Regulation will shape shipowner strategy in the coming decade and beyond

Regulation is a constant presence in the global shipping industry, but regulation will have an arguably greater impact in the coming decade than at any time since the inception of MARPOL or the introduction of the first sulfur Emission Control Areas.

The environmental regulations already in the process of implementation and those still under development represent a radical shift towards lowering and ultimately removing carbon emissions from the industry.

And unlike some previous regulations that set a baseline and remain in place, the IMO’s carbon reduction targets will see restrictions tighten as the years progress, while new regional rules will bring shipping into the European carbon market for the first time.

At the same time, the process of reducing SOx emissions that began in Europe and spread to the United States will be further extended, if a new emissions control area for the Mediterranean Sea is adopted.

IMO GHG strategy

Arguably the most important global regulatory development shipowners need to have in mind while considering future strategy is the IMO GHG initial strategy, adopted by Resolution MEPC.304(72) on 13 April 2018.

The ambitions of member states to reduce carbon emissions further and faster than originally envisioned saw the initiation of a revision process by MEPC 77 in 2021.

Influential IMO member states have proposed that IMO should adopt an ambition of zero emissions for the international shipping sector by 2050, together with strengthening the level of ambition for 2030 and to introduce an additional level of ambition in 2040 to ascertain that the full transition to zero-emission shipping is realized in 2050.

The discussion on the revision of the strategy will continue at the upcoming MEPC meetings with the aim of a finalized and adopted text at MEPC80 in summer 2023. If IMO adopts a stricter strategy, maritime decarbonization efforts will need to be promptly aligned with the revised strategy.

The IMO’s ‘mid term measures’ which are expected to be finalized by 2025/26, include the International Maritime Research and Development Board (IMRB) supported by flag administrations and most of the shipowners’ associations.

Funded by a mandatory payment $0.624 per tonne of CO2 emissions corresponding to about $2.00 per tonne of liquid fuel oil (MGO/MDO/LFO/HFO) purchased. Approximately five billion US dollars will be gathered over the life of the programme – to be invested in

R&D projects for decarbonisation while cross-checking of payments against emissions will be reported in IMO DCS.

The Marshall Islands and Solomon Islands have suggested a more aggressive version with a mandatory payment of $100 per tonne CO2 equivalent by 2025, with upward ratchets on a five-yearly review cycle. This would likely mean a price on all GHG emissions by 2030 in the range of $250-300 tonne CO2 equivalent.

A submission by Norway has introduced three possible concepts. These include a fuel GHG intensity limit under which a ship could only bunker and use fuels with a CO2 or GHG emission factor below a certain level. This would be subject to a stepwise approach similar to the sulphur requirements in regulation 14, MARPOL Annex VI.

Also proposed is emissions cap and trading, similar to the EU ETS with the agreed cap determining the total amount of greenhouse gases that a ship can emit and emission allowances traded as needed through auctioning or other allocation processes.

Finally, carbon intensity indicators and credit trading/fleet averaging is proposed, based upon the recently approved Carbon Intensity Indicator and rating scheme. Ships that do not meet the target would need to acquire credits from ships that surpass the requirement. Under a fleet averaging scheme, emission credits could be redistributed between ships within the same company.

Well to Tank and Tank to Wake

Also important to monitor will be the development of the lifecycle GHG/carbon intensity guidelines (LCA) aim to incentivize the uptake of sustainable alternative low-carbon and zero-carbon fuels. These guidelines provide well-to-tank and tank-to-wake GHG emission factors for all fuels and electricity used onboard a ship.

Although the well to tank emissions are not accounted for in international shipping, the LCA Guidelines will provide information to ship-managers and charterers on the sustainability of the fuels, both for GHG and other emissions, so they can make informed decisions during the selection of the fuel to be used on board.

Tank to wake emissions now include methane (CH4) and nitrous oxides (N2O)-equivalent CO2 emissions. In addition fugitive emissions such as methane slip are being considered with the introduction of a slip factor expressed as % of fuel mass while default emission and slip factors per fuel type, engine/converter type are proposed.

The draft text sets the Global Warming Potential (GWP) of methane over 100 years at 29.8 for fossil and at 27.5 for non-fossil methane and the GWP of N2O over 100 years at 273, however there was a call during the discussion at the ISWG-GHG11, fairly supported, to account for GWP20 instead of 100.

A carbon source factor (SF) may be introduced according to IPCC accounting principles when calculating the tank to wake GHG emissions. This factor determines if tank to wake CO2 emissions should be accounted for in the IMO GHG inventory for international shipping (SF = 1) or not (SF = 0) and should be multiplied with the CO2 emission factor for the specific fuel. For properly certified biofuels and fuels produced with carbon

capture, where the captured CO2 is accounted in national GHG inventories of any UNFCCC member countries, the SF could be zero.

EU Impact

The European Union’s ‘Fit for 55’ package of measures and in particular, the extension of the EU ETS to shipping and the FuelEU Maritime Regulation are subject to negotiation in Brussels while shipowners put efforts to introduce amendments to the originally proposed text.

Concerning the revision of the EU ETS, discussions include the definition of the ‘commercial operator’ in a bid to make charterers equally responsible for carbon emissions as well phasing-in the implementation between 2023 and 2025 or 2026.

Operators face volatile compliance costs based on the fluctuating carbon price which reached almost 100 euros/ton of CO2 at the beginning of February, fell to around 60 Euros/tonCO2 due to the war in Ukraine and quickly recovered to around 80euros/tonCO2.

Regarding FuelEU Maritime, discussions include whether to lower the ship size threshold from 5,000 GT to 400 GT and the role of the independent verifier for the penalty calculation.

Operators have already started calculating their compliance costs and fuel compliance options. Fossil LPG and LNG burned in engines with low methane slip seem to be a compliant option up to 2040 based on the default values provided into the regulatory text for calculation of the GHG intensity.

It is expected that discussions will continue this year, with the EU Parliament starting negotiations with the Council in June. Legislative text for EU ETS and FuelEU Maritime will be concluded by the co-legislators and in trialogues with the Commission and adopted, after which the ESSF sub-groups will start discussing and formalizing the necessary Delegated and Implementing Acts – a process which is not expected before 2023.

A new ECA?

Another consideration for operators planning their fuel selection strategy is that countries bordering the Mediterranean Sea have set out a proposal to designate the Mediterranean Sea as an Emission Control Area for Sulphur Oxides. The proposed ‘Med SOx ECA’, would operate in accordance with Regulation 14 and Appendix III of MARPOL Annex VI, to take effect from 1 January 2025, setting the sulphur content of fuel oil used on board a ship within its boundaries not exceeding 0.10% m/m.

Specifically, the proposed Med SOx ECA includes all waters bounded by the coasts of Europe, Africa and Asia, as well as:

• the western entrance to the Straits of Gibraltar,
• the Dardanelles,
• the northern entrance to the Suez Canal

The designation of the proposed Med SOx ECA is supported by an acknowledged need to prevent, reduce and control emissions of sulphur oxides and particulate matter from ships.

Conclusion

The objective of the ABS Regulatory Affairs department is to support our clients in coping with forthcoming regulations and providing to the regulators the feedback from ship operators in order to assist in the development of a fair regulatory framework, assuring level playing field.

We have already started working with shipowner associations and the department has a new, additional objective to enhance ABS’ engagement with administrations and regulatory bodies and support the industry with compliance guidance offering detailed insight and guidance on the impacts of today’s unprecedented and dynamic regulatory environment.

The views presented hereabove are only those of the author and do not necessarily reflect those of  SAFETY4SEA and are for information sharing and discussion  purposes only.