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CII is Almost Here—Along With New Complexities for Shipping

CII is nearly upon us—and some experts are predicting major shifts in the market and new complexities, especially when it comes to time charters.

The International Maritime Organization’s (IMO) carbon intensity indicator (CII) entered into force on November 1, with data collection due to start January 1.

“From 1 January 2023 it will be mandatory for all ships to calculate their attained Energy Efficiency Existing Ship Index (EEXI) to measure their energy efficiency and to initiate the collection of data for the reporting of their annual operational carbon intensity indicator (CII) and CII rating,” according an IMO press release.

Critics have a list of concerns, including the potential that—at least early on—CII could cause more harm than good when it comes to CO2 emissions.

As Gibson Shipbrokers noted in its Sept 9 report, “…as is sometimes the case with regulation, unintended consequences can arise, which could in the short-term increase inefficiency of the fleet until industry practices adopt, or older vessels are removed from trading,” Gibson said. “Indeed, regulation also sometimes fails to account for commercial practices which are not always compatible with technical directives from the IMO.”

The Complexities of CII

Gibson referred to EEXI as “more straightforward” because ship owners are responsible for compliance. However, the firm said CII is more “commercially complex,” since it “concerns how the vessel is traded,” noting that this is especially true for time charters.

“Under a spot voyage, it is the owner’s obligation to manage the vessel’s performance to attain the CII rating the owner desires,” Gibson said. “However, under a time charter, the situation could be much more complex.”

Since CII ratings are retrospective, Gibson said time charter vessels “could be traded inefficiently and returned to the owner with an inferior rating, putting the owner at a commercial disadvantage following the charter.”

For the charterer, the operational nature of CII means it can be managed through trading patterns. However, there are other factors that can impact the CII performance of a ship—such as “design, maintenance and warranted fuel consumption,” Gibson said. “If any of these factors is not as described in the charter party, then a dispute is likely to arise.”

As Sam Chambers notes in an article for highlighting the Gibson report, “For the first time, the decisions made by charterers will fall within the scrutiny of an IMO instrument.”

BIMCO’s CII Time Charter Clause

Chambers also noted that BIMCO was expected to publish a CII time charter clause—which recently came out.

“The BIMCO Documentary Committee has adopted the CII Operations Clause for Time Charter Parties which will help the industry commercially navigate the complexities of the new CII regulations from the International Maritime Organization (IMO),” BIMCO said.

“Owners and charterers need to collaborate and cooperate to manage the IMO objective to reduce carbon emissions. The clause sets out a way forward in a time charter context, where the charterers are responsible for the operation of the vessel. Although the owners and charterers have different roles, the task to reduce carbon emissions must be shared and requires both parties to be committed to collaborate to manage this task. When entering into a charter party, or incorporating the clause into an existing charter party, the parties are to agree on a specific CII value to be achieved each year.”

“The subcommittee comprised ship owners, charterers and legal and insurance experts. After more than eight months of deliberation and consultation, we have arrived at a clause which serves as an excellent starting point for negotiations for owners and charterers and which is workable in practice. The new clause will be reviewed as the underpinning regulatory regime develops,” said Nicholas Fell, Chairperson of BIMCO’s Documentary Committee.

“The CII clause is the latest addition to BIMCO’s suite of carbon clauses for time charter parties. The subcommittee will now continue its work to develop further clauses (such as a CII clause for voyage charter parties) to assist charterers and owners responding to new regulatory requirements, regardless of whether they come from the IMO, EU, or elsewhere,” said Stinne Taiger Ivø, Director, Contracts & Support at BIMCO.

You can find the CII Operations Clause for Time Charter Parties and explanatory notes here.

BIMCO’s Suite of Carbon Clauses for Time Charter Parties

BIMCO also noted that the shipping industry will likely face additional regulations from the IMO and the EU intended to reduce CO2 emissions.

In that light, there’s a growing need for new contracts and clauses—which is why BIMCO has been stepping up to the plate with a “suite of carbon clauses for time charter parties.”

In December 2021, the EEXI Transition Clause was published and at the end of May 2022, BIMCO released a new Emissions Trading System Allowances (ETSA) Clause for Time Charter Parties.

EEXI Transition Clause

Like the CII, the requirements for the EEXI certification will take effect from 1 January 2023.

Noting that the new regulation will “require existing ships to improve their efficiency roughly to be in line with the EEDI requirement for new ships today,” BIMCO said a large part of the global fleet may need to apply technical modifications, “primarily through engine power limitation (EPL) or shaft power limitation (SHAPOLI)” to get the EEXI certification. “The new EEXI Transition Clause can be used in both existing and future time charter parties,” BIMCO said. “It addresses the relationship between shipowners and charterers in the context of compliance with the new regulation where technical modifications and logical amendments to charter party descriptions and warranties are required.” “The upcoming regulatory changes will impact the way ships can be operated in the future and require a new approach to the contractual relationship between owners and charterers,” said Peter Eckhardt of German shipowner F. Laeisz, who headed the drafting team. Developed by a team of experts, the EEXI Transition Clause for Time Charter Parties can be found together with accompanying explanatory notes here.

Emissions Trading System Allowances (ETSA) Clause for Time Charter Parties

According to BIMCO, the Emissions Trading System Allowances (ETSA) Clause 2022 for Time Charter Parties uses “clear language to allocate obligations and responsibilities for obtaining, transferring, and surrendering allowances for greenhouse gas emissions from ships operating under an emissions scheme.”

“The basic principle is that as the charterers are operating the ship and providing and paying for the fuel, they are also responsible for emissions trading allowances, which they transfer to the owners for settlement,” BIMCO said. “The owners must monitor and report the ship’s emissions and provide to the charterers the relevant actual emissions data and the basis of their calculations. Using this information, the charterers transfer the appropriate allowances to the owners at the end of each month. The clause addresses the adjustment of allowances due to offhire events and what happens if the charterers fail to transfer allowances when due.”

As with the other products in BIMCO’s carbon suite, the ETSA can be downloaded for free from BIMCO’s website.

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