Decarbonisation is an issue that affects all areas of the shipping industry, as stakeholders work towards the ambitious targets set by the International Maritime Organisation (“IMO”). In addition to fundamental changes such as the anticipated introduction of green fuels, commercial parties may want to consider adapting their contracts to enable reductions in future emissions as well as improve transparency in respect of their current carbon footprint.
Incorporating environmentally focused clauses into charterparties and related agreements will be one way to work towards decarbonisation targets and is an approach that we expect to become increasingly common in the coming years.
Current regulatory position
Decarbonisation is the process of reducing and eventually eliminating carbon dioxide and other greenhouse gas emissions across the shipping industry. Led by the IMO, the industry has committed to a 50% reduction in the emission of all greenhouse gases by 2050 (compared to 2008 levels).
The extent of the challenge ahead is set out in the IMO’s Fourth Greenhouse Gas Study 2020 (the “2020 Report”), which confirmed that in 2018 the global shipping industry constituted approximately 3% of total global carbon emissions, producing approximately 1,056 million tonnes of CO2 annually, a 9.3% increase from levels in 2012. Furthermore, decarbonisation targets must be implemented against a background in which the volume of global seaborne transport is forecast to increase by 40-100% by 2050.
Reducing the emission of greenhouse gases is therefore a priority both for regulators and commercial entities as all stakeholders look to build on the introduction of fuel oil sulphur caps in 2020 and the introduction within Annex IV of MARPOL of energy efficiency requirements in both vessel design, through the Energy Efficiency Design Index, and vessel management, through the Ship Energy Efficiency Management Plan (“SEEMP”).
It is encouraging that the 2020 Report demonstrates that these and complementary initiatives have already reduced vessel emissions, with the gradient of the emissions curve flattening despite continuing growth of the industry. However, the same Report demonstrates that considerable further efforts are required to reduce the carbon intensity of the global fleet if decarbonisation targets are to be met.
Accelerating the pace of decarbonisation
Stakeholders across the industry are already organising to ensure that their operations are in line with the IMO’s decarbonisation targets and industry publications are repeatedly highlighting new initiatives across the breadth of the sector.
The Getting to Zero Coalition is a partnership between the Global Maritime Forum, Friends of Ocean Action, and the World Economic Forum and comprises of over 140 companies within the maritime and related sectors that are committed to decarbonising both ocean-going shipping and its energy value chains, with a particular focus on delivering tangible progress towards a zero emission fleet, and green fuels.
Progress towards a zero-emission fleet will require the further development of green fuels. It may also require market-based measures including levies and taxes to incentivise the transition from fuel oil. Such solutions will take time and further capital investment both in respect of production streams and to build and adapt vessels to use these fuels. Understandably, stakeholders are considering the extent to which levies and taxes on fuel oils would affect commercial operations.
Alternative initiatives are seeking more immediate effects through different approaches. The Sea Cargo Charter represents early efforts to include environmentally focused clauses within charterparties and demonstrates how they may operate in practice.
The Charter was launched by multiple global chartering organisations in October 2020 and requires signatories to measure the emission intensity and total emissions of their chartering activities on an annual basis. These can then be assessed against IMO and other applicable decarbonisation targets.
This approach hinges on accountability, transparency, and enforcement. It is the latter which provides for signatories to incorporate a standard form clause within their charterparties requiring vessel owners to provide fuel emission reports after they complete each voyage. This would allow the charterer to calculate, monitor and report their own alignment with decarbonisation targets.
Climate-conscious drafting – Charterparties
What is particularly interesting about the Charter is that it represents parties within the charterparty chain taking an active and contractual approach to decarbonisation.
It is possible, following the Charter’s example, to consider other ways in which environmentally focused clauses can be considered within charterparty chains, as well as within related contracts such as for the sale and purchase of goods carried on board, vessel financing, and insurance cover.
With vessels already operationally subject to SEEMP and the related Energy Efficiency Operational Indicator (“EEOI”) to calculate fuel efficiency, amongst other requirements, owners and charterers can actively consider optimisation measures that complement decarbonisation.
These efforts may include leveraging technology to optimise route planning and ‘just in time’ port operations, as well as a technical focus on propeller and rudder efficiency, hull-fouling and other performance issues, all to achieve a reduction in fuel use. Alternatively, fuel consumption can be addressed through reduced steaming speeds, with efficiency gains providing a balancing element to reduced speeds.
There is wide scope for owners and charterers to consider provisions addressing technical and operational efficiency within charterparty riders, and in particular general clauses addressing vessel fuel efficiency. It will be interesting to see whether premiums and discounts, or even bespoke damages arrangements, might be introduced in future, and calculated with reference to a vessel’s fuel efficiency during performance of the charter. This may be particularly relevant in the context of the forthcoming EU Emissions Trading Scheme (“EU ETS”) and the repercussions it may have surrounding obligations to supply bunkers.
Climate-conscious drafting – Related contracts
In the wider context of international trade by sea, there again appear to be drafting options available to contracting parties.
As a starting point, traders concluding sale contracts that include chartering obligations may wish to consider ways in which reporting requirements can be extended beyond the chartering chain to provide traders with increased visibility of the carbon intensity of their own operations.
Equally, traders may wish to consider how technical and operational efficiencies, such as reduced steaming speeds, might be incorporated within shipment schedules to their sale contracts, in particular where cargoes are non-perishable.
Considering longer term measures, the IMO have proposed introducing vessel ratings by way of an Energy Efficiency Existing Ship Index (“EEXI”) and annual Carbon Intensity Indicator (“CII”).
Through the CII, vessels would receive a rating of ‘A’ to ‘E’, with corrective plans required if a vessel receives a ‘D’ rating for three consecutive years, or a single ‘E’ rating. The requirements for each rating are intended to become stricter as the industry approaches 2050 and may provide a structure against which interested parties, including insurers, can monitor the efficiency and carbon intensity of vessels.
The EEXI and CII remain subject to adoption. Alongside possible provisions within charterparties themselves, such as warranties to maintain a vessel’s CII or provisions to addressing potential trading restrictions arising from a declining rating, there are again potential opportunities arising in respect of related contracts.
Trading parties to sale contracts that include chartering obligations may also wish to consider whether vessel nomination might include requirements that a vessel has a particular CII rating, or even consider pricing mechanisms that take into account a performing vessel’s CII.
Vessel efficiency and carbon intensity is of course heavily influenced by factors like the nature of any cargo carried, adverse weather encountered, and any steaming required to ensure the safety of the vessel and crew. It is perhaps for this, among other reasons, that questions remain over the regulatory repercussions if an owner does not comply with any corrective requirements. However, at a commercial level it certainly appears possible for owners, charterers, and related parties to consider how a focus on contractual provisions regarding vessel emissions might help achieve the IMO’s ambitious targets.
Given the pace at which environmental concerns are gaining prominence, in particular with preparations underway for COP26 in Glasgow, UK, in November 2021, and with the inclusion of shipping within the EU ETS, we expect parties across the industry to place increasing weight on whether counterparties align with their own environmental targets. We expect this to include the incorporation of climate-conscious clauses into commercial agreements to manage climate risk.
Against a background of ambitious decarbonisation targets and expected regulatory change, taking what steps are available now on a contractual level may both facilitate smoother regulatory compliance in future and provide parties greater visibility over the carbon intensity of their own operations.