FEATURE: Deciphering Shipping's CII Conundrum

Shipping decarbonisation: on the horizon and far away. File Image / Pixabay.

Quantifying shipping's carbon footprint ultimately comes down to getting an answer to the question: how much carbon does a particular ship emit? An attempt to provide an answer can be summed up in one phrase: Carbon Intensity Indicator or CII.

CII comes from the International Maritime Organization and is one of the latest regulatory interventions to address greenhouse gas (GHG) emissions from international shipping. But while the need to curb shipping's GHG is a given, it is unclear how effective CII will be in achieving this aim.

Part of the problem lies in understanding how CII (and its concomitant Ship Energy Efficiency Management Plan pt III)) will work in practice so an explanatory report from Infospectrum, a firm that provides counterparty risk appraisal reports, due diligence research and know your customer intelligence, is to be welcomed. The report, CII: A Known Unknown, canvassed the market and found that there were as a many questions as there were answers.

"Ship owners are not wholly critical of the CII regulations," Infospectrum's Head of ESG Desk, Clare-Marie Dobing, told Ship & Bunker.

"Many expressed their broad support for IMO's efforts to transpose its initial GHG strategy into mandatory requirements."

But she acknowledged that unreserved industry support is lacking.

"A key area of concern is the impact of the CII formula on certain vessel segments and their associated employment profiles."

Key issues with the CII Formula 

In its simplest form, CII is calculated as the ratio of the total mass of carbon dioxide (CO2) emitted to the total transport work undertaken in a given calendar year. The current structure of the formula supports a positive CII trajectory for ships travelling a greater distance, while trades that reduce the overall distance travelled per annum may be penalised.

Examples of how the formula can be distorted can be seen in the report. With the 'Sister Ship Syndrome', two identical ships can be awarded different CII ratings stemming from different patterns of operation. A distinguishing factor could be idling times in port or anchorage which are outside the owner's or charterer's control.

The application of CII also puts the owner/charterer relationship under the spotlight. Whereas spot charters are less of a concern, the report found that the same could not be said for time charters.

A chartered ship might undertake a long voyage followed by multiple short voyages. Such a voyage pattern might affect the ship's CII rating which, in turn, could put the ship at a commercial disadvantage when handed back to the owner. Add to that, the question of how CII might be expressed contractually, and the extent of the ground to be covered before reaching a consensus becomes clear.

"BIMCO has provided a clause for owners to use but most charterers are currently unwilling to agree to the clause in its entirety," Dobing explained.

"This has led to the development of alternative CII clauses which appear to favour either the ship owner, or charterer, or fall somewhere in the middle."

Regulatory uncertainty

CII is to be reviewed by 1 January 2026, but in the interim, changes could be made if a member state or other party (an NGO with IMO consultative status) submits a specific proposal to the relevant IMO committee.

"It would then be up to IMO member states to decide whether to accept the proposal," Dobing said.

"The resolution of outstanding market-based issues is less clear and largely dependent on a fuller understanding of the impact of each individual CII letter grade (A through E) on asset values, charter rates, ESG screens, and an owner's ability to secure finance and insurance.

"A change in position from IMO member states and Port State Control with regards to enforcement (for example detaining or fining a vessel without a SEEMP Part III implementation plan) could have a further impact in the near future."