Two expert panels discussed optimising value from Carbon Intensity Indicator (CII) and how tanker owners must start to commercially engage with EU ETS. Across two important sessions at the International Tanker Shipping & Trade Conference in Greece in November 2023, expert panellists discussed the influence of CII and EU ETS on the tanker market.
The Carbon Intensity Indicator (CII) implemented by IMO relies on historical emissions data and tends to penalise leading companies while sustaining poor performers. What are the available options for the tanker owner?
Angelicoussis Group energy efficiency director Zoran Lajic agreed the current system promotes long unbalanced voyages, which is unhelpful. He highlighted the importance of a proper data collection system to quantify losses and savings, but it adds another element of competition. “I see CII as an opportunity,” he said. Large companies like Angelicoussis have the resources to cope. Not being able to cope with CII is another barrier to trade.
Odfjell chief sustainability officer Øistein Jensen called for a focus on achieving what is currently agreed on and improving vessel energy efficiency. He highlighted that penalties for poor CII performance were not high and the industry may be overestimating the problem. However his company, with around 80 large chemical carriers, had already started taking the necessary measures and this is something its clients care about.
Capital Ship Management Corp chief technical officer Nikolas Vaporis agreed, adding CII is another way of differentiating companies. He emphasised the need to work with the currently approved regulations until something new is available.
Co-founder of Hafnia Tankers and recipient of the Lifetime Achievement Award, Anders Engholm, echoed the sentiment and encouraged efforts to get a better understanding within IMO for the index. The industry should scold itself for not engaging early enough when CII was first mooted, but there is an opportunity to take part in the revision in two years time.
On the question of how much achieving CII compliance might increase operating costs, the panellists refrained from giving exact figures, but Mr Jensen mentioned that retrofitting vessels to increase CII ratings had proved to be a net positive investment as it reduces fuel consumption.
The panellists agreed that charter party agreements need adjustment to account for potential risk sharing and CII compliance. This led neatly into the second panel, which discussed new regulatory requirements and reporting obligations imposed by shipping entering the EU Emissions Trading Scheme (EU ETS), which will bring similar pressures to CII.
The EU ETS presents new reporting and regulatory requirements for tanker operators, with opportunities for competitive advantages through emissions reduction strategies and access to carbon markets. These new regulations could impact international trade, change vessel operations and contracts, and need to be navigated carefully to ensure compliance and avoid penal consequences.
Under the EU ETS regime, shipping companies, as the designated Document of Compliance holder, will be required to surrender to the authorities EU allowances (EUAs) based on their annual emissions. This will start at 40% of emissions in 2024, rising to 70% and 100% of emissions in 2025 and 2026, respectively, under the three-year phase-in of the scheme.
Presenting remotely, European Commission Directorate-General for Climate Action deputy head of unit, mobility (ii): air, rail, water and intermodal policy, Marcos González Álvarez explained the EU’s decarbonisation goals and package, highlighting the inclusion of maritime sectors in the ETS from January 2024. Emissions from companies need to be covered by EUAs that decrease over time.
Mr González Álvarez noted that shipping’s inclusion in ETS, which has been running for other industries since 2005, will require significant reviews – for possible evasive behaviours and the potential inclusion of smaller vessels. A penalty system is in place for non-compliance. In addition, “Member states need to lay down penalties for breaches in the requirements that need to be effective, proportionate and dissuasive,” he said.
It is a complex regulation and not all tanker companies are geared up to start the process. One of the third parties bringing clarity and process to the market is Hecla Emissions Management, a 50/50 joint venture between the Affinity Shipping Group in London and the Wilhelmsen Group in Norway.
Hecla director Hugo Wilson explained the company is helping customers navigate the complex administration around ETS while also advising on trading allowances. He noted that only about 5% of shipowners currently have an account to interact with the ETS market, presenting potential issues for when the scheme incorporates shipping in January 2024, and EUAs are surrendered just 12 months later.
And shipping sector will be entering an extremely active EU ETS market, “It trades between €2.00Bn (US$2.14Bn) to €3.00Bn per day, almost exclusively (95%) on the futures market.”
This availability of data and trading experience means some proactive shipowners are already familiarising themselves with EU ETS allowances, with some having procured allowances and others including a theoretical carbon cost element in their existing invoices to charterers.
But why is the rest of shipping being so slow to engage with EU ETS? INTERTANKO commercial manager and area manager Greece and Cyprus Dimitris Dimopoulos suggested that many are waiting for the European Commission’s 1 February list of shipping companies. Once the list is published, operators will commence setting up their accounts. “But I do not think owners should wait till the last minute before becoming familiarised with the concept of allowances,” said Mr Dimopoulos.
But how will EU ETS and EUAs be incorporated in commercial activities? Mr Wilson from Hecla believes market adjustment will occur, reminiscent of what occurred with the implementation of IMO 2020 sulphur fuel oil cap. He also highlighted uncertainty due to unclear agreements between owners and charterers, especially related to the settlement method.
Mr Dimopoulos suggested reimbursement choices – whether it will be incorporated into the existing freight rate, through a word scale or via a surcharge clause to cater for price fluctuations.
Mr Engholm asked from the floor of the conference how allowances should be treated in commercial transactions. In response, Mr Wilson concurred that owners should not accept allowances a day before the deadline. The transfer of allowances should be coupled with freight.
Both Mr Wilson and Mr Dimopoulos advised that non-payment or delays in payment should be considered a breach of agreement similar to non-settlement of freight.
Source: Riviera
