It may be flawed, but IMO’s Carbon Intensity Indicator could be one of the best tools yet for getting shipowners and charterers talking about efficiency investments, writes Mikael Laurin, head of vessel optimisation at Yara Marine Technologies.
In the first few months since it came into force, the Carbon Intensity Indicator (CII) has already seen a significant evolution in market reaction. During the years leading up to its introduction in January, it first evoked mild panic, then confusion around compliance options, and finally, anxiety over the cost of technologies needed to achieve the publicly accessible efficiency rating. But after a few months in force, I believe a new emotion is gaining ground for the CII, which would justify a colloquial change of name to the Collaborative Investment Incentive.
While collaboration may seem to be an unexpected benefit, it is actually one of the most direct side effects of the CII. While this collaboration does not go so far as to recapture the industry-wide pushes during the COVID pandemic or the intensity of will following COP26, it has set up the groundwork for sustained and routine discussions on emission monitoring and management across ship owners and operators and charterers.
Simplifying the impact of the CII
There can be no doubt that the CII is a flawed index for its original purpose, which is rating the operational efficiency of vessels. The loopholes and countless unintended consequences of its framing are the talk of the shipping industry. Many acknowledge that the most obvious flaw is the failure to consider a vessel’s actual cargo load, resulting in a better rating for vessels that cover distances and create emissions without directly contributing to world trade. This flaw can be traced back to the fact that data on actual cargo load was omitted from IMO’s Data Collection System.
It should be noted that the CII doesn’t deliver much value as an analytical tool for ship operators. In most cases, they are already having far more in-depth discussions about emissions ratings and optimization of operations. They are likely to be assessing how a vessel should measure distance, propulsive energy use and fuel consumption, all while keeping detailed information on the cargo carried and environmental factors impacting the vessel. After all, this is what enables a ship operator to not only discuss real carbon intensity metrics, but also assess a vessel’s performance characteristics and pinpoint actions that will improve them.
It’s unclear if the CII concept is likely to change even in the face of, at times, loud criticism. Nonetheless I would like to contribute with an idea for a more useful way of rating emissions per transport work. The current CII metric assumes that all vessels are fully loaded so one of the parameters linked to transport work is static. If we accept that the actual cargo load will not be part of the data, we could just as well remove the variation in the other transport work parameter. Namely the distance sailed. The actual distance sailed would have to be replaced with a static “baseline distance” for each voyage and vessel type and size. With transport work locked in place for a specific voyage, the only thing left to compete on is emissions, which was the idea from the start.
In essence, the game becomes fairer once we simplify the rules.
The introduction of routine collaboration
A particularly controversial element of the CII has been the change entailed in the working relationship between ship operators and charterers. It is almost certain that the future will bring disputes around voyage instructions that have a detrimental effect on a vessel’s CII rating. Although a charter party may require the vessel to run at a specific speed or take the shortest route, which results in emission levels that could impact the CII rating, this would contravene the agreement with the owner to return the vessel with its agreed CII rating. Fundamentally, this could make certain routes unworkable.
From an owner’s perspective, there is a risk that at the end of a charter period, their vessel is returned with a rating that impacts the value achievable for future charters or even for the sale of the ship.
Broader discussions have emerged about how to resolve potential conflicts arising from emission strategies, and these have led to the creation of mediation instruments by ship owner associations. For example, BIMCO’s recently debuted CII clause is gaining traction in modern contracts as a means to achieve balance between the needs of various parties. The clause adds a new dimension of a time interval to represent the charter period, during which data must be gathered and reported.
If a charter period covers only part of a year, both the owner and charterer need to make sure that the vessel is capable of keeping constant track of its CII rating so that it can be reported at the end of the period. Continuous monitoring and up-to-date application of CII correction factors and voyage exclusions are the only efficient ways of coping with this administrative task. Saving up all the data analysis until the end of the CII reporting period will not be acceptable under the terms of the BIMCO clause.
Dividing this task between the various charter parties is made less arduous by the allocation of responsibilities in the clause, along with a “good faith duty to cooperate and share data relevant to assessing and monitoring.”
Put simply, the ship owner is responsible for equipping and maintaining an efficient vessel that is capable of producing reliable data that makes it possible to confirm its level of efficiency. The operator or charterer needs to make sure that they understand how to assess the technical efficiency of a vessel together with the ship owner, and then take responsibility for using the vessel in an operationally efficient way.
While this has felt like a challenging and destabilizing shift for many, charter relationships have needed to evolve in order for our industry to more effectively achieve our decarbonization goals.
And, although the BIMCO clause is presumably a legal tool to minimize disputes, in reality, what it is doing is sowing the seeds for collaboration.
Collaborative journeys to net zero
It is clear that the CII requires hands-on control of a vessel’s operational performance. In other words, ship owners, operators and charterers need to base their operational strategy on data. This will be used to assess actionable knowledge, align on a strategy for year-on-year performance improvements and, most importantly, execute these plans in the best possible manner.
Shipping has suffered from misaligned incentives for a long time, with a prime example being the requirement that ship owners invest in fuel efficiency, without a guarantee of increase in charter rates for more fuel-efficient vessels. Conversely, a charterer might not charter a vessel long enough to see that same investment pay off. By encouraging cross-stakeholder conversations around emissions and technologies to improve them, the CII offers a rare opportunity for owners and charterers to align interests on efficiency investments and to have this shared goal embedded as the bedrock of these interactions.
Thus, although the CII is rife with issues when it comes to implementation and actual environmental impact, there can be no doubt that it has certainly been effective in one area: creating a uniting point for charterers and shipowners to sit down together and discuss which investments in technology are going to be needed to improve their vessels. It is with this in mind that I hope the industry embraces the Collaborative Investment Incentive and reaps the rewards that it could bring for our sector as a whole.
