CII regulation - the elephant in the room?
Starting from 1 January 2023, the collection of data for the reporting of annual operational carbon intensity indicator (CII) and corresponding CII rating becomes mandatory. Here at Nortech AI, we have discussed the new measures, and we have examined the details of calculations behind CII requirements in our previous post. The industry knew that this day would come, which has led to lengthy discussions for the last two years about the effectiveness of this regulation.
Intended goal of CII:
The 76th session of the Marine Environment Protection Committee (MEPC76) introduced multiple measures to tackle carbon emissions from ships, one of them being the CII measure. This was done in an effort to meet the goal set by the International Maritime Organization (IMO). The initial IMO strategy in 2018 has set a goal to reduce the carbon dioxide emissions (CO2) per transport work by at least 40% by 2030 and to reduce total annual GHG emissions by at least 50% by 2050 in comparison to 2008 levels.
IMO has published their view on the world fleet’s performance based on 2019 data. IMO has indicated that around 30% of the fleet would receive a C grade, while 20% of ships would receive a D grade and around 15% would score an immediate non-compliance with grade E. In terms of top-performing grades: around 20% and 15% of vessels would receive A and B grades respectively. Seaborne Shipbrokers have identified a similar division in grading: 25% of the vessels would receive a C rating, around 40% an A and a B, and 35% a D and E.
But the differences arise in the different ship types. Other sources like VesselValue, have pointed out that the best performers would be the bulker segment with the highest proportion of vessels scoring A, B, or C grading. While the worst-performing segment is expected to be tankers, where only 31% of vessels score a grade of C or higher.
Even within the different segments “size matters”, since we can see that larger vessels are benefitting from the CII formula. Signal Ocean has pointed out that within the dry bulk segment around 55% of capsizes would receive A or B, while handysizes exhibit the opposite effect of 56% receiving a D or E rating. For Handymaxes the outlook is even gloomier since 84% of vessels would score D or E. Tanker segment exhibits a similar pattern since VLCCs are scoring much higher grades than MRs.
Criticism and issues surrounding the new regulation:
Different researchers and independent policy advisors have raised their concerns over the latest regulations and their intended purpose.
Lack of evidence for driving change in the shipping industry
One of the reasons stated is the availability of low-cost remedies like speed reduction. The use of such remedies will indeed make the vessels compliant with the regulations, but the concern is that it will not actually push the industry for a change towards more efficient solutions and the use of alternative fuels, at least in the short term.
Lack of enforcement
Currently, in case of noncompliance, a vessel has to submit a plan on how the CII score will be improved in the following year but there is nothing more certain than that. Some port states in the future might prevent entrance into their ports in cases of continued noncompliance but the penalty system is still very unclear. At the same time, IMO encourages developing incentives for the top-tier vessels in terms of CII grading, but this question for now still has no further details.
Short term vs long term impact
Short-term outlook: the regulation does nothing to prevent an overall increase in the industry’s emissions
Long-term perspective: due to the reduction factors there will be a certain point where speed limitations would drive out the truly inefficient vessels.
Another issue is that CO2 equivalents like methane are not included in this regulation, although it might change at the point of revision since the EU has already addressed this issue in their emission trading system – EU ETS. You can read more about this topic in our previous post – Latest on Emission Regulation from the EU.
Grade dependence on trade pattern
NIBC has pointed out that vessels on short-haul have very poor ratings, while ships on long haul have much better scores on paper. Even if sister vessels are compared, one can score a very good grade while the other can be even non-compliant purely based on their trade pattern. This might lead ships to switch their trade patterns to comply with CII.
incentive for ballast voyages
Furthermore, the sad fact is that CII regulation incentivizes the shipowners to send noncompliant vessels on ballast voyages to reduce the CII scores which would lead to higher grading. On top of that the correction factors are also reducing the aggregate effect of this regulation.
In 2021 an article by Wang, S., Psaraftis, H. N., & Qi, J was published – Paradox of International Maritime Organization’s carbon intensity indicator. This article addresses the issue of the CII formula itself. At that point in time IMO still had not agreed on the exact CII formula, but had laid out different variants of the. One of them was also the supply based attained CII formula which now has been adopted. The authors showed that a vessel can maintain compliance over years just by sailing extra ballast legs. The paradox here is that the CII regulation may lead to an increase in overall emissions. This paradox is to be tested also with actual data as well, but the consensus is clear, that the regulation might not in fact achieve the intended goal.
Can we declare an absolute failure to meet the goals of decarbonization?
Some might say, the industry will continue with business as usual and exploit the noticeable loopholes in this regulation. Yes, there are and there will be a portion of shipowners that will indeed exploit these loopholes and will put in efforts just to meet the requirements. But it does not represent the whole industry. We must point out that CII regulation is another requirement that will make shipowners think more about their operations. In the end, it is not only about being compliant, it is also about increasing the operational efficiency that will not only help shipowners meet the regulatory requirements, but also decrease operational costs.
The way forward...
This article covered different flaws and criticisms that the CII regulation has created, but it is a new reality and shipowners must comply with it. The industry might see some changes and upgrades in the regulation starting from 1 January 2026, when the review of the regulation must be completed for the 2027-2030 period. In the next article, the possible solutions and opportunities will be discussed, specifically how Nortech AI can facilitate the process of increasing operational efficiency.
Here at Nortech we like to be on top of the latest developments in the regulatory environment, but more importantly we can be a trusted partner for shipowners when it comes to digitalization and further enhancement of decarbonization efforts. Our aim is to facilitate operational excellence that is based on data driven decision making.