Container Green Transition

The new IMO regulation targeting ship efficiency and carbon intensity coming into force next year, the ongoing COP27 in Egypt and the news of more new orders for container vessels powered by alternative fuels are all bringing more light onto shipping emissions and the green transition required of the industry. In the longer term the IMO 2030 and 2050 targets are also adding pressure to shipowners and operators trying to navigate the next few decades.

Though operational measures have been key to improve container shipping’s carbon intensity, to get further down the path of decarbonization new fuel types will be needed. Some ships with these cleaner fuels are already in service, there are more on the orderbook, and even more on drawing tables around the world as owners and operators try and position themselves favorably in this developing situation.

This report will look at the upcoming IMO 2023 regulation and its potential impact.

New regulation, a real push for these new ship types?

The long term goals for decarbonising shipping are forcing carriers to act, and to some extent o make decisions in the blind, especially when it comes to ordering new ships as there is still a lot of uncertainty as to how environmental and climate-related regulation will shape up over the next decades. Even the new IMO 2023 regulations stepping into force in less than two months still have uncertainties around them, let alone the further steps that will need to be taken to reach the IMO’s 2050 target for a 50% reduction in greenhouse gas (GHG) emissions and a 70% fall in carbon intensity (CO2 per transport work). Most of the container ships now on order will still be sailing in 2050, and therefore have to comply with regulation that is as yet undrafted. As well as the IMO other institutions, with the EU leading the way, and countries are looking at how to push the industry further along in its transition.

IMO 2023 regulation

The CII and EEXI which 2023 will bring aims to ensure the 2030 target is met. Unlike the IMO 2020 Global Sulphur Cap which had a fixed start date affecting everyone from 1st January 2020, the effects of the new regulations in 2023 will be more drawn out.

The CII (carbon intensity indicator) will start in 2023 with a reporting period, with the first year in which the regulation will actually penalize (in a yet unknown manner) non-compliant ships in 2025.

Of course, the start of reporting will incentivize shipowners to improve their CII scores if they know already that their ships may be at risk. Because the CII is calculated based on CO2 emitted, distance travelled and capacity, there are several ways in which ship operators can improve their CII score using operational measures.

In the CII calculation ship operators can influence either CO2 emitted or distance travelled, whereas capacity is a given. CO2 emitted can be reduced by steaming slower, using cleaner fuels or the more costly choice of retrofitting the vessel to make it more efficient.

The other factor that can be changed is the distance sailed. Because the CII is based on capacity and not actual cargo carried, you may be able to improve your CII score without actually being more efficient. This could be sailing further, reducing cargo on board on backhaul legs, avoiding port calls where you know there is a longer waiting time or reducing the number of port calls on a trade. It could result in smaller ports seeing their connectivity fall and push shippers using this port to use more inland transport (which is much less carbon efficient than seaborne transportation).

This could also result in ship operators moving ships between trades more than before. Say Ship A is a large ship sailing on a long haul trade, covering a lot of distance and with time at port representing a small share of the total voyage time, Ship A has a very low CII score (A or B). Ship B on the other hand is smaller, sailing on an intra-regional trade, covering much less distance and spending a lot more time in port and waiting outside port, consequently it has a bad CII score (D or E). Swapping these two ships around a certain number of times would not improve the carriers overall emission result, but could improve Ship B’s CII rating enough that it becomes compliant, while worsening Ship A’s CII, but still leaving it on the right side of the requirement for compliance.

These adjustments to improve the CII rating will continue and as the requirements for the compliant ratings get tighter, more ships will have to start adjusting their operations or ship, or face a non-compliant rating.

EEXI – a different creature, yet pushing the same agenda

In contrast to the CII which is an annual measure to be reported every year, the EEXI is a one off measure. Over the course of 2023 as ships undertake their annual survey ships, their EEXI will be calculated. It is calculated based on the design of the ship and its engines, and does not reflect what the ship is doing. The easiest way to achieve compliance for a ship that isn’t by design compliant is by reducing the engine power (engine derating), lowering the speed and fuel consumption.

More costly options which operators may consider for younger ships with plenty of years left to recoup the investment is retrofitting the vessel to make it more efficient or to allow it to run on cleaner fuels. On top of the money that needs to be spent, time in shipyard and out of service must also be considered sunk cost.

Whatever happens these new operational measures to meet new criteria will be more costly for operators/owners and lower the trading efficiency of the fleet, but with the huge number of ships waiting to be delivered in the next few years amidst stalling demand growth, the lower fleet efficiency will not bring a capacity problem for most shippers around. The higher operational and investment costs are inevitable, but the pace of how much owners are willing to spend will also depend on the willingness of shippers to pay more for cleaner shipping, as well as potential new CO2 taxes, increasing the cost of keeping the status quo and making cleaner solutions relatively cheaper.