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Life after IMO 2020: What’s next on the regulatory landscape?

Matthew Williams, LR’s specialist for strategic regulatory projects, takes a closer look at developments and requirements for safety and environment regulation from now up to 2025.

IMO 2020, an outside Emission Control Area (ECA) sulphur 0.50% max. limit on marine fuel, has attracted substantial industry focus in the past few years; rightly so given the preparations needed and the uncertainties arising from delayed regulatory decisions and in-sector compliance relying on out-of-sector changes in fuel supply chains. Yet while much of the industry may have been focused on the immediacy of the impact of reductions in sulphur oxides emissions, the regulatory system for shipping has firmly shifted its focus to carbon and other GHG emissions.

Life after 2020 brings with it the familiar, continuous process of evolving IMO instruments and introducing new or amended requirements for the industry to comply with. This regulation-as-usual activity comes at a cost, but the fundamentals of ships and shipping largely continue as normal. However, the focus on addressing carbon and other GHG emissions also means the potential need to employ unfamiliar tools in the regulatory system for shipping to incentivise its next substantial transition.

This article provides an overview of the developments in regulation in the safety and environmental domains, specifically, any mandatory requirements coming into force or application between now and 2025. It highlights two areas of uncertainty within the context of regulation-as-usual: cyber security risks and short-term measures for reducing the carbon intensity of ships. It then looks at a particularly significant source of uncertainty in the next decade: how will the regulatory system incentivise the uptake of alternative low and zero-carbon fuels?

Regulation-as-usual

Cyber risk management

Adopting digital technologies to enhance the safety and efficiency of ships remains an opportunity for owners and operators in all sectors and trades. However, the benefits of this technology comes with risks that need to be managed to ensure continued safety of ships, personnel and cargo, and to protect the return on investment made in such technology.

Cyber safety and security risks are made more complex by the pace of change in malicious threats and the potential for multiple, concurrent losses of availability and integrity of safety-critical functions.

Companies should be prepared to identify and safeguard against cyber safety and security risks arising from the use of information and operational technology in safety critical functions, as well as growing connectivity between ships and shore-based networks. While this should already be an operational norm for companies taking advantage of the opportunities of digital technology, cyber risk management should be incorporated into approved safety management systems ready for the first annual verification of the Company Document of Compliance after 1 January 2021.

To help our clients address cyber threats, LR acquired award winning cyber security specialists Nettitude in 2018 and now offers a wide portfolio of cyber security assurance services to support customers with everything from training and crew awareness through to penetration testing, red teaming etc. Find out more at www.lr.org/en/cyber-security

Short-term measures

The Energy Efficiency Design Index (EEDI) has been driving technical efficiency improvements in new ships since 2013. Its role will continue for the foreseeable future as it is explicitly identified in the levels of ambition in the Initial IMO Strategy for Reduction of GHG Emissions from Ships (Initial IMO Strategy). Amendments are expected to be adopted this year to bring forward EEDI Phase 2 for certain ship types and work by the IMO continues to develop a future EEDI Phase 4.

This new phase is unlikely to commence before 2029 and will apply to new construction ships, which can be expected to be in operation until 2050. Reduction rates will be informed by the data collected by the IMO Data Collection System (IMO DCS) and the 4th IMO GHG Study due to be finalised in July 2020. Equally significant, however, is the consideration of technology readiness of alternative power sources and energy carriers and how to address emissions beyond carbon dioxide.

While EEDI has achieved progressive reductions in installed power, with more innovative energy efficiency technologies at the margin, EEDI Phase 4 is expected to need to deliver a significant increase if it is to provide a carbon intensity standard relevant in 2050.

EEDI Phase 4 is only part of the discussion; it is a technical carbon intensity standard for new ships, which may be contracted for delivery at some point in the future, so what about ships in operation today?

Energy Efficiency Existing Ships Index

The IMO could agree to use an Energy Efficiency Existing Ships Index (EEXI), or mandatory carbon intensity reduction targets for new and existing ships addressed through a strengthened Ship Energy Efficiency Management Plan and carbon intensity indicators (SEEMP & CIIs). Increasingly likely (for reasons explained later), the IMO could agree a goal-based measure with EEXI and SEEMP & CIIs being functional requirements.

As they stand, EEXI is almost a carbon copy of EEDI but applied to existing ships and it would apply to ship types already covered by EEDI. SEEMP & CIIs would strengthen the requirements to manage the in-service energy efficiency of a ship, as well as make new and existing ships subject to mandatory carbon intensity reduction targets. However, in the absence of sufficient data to evaluate and normalise CIIs reflecting the utilisation of weight, volume and passenger capacity in different trades, it is a matter for debate whether assessment of compliance using a CII should immediately have an impact on the validity of a ship’s statutory certificates.

Application is slated for all ships of 400 gross tonnage and above. There is scope to negotiate this up to 5,000 gross tonnage to support use of the IMO DCS to manage administrative burdens and a focus on the ships considered most responsible for GHG emissions.

EEXI is relatively simple, familiar and the proposal is mature, but concerns have been raised about its true emissions abatement potential and the extent to which it encourages innovation. After all, its primary objective is not to reduce carbon intensity, but to level the playing field for existing and new ships regarding technical efficiency.

Ship Energy Efficiency Management Plan and carbon intensity indicators

SEEMP & CIIs would be more complex to implement. The proposed reliance on an annual efficiency ratio (determined by deadweight) for verification of compliance, rather than more nuanced CIIs for different trades, is problematic and could incentivise counter-productive compliance strategies. However, it is thought that the overall approach would better support innovation and its emissions abatement potential should be more certain; and that is the objective.

Variations on the theme of SEEMP & CIIs are expected to add to the richness of the debate. The theme is the extent to which the requirements for SEEMP are strengthened, the process for verifying compliance and the practical implications for ships that do not achieve required reductions in carbon intensity. However, judging by previous sentiment, it is difficult to see measures that do not mandate and enforce measurable reductions in carbon intensity satisfying the political and environmental imperative for action. The potential for fragmentation in the regulatory system for shipping as a result of regional initiatives is very real.

While both types of measure have their strengths and weaknesses, technically efficient ships operated in an increasingly efficient manner are needed if the IMO is to achieve its level of ambition for 2030. In fact, this assumption must be made unless data from the IMO DCS and the 4th IMO GHG Study 2020 indicate otherwise. As such, a single goal-based measure with EEXI and SEEMP & CIIs as functional requirements could provide an important way forward. An important point for discussion is whether EEXI and SEEMP & CIIs would be equivalent, mutually exclusive alternatives, or would both need to be complied with simultaneously or in phases. Concerns over the abatement potential of EEXI cast doubt on the idea of it being an equivalent, mutually exclusive alternative to SEEMP & CIIs, strengthening the case for a measure that requires both.

Data collection is also likely to be under discussion. Firstly, in the context of establishing the stringency of short-term measures based on data from the IMO DCS and the 4th IMO GHG Study 2020. Secondly, in the context of evaluating CIIs ahead of hard enforcement of reduction targets. In both cases, the result would be more robust and effective requirements, but such discussion runs the risk of being perceived as delaying real reductions in carbon intensity.

There is more political discussion to come before the technical details start to be finalised and there is much work to be done to achieve consensus on short-term measures. Equally, the pressure on IMO to reduce the carbon intensity of ships before 2023 should spur on developments to some form of consensus at Maritime Environment Protection Committee 75 later this year.

Regulation-for-change

The international political and environmental consensus is that reducing the carbon intensity and absolute emissions of GHG from international shipping is the main effort for the foreseeable future. In the context of GHG emissions, business-as-usual is not a tolerable option.

Whatever the development or growth scenario for international trade, a transition away from fossil fuels is necessary, and it comes with a responsibility to avoid upstream GHG emissions and sustainability risks arising as a result – even carbon-neutral energy sources can have social costs. That is a significant strategic and technical challenge for shipping and the energy supply chain. It is also a huge challenge for the regulatory system: enabling shipping to progressively reduce its GHG emissions, minimising the social costs of doing so, and preserving the contribution of shipping to trade and the economic growth required for sustainable development.

The critical decision for the regulatory system is whether this should be done by command and control style technical regulation, or whether the regulatory system explores the use of economic regulations to correct market failure by pricing the social costs of fossil fuels appropriately. The Initial IMO Strategy implies the latter, but the former remains a back-stop option.

Command and control style technical regulation is a familiar, well-trodden path. The progressive reductions in maximum sulphur content of fuel oil that have been required since 2012 could be replicated by the IMO for GHG emissions. For example, amendments to MARPOL Annex VI to require progressive reductions in maximum emissions factors (a value representing the rate at which a specific fuel emits GHGs) of fuels used between now and 2050. However, this approach risks introducing aspirational requirements, disrupting industry’s own initiatives to decarbonise and repeating the mistakes of the timing and uncertainty surrounding the decision on the 2020 sulphur limit.

Incentives

Alternative forms of regulation are attractive, but are not without difficulty: emissions taxation is politically unacceptable to many, would likely be regressive and is not the most efficient means of allocating resources. A levy on fuel is a more flexible alternative, which the industry is understood to be sympathetic. Emissions trading schemes that should be more efficient have only achieved varying degrees of success, in part because it is difficult to accurately and robustly monetise the impact of GHG emissions on society. Emissions offsetting would not result in in-sector emissions reduction. Market-based measures are not new to the IMO and have proved divisive in the past; for example, a previous round of consideration that started in 2006 ended without agreement in 2013. While the imperative may have grown since then, this illustrates the extent of the challenge facing negotiators.

A decision on how the IMO will incentivise the transition away from a dependency on fossil fuels is slated for some point between 2023 and 2030; the window for agreement on candidate mid-term measures summarised in the Initial IMO Strategy. But the extent of the challenge means that discussion might need to start much earlier. There is the challenge of designing and agreeing a market-based measure(s). There is the wider narrative of decarbonisation ahead of the IMO’s vision. There is time being taken to develop short-term measures.

There is also the pressure on the IMO to deliver and demonstrate its commitment to the intent of the Paris Agreement and assuage concerns that it is not moving fast enough. The references to shipping in the European Green Deal are a case in point. If they result in substantive follow-up action, this increases the risk of fragmentation of the regulatory system for international shipping. This all suggests a need to achieve agreement closer to the mid-term measures timeframe of 2023 rather than 2030. It’s a need not lost on some member states that are recognising the need to start important discussions ahead of 2023. The reality is that the discussions that have not yet started in earnest are the ones that will matter most.

Whichever route is chosen to incentivise a transition away from a dependency on fossil fuels, the norms for ships and shipping are expected to be challenged. Regulation-for-change will leave no part of the industry untouched. The need to understand developments in the regulatory system itself, and the risks and opportunities emerging from such changes, is more important now than at any time in recent years.

Life after 2020 will be marked by the familiarity of regulation-as-usual, and the uncertainty and challenge of regulation-for-change. LR is working hard to ensure that our customers have the latest and most comprehensive information available on both so that they can identify and respond to the opportunities and risks that life after 2020 will inevitably bring.

Want to know more?

For further information about these or any other upcoming regulatory changes, please contact your local LR office or visit www.lr.org/imo. Here you will find various IMO Committee and Sub-Committee meeting documents.

Visit www.lr.org/en/marine-shipping/marine-subscribe/  to subscribe to receive our bulletin with updates of IMO agendas, summary reports and our forthcoming IMO legislation document.

The information in this article was correct at time of press (26 March 2020).

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