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An alternative view of the Carbon Intensity Indicator

Edwin Pang, founder of UK consultancy Arcsilea and chair of RINA’s IMO Committee, reckons emissions cutting agreements agreed upon this month are more significant than many other commentators have suggested. In the second of a two-part series, he explains why.

Yesterday I explained why I believe the Energy Efficiency Existing Ship Index (EEXI) regulations agreed upon this month are a far bigger deal than many people are giving credit for.

The other short term measure agreed at MEPC 76 this month is broadly termed CII, short for Carbon Intensity Indicator. For CII, there have also been suggestions that requiring an 11% reduction in 2026 is no better than business as usual and therefore a disappointing outcome. As always we need to examine this a little closer to work out what this 11% means in context.

The work done by the correspondence group on the carbon intensity guidelines concluded that the world shipping fleet above 5,000 gt improved by either 23.6% or 33.3% between 2008 and 2019 on average (depending on the metric used, either supply – deadweight miles or demand – tonne miles). This improvement comes from:

  • Replacement of old ships with newer more efficient ships,
  • Addition of larger ships to the fleet, leading to increases in the average size of ships
  • Operational improvements (including slow steaming)
  • Technical improvements to existing ships

Regardless of which metric you subscribe to, this is an incredible achievement by a sector which was already the most GHG efficient part of the global logistic chain and we should applaud all who have been involved in this achievement (whatever the drivers may have been, CO2 saved for the right motivation is no more virtuous than CO2 saved for financial gain), including the shipyards, shipowners, crew, research establishments, equipment and software suppliers. I find it odd that the sector is never praised or celebrated for this achievement, but instead is the target of mostly negative and hostile press.

This achievement has meant that post-2008, shipping has completely decoupled growth in world trade from CO2 emissions as can be seen from the chart below from the 4th IMO GHG study (where quantities are all indexed to 2008) and which is corroborated by the general decline in average daily fuel consumption figures experienced by many shipowners over the last 10 or so years.

But where does this 11% target come from? The initial IMO Strategy set a target for at least 40% improvement in carbon intensity in 2030 relative to 2008. So in order to at least meet this 40% target, the shipping fleet needs to improve by a further 16.4% or 6.7% (40% – 23.6% or 33.3%) respectively, relative to 2008.

However, the CII baselines are fixed at 2019, so changing the reference year from 2008 to 2019, 16.4% becomes a 21.5% gap between 2019 and 2030, and 6.7% becomes 10%. In order to have some round numbers for policy implementation over 11 years (2019-2030), 21.5% was rounded up to 22% and 10% was rounded up to 11%.

Now this improvement target is for shipping as a whole (that is the ship types in MARPOL Annex VI, above 5,000 gt, operating internationally). So far so good. But we next need to engage in a bit of a sleight of hand, out of expediency. When it comes to implementing regulations, we regulate ships, not fleets. So this 11% or 22% improvement target in fleet terms is then applied as an individual ship target in the IMO requirements.

If you are still following at this point, you will notice that of the four sources of improvement in the fleet, two of them, namely the effect of replacing old ships with newer ships, and addition of larger ships, are not taken into account when trying to achieve compliance on an individual ship basis, so this leaves operational and technical improvements as the remaining tools.

For some segments (including bulk carriers, tankers and containerships), replacement of older ships with newer ships and increasing ship size accounted for around 50% of the improvement between 2008 and 2019.

So in making this assumption that a fleet target should be the same as the individual ship target, we have effectively made the target more ambitious since we have reduced the number of compliance strategies available to the shipowner and discounted the contribution of newer and larger ships going forward, though of course in the eventual assessment of progress towards the target on a fleet level these additional compliance strategies will still be accounted for.

Now the annual GHG intensity improvement of the fleet between 2012 and 2018, as derived by the 4th IMO GHG study, was about 1.5-1.6% per year for both supply and demand metrics, though it has also somewhat fluctuated during that period. Stripping out the influence of new and larger ships, it likely means technical and operational improvements alone have accounted for just 0.75-0.80% per year.

MEPC 76 agreed to a 1% per year reduction rate from 2020-2022 (3% in total), and 2% per year from 2023-2026 (8% in total) to make up the 11% by 2026.

Making the comparison in the table above shows that the IMO reduction rates quite quickly outstrip what has previously been achieved by technical and operational improvements alone.

When the CII requirements enter into force at the start of 2023, they will start at a requirement of 5% better than what was achieved in 2019. This might not seem like a big deal, but we need to recall the other characteristic of the CII system, which are the A-E rating boundaries.

The distribution of the rating boundaries is based on 2019 data in the IMO Fuel Oil Consumption database, and 15 per hundred vessels are rated E, and a further 20 per hundred of the population are rated D. I’ve chosen not to use percentages here in order to avoid confusion with the reduction rate percentages.

Those rated E in 2023 are required to submit a corrective action plan that will set out the steps needed to improve their rating. In any case charterers may well decide that they will only charter ships rated A-C.

If that is the case, those ships rated E in 2023 face having to make improvements of at least 19% for tankers (the difference between the upper and inferior boundary in the picture above), and at least 12% for container ships and bulk carriers (if you are very close to the D/E boundary, and increasing the further away you are). On an equivalent basis, E rated roro cargo and passenger ships potentially face having to make improvements of at least 27-28%.

And this is on top of the cumulative reduction rate of 5% in 2023.

And lest you think that only a few ships are affected, 15% of the fleet of tankers, bulk carriers and container ships amounts to around 3,200 ships.

It is easy to see why one would conclude that 11% by 2026 is low ambition, relative to what else was on the table at MEPC 76. But 11% hides a much more complex picture, and for many of those on the front line trying to ensure compliance with the requirements, these will be challenging times.

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