Complying with IMO’s short-term greenhouse gas (GHG) reduction strategy will not be easy, but non-mandatory measures will prove more challenging, write MSI’s David Jordan and Will Fray
Analysis by Maritime Strategies International (MSI) of the impact of IMO regulations and market measures on the dry bulk sector illustrates the contradictory forces at play in shipping’s efforts to decarbonise. While some believe IMO’s reduction targets are not ambitious enough, market measures such as the Poseidon Principles promise much tougher compliance targets.
Taken together, the impact of the EEXI, CII, AER and the Poseidon Principles will be felt across the industry, from the financing and operation of vessels to macro level supply/demand balances, scrapping and newbuilding. To date, the industry has not yet fully grasped the multi-dimensional implications of regulations that will soon come into force.
EEXI is a one-time, technical measure based on the ship’s design, equivalent to the Energy Efficiency Design Index (EEDI), with some adaptations due to limited access to design data.
Between 19-32% of all dry bulk carrier segments below capesize and less than 10% of capesizes are EEXI compliant, according to initial estimates by MSI. Ultimately, most dry bulk carrier owners will have to take some level of action to comply with the EEXI, but in MSI’s view, its impact on the trading speed or overall vessel supply is not particularly significant.
The calculation underlying the CII is based on different ways of measuring the carbon footprint of the transport work. The first of these is the Annual Efficiency Ratio (AER), which uses the parameters of fuel consumption, distance travelled and cargo-carrying capacity.
CII regulations will not be too onerous for dry bulk carrier owners when they initially come into force. Based on estimated 2020 AERs and provisional attained CII based on the technical guidelines on carbon intensity reduction adopted by IMO, 77% of the existing fleet attain a minimum CII rating of C or better; meaning only 23% would require corrective action.
However, CII is likely to encourage the scrapping of less efficient tonnage, stimulating newbuilding demand. Similarly, if widespread slow steaming is adopted by the industry, it will have a significant impact on additional incremental vessel demand.
If the dry bulk fleet slowed down, on average, by 1 knot to reduce its emissions and improve its CII rating, this would imply a reduction of available supply of around 52M dwt – roughly 6% of the fleet.
The comparatively lenient requirements of the CII are made readily apparent by comparing the estimated CII ranking of the existing dry bulk carrier fleet in 2023 with how the same vessels compare to the Poseidon Principles’ decarbonisation trajectory in 2023.
The Poseidon Principles also employ the AER as a key part of its methodology in its efforts to assess and disclose the climate alignment of ship finance bank portfolios. While it does so in a manner that is consistent with the policies and ambitions of the IMO to reduce GHG emissions for shipping, there are notable differences in the decarbonisation trajectories it uses.
The decarbonisation targets of the Poseidon Principles, at least in the short-term, are considerably stricter than those of the CII. Based on 2020 AER figures, 77% of the existing dry bulk carrier fleet in terms of the number of vessels attain a minimum CII rating of C or better in 2023. However, again based on 2020 AER figures, under 20% of the fleet would be compliant with Version 4 of the Poseidon Principles’ decarbonisation trajectory.
Despite the severity of the impact these measures will have on shipping, the market’s understanding of their practical implications until now has been limited at best. This is perhaps unsurprising given the slow evolution of regulation and the non-mandatory nature of the Poseidon Principles.
However, with less than 18 months before the EEXI and CII are due to come into force and with pressure from ESG-related measures like the Poseidon Principles set to increase, the industry should be prepared for radical shifts in the operating landscape and develop strategies that reflect the changes to come.
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