiqued the method the IMO uses to calculate ships' carbon intensity. For example, it rewards ships that travel longer distances, but does not take into account they might not have a full load of cargo; thus, this could generate more voyages and CO2 emissions overall.

EU leads the way on policy

At the same time the IMO is wrestling with global rules, the EU is moving ahead with its own plan to reduce emissions from the shipping sector.

"EU lawmakers are frustrated by the IMO and the reluctance of the shipping industry to submit to market-based measures," said Adam Hedley, a partner in Reed Smith's London office. "So, what we've seen increasing … is the EU threatening to take unilateral action to try to spur IMO to take action."

Following a leak of draft amendments to regulation, the EU is expected to propose the incorporation of shipping in the bloc's Emissions Trading System (ETS), the world's largest carbon trading market, on 14 July.

Proposals to expand the ETS would mandate those ships that operate within the bloc's waters pay for their carbon emissions, with the proceeds going toward development of infrastructure for cleaner alternative fuels.

For larger ships travelling through EU waters, monitoring, reporting, and verification of CO2 emissions has been in place since January 2018, Hedley explained, but incorporation into the ETS would be a step up to enforcing more limits on emissions.

Aviation emissions have been included in the ETS since 2012, and Hedley said they could be a model for how shipping carbon emissions. As with aviation, the EU could potentially regulate emissions from ships going from and between EU cities, but not outside the bloc. (Skeptics note that the EU grants exemptions for international flights covering 82% of the required allowances.)

But the idea of incorporating shipping into the ETS is facing stiff opposition, with Hedley noting that "the EU consulted in early 2021 … and only around 35% of those who responded were in favor of bringing shipping into the ETS."

Given the industry's fears of losing global competitiveness, Hedley added, "perhaps this is not surprising at the industry level."

Immense practical challenges

Whether or not the EU incorporates shipping into its ETS and other nations follow that scheme, Austin said it is clear that the shipping industry, which moves 90% of the world's international trade goods, faces many practical challenges beyond regulatory compliance as it attempts to reduce its carbon footprint.

At the top of the list is the question of whether ammonia or other fuels will power ships instead of the fossil fuel-based bunker fuel of today or even the cleaner LNG that is making modest inroads in the market.

Whatever fuel is deemed to be most practical for ships, Austin said the next challenge will be production of that fuel in sufficient volumes and at locations that are accessible for ships. Not only will this require massive investments in land-based production and infrastructure, but he noted "much of this is outside the control of the shipping industry," as it doesn't produce the fuel nor approve site permits for the companies that do produce it.

Citing one study, Citigroup Chairman of Global Logistics, Shipping and Offshore Michael Parker said at a conference in June that full industry decarbonization will cost $2 trillion—but 85% of that will be for land-based investment for fuels, fuel infrastructure, and emissions reductions at ports.

Those issues of availability lead to the other major challenge: timing. Even reaching the 50% emissions reduction by 2050 would require that new ships are contracted for construction by the early 2040s, and that ship buyers are confident they will be able to access the fuel they need, Austin said.

"Again, much of it is outside the shipping industry's control," Austin said, observing that a combination of fuel mandates and carbon pricing would be required to drive required decision-making on both the part of shipowners and fuel providers.

--Includes reporting by Tom Sosnowski and Benita Dreesen, OPIS.

Posted 06 July 2021 by Cristina Brooks, Senior Journalist, Climate & Sustainability, IHS Markit and

Kevin Adler, Editor, Climate & Sustainability Group, IHS Markit

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