From 01/01/2023, additional rules to prevent air pollution by ships, by controlling carbon dioxide (CO2) emissions, come into effect. These rules are set out in MARPOL Annex VI Chapter 4, which makes the calculation of Existing Ship Energy Efficiency Index (EEXI) and Carbon Intensity Index (CII) mandatory. These provisions cause significant implications for charter and shipping contracts, and it is pertinent to know them. However, before that, it is necessary to briefly introduce the content of the mentioned requirements.
In short, EEXI is required for ships of over 400 gross tonnage, with a maximum allowable amount varying according to vessel type. Its formula relates to the amount of carbon dioxide emissions in the design of ships, their carrying capacity and speed of service. These limits will be lowered every 5 years. The simplest way to adjust the EEXI, if necessary, is by installing devices that reduce the power of combustion engines or the force of the drive shaft. In addition, it is possible to reduce EEXI by installing various devices on the ship, such as batteries, waste heat recovery system, sail propulsion assistant, etc.
In contrast, CII is loaded on ships of over 5,000 gross tonnage. Its calculation base takes into account ship fuel consumption data collected within one year. Its formula relates to the measured amount of carbon dioxide emissions from the ship, its carrying capacity and the distance traveled in that period. The annual CII is classified into classes A, B, C, D, or E, with A being the best performing class. MARPOL stipulates that ships classified in Category D for three consecutive years or in Category E for one year must submit a recovery plan to the Ship Flag Department so that the ship begins operating at least in Category C.
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The alternatives for ships to have sufficient ICT are, among others: the use of fuels with a lower carbon content; Keep the structure clean. improve trajectory and speed; installation of hull efficiency devices; Installing solar panels or wind generators to generate energy for housing.
Compliance with these rules creates a relevant interface with charters and marine transport in that: (i) if a thrust reduction is implemented, there will be a reduction in the maximum and service speeds of the vessel; (ii) it is necessary to use fuels that are lower in carbon and are more expensive; (3) It is necessary to install equipment or systems to improve the result of EEXI or CII, which leads to unavailability of the vessel to make voyages and investment costs.
In this sense, to address these effects on leases by period, BIMCO has published EEXI TRANSITION CLAUSE FOR TIME CHARTER PARTIES 2021 (“EEXI Clause”) and CII OPERATIONS CLAUSE FOR TIME CHARTER PARTIES 2022 (“CII Clause”).
The EEXI clause is designed to make modifications to the ship with the aim of reducing the power of the combustion engines or the force of the propeller shaft. Other types of modifications must be agreed upon in advance between the contracting parties.
For energy reduction modifications, the tenant does not need to obtain permission from the tenant to implement them, and must communicate expectations of their realization at least three weeks in advance. In this case, the charterer must direct the vessel to the location required by the charterer. Vessel downtime and adjustment costs are at the expense of the charterer. Once the modification is complete, the charterer will be obligated to direct the vessel’s voyages taking into account her new maximum speed, which will be less than the originally contracted maximum speed. We stress that there is no requirement for the contract to be terminated by the lessee if the new maximum speed is significantly lower than the originally contracted speed.
In turn, the CII Clause states that the contracting parties must cooperate in order to achieve the ship’s CII objectives. Therefore, the charterer is expected to set travel schedules in order to keep the vessel’s CII within the limit agreed upon by the parties to the contract. If at any time the charterer determines that there is a tendency for CII to exceed the limit stipulated in the contract, the charterer must submit a plan for the future schedule of the vessel, in order to keep CII within the contracted limit. The lessee is expected to compensate the lessee in the event of losses and damages resulting from non-compliance with the provisions of this clause. It was also specified that the charterer should include in the bills of lading arising from the execution of the lease a clause stating that the carrier shall not be liable for damages suffered by the shipper by reason of the fulfillment of the obligations under Clause CII.
This clause does not address the treatment to be given in the event of non-compliance with CII limits due to inadequate conditions of the ship’s hull or inadequate maintenance or operation of the ship’s equipment and systems affecting a CII outcome.
It is important to consider that adjustments in vessel travel schedules, in order to meet CII requirements, may ultimately cause related effects on the marketing of the goods being carried, such as delays in their arrival.
It should also be noted that from the charterer’s point of view, depending on the situation, it is appropriate to direct the vessel to reach the port of destination as soon as possible, in order to favor the receipt of trade-related demurrage. Contract or lease for each trip, as applicable. On the other hand, from the point of view of the charterer, this flight instruction is not convenient, as it favors an increase in CII. This conflict can be the subject of significant contention between contractors.
BIMCO has not yet made any provision to deal with EEXI and CII compliance requirements in cruise charter contracts. However, we contend that meeting these requirements also affects these types of contracts. For example, the charterer may choose to make the contracted voyage at a lower speed than the service speed, in order to keep the vessel’s CII within the limit. This situation may affect the commercial contract relating to the transported goods, in the event of a delay with respect to the date committed. In this sense, it is worth remembering that in this type of contract it is up to the charterer to determine the speed with which the vessel will meet in executing the voyage.
In addition to the EEXI and CII clauses, BIMCO has published the ETS – EMISSION TRADING SCHEME ALLOWANCES CLAUSE FOR TIME CHARTER PARTIES 2022 (“ETS Clause”), which deals with the payment of emissions fees, required by the European Union in the Emissions Trading System (EU ETS). European – EU ETS). This clause states that the tenant must provide the necessary resources to the tenant to pay the said fee.
Items submitted to date indicate compliance with regulatory requirements related to ship voyage decarbonisation. We point out, however, that there is potential demand for other contractual modifications arising from specific, voluntary requirements of charterers and shippers.
In December 2022, the Boston Consulting Group published the results of a survey that evaluated 125 shipping companies in relation to their interest in paying a freight premium for carbon neutral shipping.
The survey showed that 82% of the consulted companies are willing to pay such a premium, which is 11% more than those in the survey conducted in 2021. The survey also revealed that 71% of the consulted companies are willing to prove loyalty. Relationships with carriers that have carbon neutral policies. In 2021 that amount was 67%.
In addition, it was noted in the survey that 50% of the consulted firms had the main reason for preferring carbon shipping as per the demand of their clients from the consulting firms or pressure from the financial market. In 2021 that amount was 40%.
These data lead to the conclusion that there is a strong trend for charter and marine transportation contracts to also include specific provisions to meet the demand of their contractors. As an example, we can cite the following items: the use of low-carbon fuels; tenant carbon transfer policy and procedure requirements; Create additional requirements for EEXI and CII, specific to the contractor; Evaluate performance in relation to decarbonization requirements with expected payment of bonuses or discounts on contracted rates.
It is expected that changes in the provisions of charter and maritime transport contracts will increase in the coming years. Such changes will require greater negotiating efforts from the parties to reach an agreement. In the wake of these trends, we understand that there will be an increase in contractual disputes because decarbonization clauses are new to the market (therefore there are flaws in their content) and because their application is very complex.
Iwam Jaeger Junior is a partner in Kincaid Mendes Vianna Advogados
Paulo Campos Fernandez is a consultant at Kincaid Mendes Vianna Advogados