American Bureau of Shipping
Regulation is a constant presence in the global shipping industry, and the changes currently underway will do much to forge the operational landscape in the coming decades. The environmental regulations already being implemented and those still under development represent a radical shift towards lowering and ultimately removing carbon emissions from the industry.
Unlike some previous regulations that set a baseline and remain in place, the International Maritime Organization’s (IMO) carbon reduction targets will see restrictions tighten as the years progress, while new regional rules bring shipping into the European carbon market for the first time.
At the same time, the process of reducing sulfur oxide (SOx) emissions that began in Europe and spread to the US will be extended if a new ECA 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 greenhouse gas (GHG) initial strategy, adopted by Resolution MEPC.304(72) on Apr. 13, 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 adopt an ambition of zero emissions for the international shipping sector by 2050, together with strengthening the level of ambition for 2030, and introduce an additional level of ambition in 2040 to ascertain that the full transition to zero-emission shipping is realized in 2050. Discussion on revision of the strategy will continue at the upcoming Maritime Environment Protection Committee (MEPC) meetings with the aim of a finalized and adopted text at MEPC80 in summer 2023.
The IMO’s ‘midterm measures’ include International Maritime Research and Development Board (IMRB) input supported by flag administrations and most shipowners’ associations. Funded by a mandatory payment $0.624/tonne of CO2 emissions corresponding to about $2.00/tonne of liquid fuel oil—marine gasoil (MGO), marine diesel oil (MDO), light fuel oil (LFO), and heavy fuel oil (HFO)—purchased, about $5 billion will be gathered over the life of the program, to be invested in research and development projects for decarbonization.
The Marshall Islands and Solomon Islands have suggested a more aggressive version, with a mandatory payment of $100/tonne CO2 equivalent by 2025 and upward ratchets on a 5-year review cycle.
The International Maritime Sustainability Funding and Reward (IMSF&R) mechanism is the alternative proposal supported by China. The proposed system is designed on the basis of the existing CII mechanism where funding contributions will be collected from ships with actual CO2 emissions above the upper benchmark level and would be used to reward the superior players with emissions below the reward benchmark level, for research, development, and demonstration, as well as technology transfer, capacity building, and negative impact mitigation in developing countries.
On the other hand, Japan is proposing the Zero Emission Vessels (ZEVs) incentive scheme in which revenues raised by a carbon levy will be used as rebates to incentivize the uptake of zero-emission fuels. A levy rate well below $100/tonne of CO2 would likely ensure revenues to provide sufficient incentives at least in the initial period, as analysis assumes rapid deployment of zero-emission fuels.
An emission cap-and-trade system (ECTS) is proposed by Norway which, once it established a cap on emissions, would ensure annual reduction of total GHG emissions following an agreed pathway aligned with the ambitions of the Initial IMO strategy. The annual cap will determine the total amount of ship emission units (SEUs) made available for ships. Surrendering of SEUs equivalent to a ship’s will result in substantial revenues.
Finally, the GHG fuel standard (GFS) is the European Commission proposal supported by the EU member states for a technical goal-based measure to help ensure demand for low- and zero-GHG fuels from the shipping sector will increase. The GFS would require all ships above a certain size to use fuels (or other energy sources) which have a well-to-wake (WtW) GHG intensity at or below a certain limit over a compliance period. The GFS would be strengthened over time in accordance with the 2050 trajectory line.
Also important to monitor will be development of lifecycle GHG-carbon intensity guidelines (LCA) aimed 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 (see accompanying figure).
Although well-to-tank emissions are not accounted for in international shipping, 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 fuel-selection decisions.
Tank-to-wake emissions now include methane (CH4) and nitrous oxides (N2O)-equivalent CO2 emissions. Fugitive emissions such as methane slip also are being considered with the introduction of a slip factor expressed as percent of fuel mass, while default emission and slip factors per fuel type and engine-converter type are proposed.
A carbon source factor (SF) may be introduced according to Intergovernmental Panel on Climate Change (IPCC) accounting principles when calculating tank-to-wake GHG emissions. This factor determines both if tank-to-wake CO2 emissions should be accounted for in the IMO GHG inventory for international shipping (SF = 1) or not (SF = 0). For properly certified biofuels and fuels produced with carbon capture, in which the captured CO2 is accounted for in the national GHG inventories of any United Nations Framework Convention on Counter Change (UNFCCC) member countries, the SF could be zero.
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.
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 implementation.
During the vote in the European Parliament’s Environment, Public Health, and Food Safety (ENVI) Committee on May 17, 2022, amendments to the draft regulatory text agreed to:
- Introduce methane (CH4) and nitrous oxides (N2O) in addition to CO2.
- Include shipping in the ETS from 2024 without a gradual phase-in.
- Implement the measure from 2027 to smaller ships with gross tonnage of 400-5,000.
- Create a sector-dedicated fund (the Ocean Fund) and earmark 75% of the revenues generated by shipping allowances to the energy transition of the sector.
- Cover 100% of all voyages within, to and from the EU-EEA from Jan. 1, 2027. Before that point, only 50 % of the extra-EU voyages are covered.
- Introduce protective measures against carbon leakage.
- Introduce a process to withdraw the measure (or parts thereof) if a global market-based measure is introduced by the IMO.
The European Parliament is expected to vote on the agreed text in early June 2022 and trialogues could begin as early as the third quarter of the year. Once implemented, operators will face volatile compliance costs based on the fluctuating carbon price, which reached almost €100/ton CO2 at the beginning of February, fell to around €60/ton CO2 due to the war in Ukraine, and quickly recovered to around €85/ton CO2.
Regarding FuelEU maritime regulations, the European Parliament’s Transport and Tourism (TRAN) Committee continues its debate on the numerous amendments tabled to the proposed regulatory text.
- Lowering ship-size threshold from 5,000 gross tons (GT) to 400 GT.
- The role of the independent verifier in penalty calculation.
- Doubling the intensity reduction targets during the first years.
- Extending the scope to 100% extra-EU voyages.
The TRAN committee will continue to work through the amendments, their vote scheduled for July 11, 2022, and plenary in September. Operators, however, have already started calculating compliance costs and considering fuel-compliance options. Fossil LPG and LNG burned in engines with low methane slip seem to be compliant options for many years based on default values provided into the draft regulatory text for calculation of GHG intensity.
Another consideration for operators planning fuel selection strategy, is that countries bordering the Mediterranean Sea have proposed designating the Mediterranean Sea as an SOX ECA. The proposed ‘Med SOx ECA’, would operate in accordance with Regulation 14 and Appendix III of MARPOL Annex VI, to take effect Jan. 1, 2025, setting the sulfur content of fuel oil used on board a ship within its boundaries as not exceeding 0.10% by mass.
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 Straits.
- 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 sulfur oxides and particulate matter from ships.
Stamatis Fradelos ([email protected]) is vice president of regulatory affairs for the American Bureau of Shipping (ABS). Before joining ABS, he worked as both a marine field surveyor and a plan-approval surveyor. Fradelos holds an M.Sc. (2000) in mechanical engineering, an M.Sc. (2002) in marine technology and science, and an MBA (2005) focused on techno-economic systems from the National Technical University of Athens. He is a fellow of the Royal Institution of Naval Architects and a chartered engineer of the UK Engineering Council.