Bergeron: CII metrics are not fit for purpose

The IMO’s regulation on the carbon intensity indicator (CII) that enters into force in 2023 has come under a lot of fire in the shipping industry as a regulation that could punish owners with poor vessel ratings on the grounds of factors that they cannot influence upon.

The CII is aimed at supporting the International Maritime Organization’s (IMO) objective of reducing the carbon intensity of international shipping by 40% by 2030, compared to 2008 levels.

The rating scheme is an operational measure that will apply to all cargo and cruise ships of 5000 GT and above.

Specifically, the regulation is more commercially driven when compared to Energy Efficiency Existing Ship Design Index (EEXI),  as a ship’s rating is highly dependent on how a ship is traded, which is largely dictated by a ship’s charterer.

The CII rating will be assessed based on the ship’s annual efficiency ratio, which measures distance traveled, speed as well as the intensity of the use of the vessel. Factors that can also impact these are operational realities, like port congestion or port infrastructure, another issue that is outside of ship owners’ control.

Fuel use is the current basis recommended by the IMO, International Panel on Climate Change, and U.S. Environmental Protection Agency for calculating greenhouse gas (GHG) emissions from ships.

To comply with the CII rating, many owners are likely to opt for slow steaming to reduce fuel consumption, and for many sectors, this may result in disrupted trading patterns and even higher emissions from older ships as an unlikely outcome. This is in disconnect with charter terms that incentivize the owner to go as fast as possible to get to port.

At the end of the day, the shipowners would be the ones ‘stuck’ with a poor rating, and if a ship gets a D or E rating for three consecutive years, they will need to submit a corrective action and face a trading ban for three years.

The criticism of the regulation stems from a belief that driven by political aspirations and ambitions, the IMO has disregarded the shipping market’s insight on the likely impact of the regulation.

“Regulations are coming and we will adhere to them. But what we are saying is that some regulations don’t make a lot of sense, because the science hasn’t evolved. Looking at the CII that comes into force next year, the metrics are not fit for purpose and they are creating perverse incentives,” Scott Bergeron Director of Business Development & Strategy – Oldendorff Carriers said while speaking on the Energy Transition and Shipping panel hosted by the Capital Link Inc. in New York.

Bergeron insists that in order to meet the common objective of cutting absolute emissions charterers and shipowners need to work together and focus on a metric that does that.

“This is the first regulation where when we meet with charterers and cargo interests the question that arises is not ‘how are you gonna deal with this’, but ‘how are we gonna deal with this’,” Bergeron said, adding that this was a global energy issue not a shipping industry’s issue alone.

“In real terms in order to make a difference, we need to focus on the installed marine asset base. This is in particular true in the Jones Act trade. If you are building a ship today in the United States, the earliest delivery you can get is in 2027. The construction cost for a new vessel is exorbitant. The technologies are not established as to what the propulsion should be and what the fuel systems might be. Then you need to think about the implications of the decision today on a vessel with a 30-year life in 2027,” Sam Norton, President/CEO – Overseas Shipholding Group (OSG), said.

“It can happen that the coastal needs for fuel transportation in the U.S. are radically reduced and you face stranded asset risks. Given that the size of the investment for a Jones Act ship is considerable, to me, the real drivers for incremental changes are how to optimize fuel efficiencies on board your vessel and how to work with charterers to optimize the efficiency of voyages. Ultimately, I think that this comes to the need of charterers and owners to sit down and recognize that this is our problem not just an owners’ problem, particularly if you understand how the CII works.”

Norton stressed that since charterers are determining voyage particulars and vessel use factors, there was a point of conflict that needed to be resolved with regard to the CII grade. He believes that the only way to make a real change was for the two sides, charterers and owners, to sit down and focus on changing the ways things were done historically to make those incremental changes a reality.

When considering the potential impacts of the regulation on the market, older ships that fail to meet the rating scheme are likely to head for demolition, putting further pressure on the supply chains at a time when congestion and lack of capacity are creating massive inefficiencies and delays.

Aside from significant investments that would be needed to make ships more energy efficient, potential supply gaps might lead to over-ordering causing market imbalance.

The mismatch between ambition and reality

The political aspirations and ambitions need to be kept in check, Bergeron believes, as the shipping industry, while being pitched a lot of innovative solutions on a daily basis, is far from being able to decide with certainty which decarbonization pathway to opt for.

“We are being asked to choose the lottery winner of the future technology,” he said.

“Vendors, suppliers, and entrepreneurs are coming to share their innovative technologies with the shipping industry, but what you find is that these ideas, as interesting as they might be, are undercapitalized and not proven to be fit for service.”

“As an industry, we are struggling between ambition, which is a great motivator, and practical, real solutions. We cannot order an ammonia-powered ship today. When it comes to methanol we are starting to see some specifications that are available and we can look into that.”

Moving forward, there is a lot of uncertainties surrounding potential investments amid risks of stranded assets. As explained, this can be greatly ascribed to a process of evolving science and determining how emissions need to be measured and what solutions will be available and commercially sound.

“When you look back 15 years ago, LNG was the fuel of the future. The science keeps evolving and we are having trouble relying on the science of today and what we are measuring.”