Camilla Søgaard Hudson
Bech-Bruun, Copenhagen
csm@bechbruun.com

Johannes Grove Nielsen
Bech-Bruun, Copenhagen
jgn@bechbruun.com

Climate ambitions

In April 2018, the International Maritime Organization (IMO) voluntarily adopted its Initial Strategy on Reduction of GHG Emissions from ships compared to 2008 levels. The strategy involves reducing the GHG (Greenhouse Gas, or CO2) intensity of ships by 70 per cent by 2050, with an intermediate aim of a 40 per cent reduction by 2030. In addition to this, the strategy includes reducing the GHG emission from international shipping by 2050 by at least 50 per cent compared to 2008 levels and to completely decarbonise shipping as soon as possible.

It is the goal of IMO that the strategy will be consistent with the EU’s climate ambitions and goals.

To achieve these ambitious goals, a combination of already existing energy efficiency requirements and new short-, mid- and long-term measures have been introduced. The IMO will at first focus on the short-term measures, and subsequently the mid- and long-term measures will enter into force. The short-term measures are planned out to be adequate for reaching the intermediate aim of a 40 per cent reduction of carbon intensity in international shipping by 2030.

Already existing short-term requirements

Two already existing mandatory requirements adopted by the IMO and the EU respectively are the EU Measurement, Reporting and Verification Regulation (MRV) and the Fuel Oil Consumption Data Collection System (DCS).

The MRV is a part of the EU’s strategy on the reduction of GHG. It is the CO2 emissions that are to be monitored, reported and then verified. The MRV applies to ships of 5,000 GT or above that are sailing within the European Economic Area. Ships within the scope of MRV must, inter alia, monitor their CO2 emissions and report the fuel used, cargo carried, port of departure and arrival, as well as the CO2 emitted.

Like the MRV, the DCS also applies to ships of 5,000 GT or above. However, the DCS only requires ships to submit annual reports on fuel oil consumption to their flag state. The flag state verifies the data and transfers this data to the IMO Ship Fuel Oil Consumption Database. On this basis, the IMO produces an annual report summarising all the data collected. 

Another already existing mandatory requirement is the Energy Efficiency Design Index (EEDI) adopted by the IMO. The EEDI is only applicable to new ships and is intended to ensure that new ships are designed to be energy efficient. For most ships, the EEDI is mandatory through a one-off certification. The purpose of the EEDI is to have ships fitted with engines and equipment which ensures lower emissions of CO2 per tonne-mile.

The EEDI is based on an approach where a ship must progressively, over time, improve its energy efficiency. The idea is that with the EEDI, the technology and innovation is being forced to constantly improve.

New short-term measurements: EEXI and CII

In June 2021, additional measures were adopted. Two of these were the Energy Efficiency Design Index for Existing Ships (EEXI), and a mandatory Carbon Intensity Indicator (CII). Both measurements entered into force as of January 2023.

The EEXI is a retroactive application of the EEDI to all existing ships above 400 GT regardless of the year the ship was built. Unlike the MRV and the DCS, this measurement is not built on a reporting and verifying system. Instead, the EEXI is intended to be a one-off certification for already existing ships and is therefore comparable with the EEDI.

Contrary to EEXI being a one-off certification, the CII is a yearly rating system for ships 5,000 GT and above. The ships are given a rating of A to E every year, with E being the lowest rating. If a ship receives an E rating for a single year, or a D rating for three consecutive years, a corrective action plan needs to be developed.

The CII will – in grams of CO2 emitted per cargo-carrying capacity and nautical mile – be measuring how efficiently a ship is transporting goods or passengers. The yearly CII is calculated based on the reported DCS data, and the ship is then given a rating on this basis. Towards 2030, it will be increasingly more and more difficult to achieve or maintain each rating.

In short, EEXI can be considered a one-off technical measure, while the CII can be considered an ongoing operational measure.

CII and its impact on charter parties

Being an operational measure, the CII rating thus depends on the way the vessel is traded or used and is a way to display how energy-efficient a vessel actually is.

Consequently, if a vessel is spending 40 days on demurrage but still burns fuel, the vessel has spent more fuel on its voyage compared to a vessel that has not been on demurrage. The first vessel will then get a lower CII rating than the second vessel, simply because it entered a busy port.

Similarly, if a vessel deviates and performs a longer voyage on the same fuel consumption due to tailwinds and favourable currents on an otherwise longer route, the vessel gets a better CII rating because it burned the same amount of fuel on a longer voyage. Similarly, a vessel facing headwinds on a specific voyage will also consume more fuel than without the headwind and will get a lower score than a vessel sailing the exact same route the week before without the wind.

If the ship achieves a rating of D or E, it is the responsibility of the ship owner to adjust the Ship Energy Efficiency Management Plan in order to ensure that a minimum rating of C is achieved. However, no further accountability for a low CII rating is to be expected.

How serious is the problem?

The losses resulting from receiving a lower CII rating than expected should not be underestimated.

In 2023 many banks and financial lenders now focus on green loans and set different thresholds for different lending rates. So, if a ship owner with a fleet possessing a decent CII score failed to maintain its score, this may result in less favourable loan conditions which will then result in pressure on liquidity if interest rates increase.

If the ship owner charters out the majority of the fleet, the ship owner will no longer be in control of the operational usage of those vessels, and thus will have no influence on the vessels’ achieved CII rating during the duration of the charter party. If the chartered vessels’ CII rating is negatively impacted due to being operated in unfavourable weather conditions resulting in increased fuel usage or is otherwise operated inefficiently with regards to fuel usage – or if the charterer is simply unlucky and often sails into headwinds, it may lead to a reduced CII rating.

This situation may thus have a significant financial impact on the ship owner. The lowered CII rating may result in raised interests, as well as difficulties in achieving financing for new engagements. The lowered CII rating may also lead to a decreased secondhand market value of those vessels, for the reasons explained just above, and will likely be more expensive to finance for new buyers who will not be able to obtain the best possible financing if the vessel they want to buy has a low CII rating.

The BIMCO CII Clause – a properly balanced approach?

The ship owner may in part mitigate the above-described consequences by ensuring an agreement with the charterer on meeting appropriate CII rating targets.

In this regard, BIMCO has released a CII Clause (‘CII OPERATIONS CLAUSE FOR TIME CHARTER PARTIES 2022’) in November 2022, with the intent for the CII Clause to be used in standard time charter parties. The CII Clause allocates the risk and responsibility for a vessel receiving a CII rating while under charter, and also allows for intervention in the nautical control of the vessel by the owner, if these targets are not met.

In its essence, the CII Clause allocates almost entirely the responsibility for achieving the agreed CII rating on the charterer. In addition, the CII Clause also contains the following indemnity clause:

‘(j) The Owners shall be entitled to claim from the Charterers any losses, damages, liabilities, claims, fines, costs, expenses, actions, proceedings, suits or demands suffered by the Vessel and/or the Owners which have been caused by any breach by the Charterers of their obligations under this Clause.’

In the explanatory notes, it is stated that the clause allows for claims of general damages for breach of contract, if they can be substantiated to have been a cause of the charterers’ breach of their obligations under the CII Clause.

While it seems fair that the charterer should bear most of the losses resulting from a lowered CII rating – especially if the charterer is at fault – many observers had thought BIMCO would have drafted a clause that was slightly more balanced. For instance, the clause does not contain any mechanisms to deal with scenarios impacting a CII rating which may be outside of the charterers’ control but may still be their fault under the charter party and which would have appeared even if the vessel had been operated by the owner itself.

Therefore, it seems natural that the CII Clause may lead to disputes regarding claims for losses resulting from lowered CII ratings. In any event, it will be up to the future cases in the leading shipping jurisdictions to define the limits of the claims for which the charterer will become liable under the CII Clause.