New emission regulations in shipping
The push for the international shipping industry to reduce its role in global air emissions has resulted in new environmental rules and regulation being introduced at an accelerated pace.
The industry needs to take action in order to ensure compliance and the new regulations are likely to lead to a range of operational, commercial and legal issues. Regulations of Sulphur Oxide (SOx) emissions requires most urgent attention, but it is also important to consider existing and upcoming regulations on emissions of NOx and CO2.
Sulphur cap (SOx) – the regulatory framework
On 1 January 2015, four so-called Emission Control Areas (ECAs) were introduced pursuant to Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL). The ECAs established under Annex VI are in the Baltic Sea, the North Sea, North America and the US Caribbean and the maximum allowable fuel sulphur content within these ECAs is 0.1%. While the introduction of the 0.1% sulphur cap in the four ECAs formed an important step in combating SOx emissions from ships, it has only impacted a relatively small share of the global shipping fleet. New and stricter regulations are however on the horizon and as of 1 January 2020 a global 0.5% cap on sulphur content in marine fuels will be introduced, revising the current 3.5% global cap. The IMO estimates that up to 70,000 ships will be affected by the new cap.
In addition to the global cap and the existing ECAs, which will remain in force post-2020, regional and local rules which in some cases are even stricter than those set by MARPOL is a complicating factor. For example, local regulations governing the Californian coast is particularly strict in that they prohibit certain compliance solutions. In Norway, draft legislation is currently being considered which would extend the ECA regulation to Norwegian UNESCO World Heritage fjords. The regulation would primarily impact the numerous cruise ships that visit the fjords during the summer season, and would also require the vessels to have environmental standing orders onboard covering SOx and other emissions.
Sulphur cap (SOx) - ensuring compliance
The key question for ship owners and operators is, as one would expect, how they can ensure that their ships are compliant with the SOx regulations. The first and arguably least complicated option is to switch to low sulphur content fuels – a solution which is likely to be favoured by many as it requires no, or at least very little, upfront capital expenditure. Low sulphur content fuel is however significantly more expensive than conventional Heavy Fuel Oil and there are concerns as to whether refiners and bunkers suppliers will be able to cope with the expected increase in demand for this type of fuel as we go into 2020. Installing exhaust gas cleaning systems known as “scrubbers” is another solution. The upfront cost of scrubbers and the ability of scrubber manufactures to meet the expected increase in demand, as well as limited shipyard capacity for scrubber installations prior to 2020, are all challenges that those considering the scrubber option will be faced with. The third, and by far the most emissions friendly option, is to use LNG as fuel. While this solution significantly reduces SOx emissions, the use of LNG as a fuel does not come without challenges. Retrofitting propulsion systems capable of burning gas on existing vessels is expensive and technically difficult while installing engines that can run on LNG for newbuilds adds to the overall vessel price. The availably of LNG in bunkering ports is also expected to remain limited for the years to come.
Sulphur cap (SOx) – new commercial and legal issues
In addition to operational and technical challenges, the 2020 sulphur cap will have a wide range of commercial and legal implications. From a commercial perspective, shipbrokers are expecting the development of a two-tier shipping market with modern “eco-friendly” ships being more competitive for employment and fetching a premium over older vessels. The rate of vessels being scrapped is also expected to increase and industry players expect that the overall cost of shipping will increase on the basis of the cost of required vessel modifications and higher fuel bills.
From a legal perspective, the new regulations, as well as the existing ECA rules, will result in new contractual issues and considerations, the most obvious being the allocation of the costs of equipment and modifications that are required to ensure compliance. In most cases, these costs are likely to fall on ship owners as a starting point. Depending on the wording of existing charterparties (e.g. in relation to fuel consumption and performance requirements), there could also be concerns as to whether the vessels will be deemed “fit for service” and how non-compliant vessels will be treated under charterparties when the 2020 sulphur cap comes into force. Another issue which is likely to arise is potential voyage deviation for the purpose of bunkering low sulphur fuels oils or LNG. Ship owner should therefore carefully consider how these issues are regulated in their existing charterparties and how they should be regulated going forward.
Regulations for other categories of emissions (NOx and CO2)
MARPOL also sets control levels for emissions of harmful Nitrogen Oxides (NOx) – a major air pollutant. Regulation 13 divides the NOx control requirements for marine diesel engines with a power output larger than 130 kW into three different tiers, depending on when the ship in which the engine is installed, was constructed. Furthermore, the engine’s rated speed decides the emission limit within each Tier. Tier I applies to ships constructed on or after 1 January 2000, Tier II to vessels constructed on or after 1 January 2011 and Tier III for vessel whose construction date is 1 January 2016 or later.
Regulations are also being introduced to combat the shipping industry’s estimated 2.5% share of global CO2 greenhouse gas emissions. This is a prioritised area since lack of new regulations are likely to result in an increase of the sector’s share of CO2 emissions by 50%-250% within 2050. Against this background, a working group of the IMO met in London in April 2018 to agree on a global strategy to reduce emissions. The meeting resulted, inter alia, in the adoption of an initial strategy to reduce emissions by 50% within 2050. Follow-up actions are currently being considered, and are expected to be introduced at the next session of IMO’s Marine Environment Protection Committee, set to convene in London late October 2018. The IMO has however already introduced several regulations aimed at reducing CO2 emissions by setting out energy efficiency requirements in relation to the design and construction of vessels. For instance, the Energy Efficiency Design Index (‘’EEDI’’) which entered into force in 2013, impacts shipbuilders and owners already from the design phase. The regulation requires a minimum energy efficiency level per capacity mile for different ship type and size segments.
The regulations described above are set to improve the shipping industry’s environmental profile and will result in a significant reduction in harmful emissions from ships. The regulations, in particular the 2020 global sulphur cap, will however
also result in ship owners, as well as ship operators and charterers, facing new challenges which need to be carefully considered and addressed. Such challenges also bring about opportunities for existing and new players in the market, and there are reports on different positions taken in preparation of 2020 on a daily basis. The variety of the positions taken and strategies implemented illustrate that it is difficult to predict the future – what is certain is that the coming years will be far from boring.