Carrot and Stick
towards decarbonization

The link between market intelligence and competitiveness is as old as shipping itself, which is one reason accurate vessel performance data offers owners the  stomach for the big stick of CII compliance and the Poseidon Principles carrot

METIS Cyberspace technology S.A. – May 2022

Those at the sharp end of shipping sometimes view the International Maritime Organization target to slash CO2 emission from ships in half by 2050 as so much wishful thinking. Meanwhile – even set against a 2008 baseline – the idea of a 40% cut by 2030 can cause tempers to fray, given its apparent implication of short-term commitments to costly new machinery or unproven fuels.

However, a better assessment of IMO’s targets for greenhouse gasses is as a framework for shipping’s new reality, where the only wishful thinking is being done by those believing in the parallel universe of regulatory division. Steps being taken at EU level indicate that, if IMO feet continue to drag on global warming, shipping will live to regret what certain administrations wished for.

The better news is that short tempers are not necessarily the appropriate response to a new reality which is still driven by age-old concepts of asset value, utilization and disposal, whose added variables now include defined targets on global warming. Also as old as commercial shipping itself, is the understanding that information provides the key to competitiveness.

A long preamble, but one designed to explain that ship owners can already optimize their operational behavior by analyzing real-time performance data covering of every vessel, to evaluate whether or not to invest in existing assets to meet 2030 regulatory requirements.

Today, most stakeholders agree on the viability of the Carbon Intensity Indicator (CII) as a scale to enforce ship CO2 reduction. The CII represents the total operational emissions generated to complete one unit of transport work, which is measured in grams of CO2 per ton-nautical miles.

All ships of 5,000 GT and above will be subjected to the calculation of the annual operational CII, which will determine the required carbon intensity reduction on an annual basis. The rating will be given on an A, B, C, D or E scale indicating a major superior, minor superior, moderate, minor inferior, or inferior performance level. Ships rated D or E for three consecutive years, would have to proceed to corrective actions, to improve to the required index (C or above). 

As well as this ‘stick’, owner evaluations will no doubt keep a hungry eye on the ‘carrot’ available to shipping via the Poseidon Principles ( Supported by 27 leading banks, jointly representing approximately USD 185 billion in shipping finance, the Principles offer a lending framework with privileged terms, to support owner alignment with IMO greenhouse gas emission goals. Financial institutions already signed up represent more than a third of shipping’s global financing. 

For the Poseidon Principles, the CII is measured using a carbon intensity measure known as Average Efficiency Ratio (AER), which is reported in unit grams of CO2 per dwt-nm (gCO2/dwt-nm). AER is vessel type, size, and year dependent, calculated on a yearly basis, and focusing on the following: Vessel fuel oil actual consumption, total distance travelled, the design deadweight tonnage (inauspiciously, not the actual cargo loaded and transported).

The stick of regulation and the carrot of incentivization represent a new dimension where competitiveness is concerned and being able to capture and analyze ship performance figures provide the key to an effective response. As we enter a new era of higher interest rates, nothing could better incentivize debt-financed shipping companies to expedite their switch to greener operations and eventually to decarbonization, for example, than privileged ‘green’ financing.

Recent increases in fuel prices provide another – and purely market led – incentive for shipowners to put all of their efforts into reducing fuel consumption and consequently reduce emissions.

METIS Cyberspace Technology recently augmented its cloud-based data acquisition and ship performance reporting solution to offer worldwide shipping’s first tool to predict the trade-off between emissions reduction and debt servicing for ships financed under the Poseidon Principles. The new functionality offers insights into its first Predictive AER Index application, where owners can indicatively conclude that while some of their ships need no further investment to meet IMO targets others require immediate or future action, or even should be disposed of at once.

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