Carbon Intensity Indicator (CII) and Its Impact on the Global Shipping Industry

The latest report of the IPCC (Intergovernmental Panel on Climate Change) woke the world from blindly following the economic frenzy at the expense of the environment. IPCC forecasts read that the global temperature could rise as much as 10F over the next decade[1].

In this environmental disaster, the maritime industry happens to be a significant contributor. The 4th IMO GHG study states that ships worldwide emitted 1076 million tons of greenhouse gases in 2018, which accounts for nearly 3% of the global greenhouse emissions [2][3]. The IMO has been pulling its weight to put a damper on this unchecked emission growth and limit the damage.
IMO has come up with its ambitious goal of achieving a 40% reduction in CO2 emission from the 2008 level by 2030 and a massive 70% reduction by 2050 [4]. Pursuing its goal, IMO introduced mechanisms such as EEDI (Energy Efficiency Design Index ), EEXI (Efficiency Existing Ship Index) and now the latest is the Carbon Intensity Indicator (CII).

What exactly is the CII ?

In essence, CII measures how efficiently a ship transports its goods or passengers in terms of CO2 emitted. More precisely the CII is the grams of CO2 emitted per ton of cargo transported across every nautical mile. It was one of the regulations adopted by IMO in June 2021 and will come into force from 1st January 2023, covering all cargo, RO Pax, and cruise ships above 5000 GT [5].

The CII value of a vessel will be evaluated annually and compared to the reference CII values determined by IMO. The emission data of 2019 sets the reference line. Based upon this comparison, the performance of every ship will be rated on a scale of A to E, with A being the best. Achieving the CII rating equivalent to the reference line will land a ship squarely in the middle of the C rating, with better and poorer performances progressively leading to higher or lower ranks. For the start in 2023, the reference line will be set at 5% emission reduction concerning the 2019 level and then gradually move up to 11% reduction by 2027 [6][7].

How will CII impact the shipping industry?

With the adoption of guidelines and tools such as the CII, EEXI, SEEMP, etc., IMO is working on reducing the carbon footprint of the maritime industry. However, some industry experts believe that IMO might have been overzealous in reducing emissions. An analysis conducted by ABS using EU-MRV 2019 data suggests, that to 92% of the current container ship fleet, 86% of bulk carriers, 74% of tankers, 80% of gas carriers, and 59% of LNG carriers would require modification and operational changes of some kind to achieve A, B or C energy efficiency rating [8].

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The ship owner’s struggle

From the above ABS data, it is obvious that a vast number of ships would require retrofitting to achieve favorable CII ratings. Securing finance for such retrofitting will be a challenge for small shipowners who often have older ships as ship finance is rapidly moving towards Environment, Sustainability, and Governance (ESG) goals. The Poseidon principles and the Sea Cargo Charters are essentially frameworks for integrating climate considerations in shipping’s financial decisions. Financing a poorly CII rated ship would increase the risk of the financer as a D-rated vessel today might slip to an E rating tomorrow when CII becomes stringent in coming years [9].

IMO has not explicitly mandated any punishment for violating CII guidelines. Still, it is believed that ports and government agencies would be rewarding healthy CII rated ships with preferred port slots, monetary benefits, etc. [10]. This, in turn, will push the charters to go for better CII rated ships, and ultimately it would be business for ship owners. In the coming days, when the world will be even more environmentally conscious, charters and financers would like to highlight their ecological and sustainability efforts. Any association with poorly CII rated ships will impact them negatively on this front. Thus, it would amount to death by a thousand cuts for small shipowners who fail to secure good ratings for their ships.

With CII, the problems for these ship owners would range from securing finance to finding business. The shipowners will always be on their toes to find new avenues to improve ratings and get business. Experts believe that a stringent CII might force many ship owners to scrap even relatively young vessels. Ships going out of service at an early age will create a vacuum in supply as commissioning new ships takes a couple of years. Currently, the industry’s players are hesitant to commission ships that probably would soon become obsolete, given the tumultuous times and influx of ever-changing regulations and technologies [9][11].

The supply chain challenge

Panos Mitrou, Global Gas segment manager at Lloyd’s Register, states that in the LNG segment, more than half of the LNG vessels will not be able to achieve A, B, or C ratings in 2023. He explains that these vessels are equipped with old technologies and require expensively sustainable retrofitting to achieve satisfactory CII ratings. He fears that with CII requirements becoming progressively stringent every year, more and more ships will become inoperable, and a demand-supply crunch will rise in the LNG segment. Mr. Mitrou explains that despite many newcomers in LNG ship manufacturing, the growing demand far outpaces the supply. The short supply of CII compliant LNG vessels will push the freights to sky high, and it will have a direct impact on the global energy transition where the world is trying to switch to LNG from coal [12].

Even in the container segment, the larger ships will perform better than smaller ships in operational efficiency. This will create a supply shortage, significantly raise freight rates, and even cause monopolistic or oligopolistic tendencies among the remaining players, further driving the rates higher.

Studies indicate that the change will worst hit the least developed countries and small developing island nations. As they import a lot of essentials such as crude oil, timber, agricultural products, etc., frequently, making them acutely sensitive to changes in freight rates. The supply chain is already tenuous, given recent events such as the pandemic, the container crunch, and the Russian war on Ukraine, which will inevitably be followed by heavy trade sanctions by Western Governments and intergovernmental bodies. CII might add strain to the already struggling global supply chain in its current format in such challenging times.

How to maintain a good CII

CII is dependent on the fuel consumption over the journey, which in turn is dependent on the operation of the ship, along with the technical efficiency and the fuel utilized. Even though every shipowner is free to choose how to proceed, IMO recommends a mix of operational and technical measures to tackle the problem of consistently achieving a good CII grade.

Operational measures for achieving good CII

The IMO mandates one operational measure to revise the SEEMP (Ship Energy Efficiency Management Plan) to include the Ship’s Fuel Oil Consumption Data Collection Plan. This would also include a description of the methodology used for the data collection and plans to improve the CII ratings for the next 3 years [13]. This, however, presents a challenge, as owners are not in direct control of the ship; for example, under time charters, the instruction for routes, anchorage, speed, loading-discharging, etc. comes from the charters. Another example: a charterer wants the vessel to maintain maximum speed for his cargo for some reason, the CO2 emission will shoot up for that given transport work of the ship. If the charterer fails to secure berths at the port and the ship has to go for long anchorage, again, the ship’s CII will be negatively impacted. It simply means that the shipowner will be paying in terms of CII for the charter’s action. There has to be an agreement between the charterer and the owner to resolve this. So the charterer will have to surrender or adjust a few rights in favor of the owner.

Other operational measures include optimizing routes to avoid harsh weather, called weather routing, and it can save about 3% fuel on a journey [14]. Regularly analyzing the vessel and fleet performance, maintaining the ship, finding and applying best practices across the fleet, not loitering on the ports, and throttle management can help significantly improve ratings.

Technical standards to achieve good CII

In the technical domain, the most prevalent method for reducing emissions, which is also backed by IMO [15], is limiting the shaft power and lowering the speed, also known as slow steaming. This method can reduce fuel consumption by as high as 59% [16]. As a part of this measure, usually, the engine is tuned to run better at a lower speed, the turbos are re-synced, and the propellers changed. At first glance, this seems remarkably similar to throttle management. However, this method is a more permanent measure and gained most of its traction in the industry by ships complying with the EEXI. This method can be expensive and not of much use to bulkers and other large vessels that already operate at lower speeds.

Another measure is installing a shaft generator system. This uses the power of the main engine while cruising instead of the auxiliary generators, saving about 3-5% fuel [17]. Using better hull coatings to reduce drag and waste heat recovery systems also improves efficiency.

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Alternative fuel is the key

More radical measures include replacing one or more engines with an LNG battery. A vessel, the VIKING PRINCESS, has reported a reduction of 17% in fuel consumption after installing such a battery [18]. But the final frontier in reducing emissions is switching over to a sustainable fuel altogether, such as LNG, methanol, ammonia, or hydrogen. The most promising contender for now is LNG. However, methanol is quickly stealing the spotlight with its desirable physical properties, availability, and the fact that green methanol would render the fuel having net zero emission. The application of Hydrogen and Ammonia is further into the future due to the lack of bunkering infrastructure. Still, it is very much possible with the help of entities such as the World Bank EBRD or the EIB.

The general sentiment regarding cruising is changing. Governments are giving nudges to tourism if only to support the economy. The recent WHO statement of a possible end of covid insight is also positive news, providing hope to a quick rally of the cruise industry.

The road ahead

It is easy to forget that the world is changing rapidly, and we stare at our doom with all the technicalities and legalities. The polar caps are melting; species are going extinct, and weather patterns are changing. Transforming our way of life is the only option left with us. We need to be smart and vigilant to find the solution to this problem without disrupting the world before the opportunity passes us by. Change is often disruptive, but it is our responsibility to take the path of sustainability and pour efforts into optimization and R&D to discover new methods and technologies. We need to shift the world supply chain on sustainable fuels and bring in technology such as artificial intelligence to optimize the movement of goods so that carbon emissions can be reduced.

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List of references

[1] https://climate.nasa.gov/effects/

[2] https://ec.europa.eu/clima/eu-action/transport-emissions/reducing-emissions-shipping-sector_en

[3] https://www.imo.org/en/OurWork/Environment/Pages/Fourth-IMO-Greenhouse-Gas-Study-2020.aspx

[4] https://www.imo.org/en/MediaCentre/HotTopics/Pages/Reducing-greenhouse-gas-emissions-from-ships.aspx

[5] https://wwwcdn.imo.org/localresources/en/OurWork/Environment/Documents/Air%20pollution/MEPC.336(76).pdf

[6] https://wwwcdn.imo.org/localresources/en/OurWork/Environment/Documents/Air%20pollution/MEPC.337(76).pdf

[7] https://wwwcdn.imo.org/localresources/en/OurWork/Environment/Documents/Air%20pollution/MEPC.339(76).pdf

[8] https://splash247.com/will-the-carbon-intensity-indicator-re-shape-the-shipping-industry/

[9] https://link.springer.com/article/10.1007/s10784-020-09523-2

[10] https://www.imo.org/en/MediaCentre/PressBriefings/pages/42-MEPC-short-term-measure.aspx

[11] https://shipowners.fi/wp-content/uploads/2020/02/ISWG-GHG-7-2-20-Detailed-impact-assessment-of-the-mandatory-operational-goal-based-short-term-measure-Denmark-France-and-Germa….pdf

[12] https://www.lr.org/en/insights/articles/lng-fleet-seriously-exposed-to-cii-impact/

[13] https://www.classnk.or.jp/hp/pdf/tech_info/tech_img/T1139e.pdf

[14] https://gmn.imo.org/wp-content/uploads/2017/10/20140301-ITUMF_Ship-optimization.compressed.pdf

[15] https://wwwcdn.imo.org/localresources/en/OurWork/Environment/Documents/Air%20pollution/MEPC.335(76).pdf

[16] https://www.wartsila.com/docs/default-source/Service-catalogue-files/Engine-Services—2-stroke/slow-steaming-a-viable-long-term-option.pdf?sfvrsn=0

[17] https://glomeep.imo.org/technology/shaft-generator/#:~:text=The%20reduction%20potential%20is%202,of%20total%20ship%20fuel%20consumption.

[18] https://www.wartsila.com/marine/customer-segments/references/offshore/eidesvik-offshore

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Psaraftis, H. N., & Kontovas, C. A. (2010). Balancing the economic and environmental performance of maritime transportation. Transportation Research Part D, 15(8), 458–462.

Chatzinikolaou, S., & Ventikos, N. (2016). Critical analysis of air emissions from ships: lifecycle thinking and results. In H. N. Psaraftis (Ed.), Green transportation logistics: the quest for win–win solutions. Cham, Switzerland: Springer.