Simply Speaking- June 2022: EEXI and CII - What Are the Implications for Vessel Owners and Lenders?

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EEXI and CII - What Are the Implications for Vessel Owners and Lenders?

Background

The International Maritime Organization (“IMO”) adopted MARPOL Annex VI in 1997 to limit air pollutants commonly associated with vessel operations. In June 2021, the IMO, working with the Marine Environmental Protection Committee (“MEPC”), passed amendments to Annex VI aimed at reducing carbon emissions produced by vessels. Specifically, the amendments to Annex VI include two new metrics for measuring a vessel’s overall energy efficiency and actual carbon dioxide emissions: Energy Efficiency Existing Shipping Index (“EEXI”) and Carbon Intensity Indicator (“CII”).

What are they and what do they do?

The EEXI is an energy efficiency metric that must be calculated for all existing vessels of 400 gross tonnage or more. The IMO and MEPC will calculate “required” EEXI levels based on the specific design of a vessel. Additionally, an “attained” EEXI will be calculated to determine the actual energy efficiency of the vessel. A vessel’s attained EEXI must be less than the vessel’s required EEXI.

The CII measures a vessel’s carbon dioxide emissions resulting from its operation – that is, how efficiently a vessel transports goods or passengers in terms of CO2 emitted in its voyages. The CII regulation applies to all vessels of 5,000 gross tonnage or more. The CII is calculated by dividing a vessel’s annual CO2 emissions by its nautical miles traveled annually and its deadweight tonnage. Additionally, there are various correction factors based on the specific design and features of the ship. Once again, a vessel’s attained CII must be lower than its required CII.

While the two concepts strive to achieve the same goal, vessels with an identical EEXI could have vastly different CIIs due to their individual operation.

Why are these new regulations important to vessel owners?

Vessel owners will need to ensure that their vessels are compliant with both EEXI and CII regulations by January 1st, 2023. Vessel Owners may need to make modifications to their vessels to reduce their attained EEXI and ensure that it is below the vessel’s required EEXI. Vessels will need to meet these standards to obtain their International Energy Efficiency Certificate. While the focus in the shipping community may currently be on the EEXI to have an IEEC issued by the relevant deadline, the impact of CII should also not be underestimated, as it is an ongoing obligation, and the required value of CII will gradually drop over time, which means a vessel needs to be continually improving on its carbon intensity. Vessels that continually receive subpar CII ratings will be required to submit corrective action plans to ensure compliance. Additionally, the IMO is urging that administrators, port authorities, and other stakeholders provide incentives for efficient vessels with low CII ratings.

What can vessel owners and operators do to improve a vessel’s EEXI and CII?

To improve a vessel’s EEXI, owners and operators should consider modifications such as engine power limitations, changing to more efficient fuel methods, hull form improvements, and upgrading to more efficient propellers. To improve a vessel’s CII, owners and operators should focus on increasing operational efficiency by planning routes to optimize environmental conditions, reduce time spent anchored and in port, and reduce or increase speed to reach the vessel’s most efficient operating speed.

How are the EEXI and CII relevant to Lenders?

The financing community has already focused on the carbon intensity of a vessel being financed. For example, many financial institutions in the shipping community are party to the Poseidon Principles and have already, on a voluntary basis, imposed requirements to reduce the carbon intensity of vessels they finance. As the EEXI and CII requirements come into effect, there will be a renewed focus in the financing community on the finance-ability of vessels that receive lower ratings and the collateral value of such vessels because of their age or lack of technological improvements to lower carbon emissions. Lenders may be hesitant to provide financing for upgrading older vessels due to the long-term uncertainty of how the vessels will comply with continually changing environmental standards. This uncertainty poses an increased risk to lenders who are particularly concerned with their long-term portfolio climate alignment scores under the Poseidon Principles. This emphasis on environmental sustainability and compliance with EEXI and CII metrics is already becoming apparent in higher demand and subsequent Worldscale rates for newer and more efficient vessels. This new dynamic will likely lead to two distinct classes of vessels: efficient vessels that demand higher rates, and older vessels who will need to either compete for limited upgrade financing or slow down their operational speeds to meet increasing EEXI and CII standards.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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