Navigating Green Shipping: Understanding the Implications of the Carbon Intensity Indicator | Denmark

Camilla Søgaard Hudson and Johannes Grove Nielsen of Bech-Bruun explore the implementation of the Carbon Intensity Indicator (CII) as a measure to reduce greenhouse gas emissions in the shipping industry and the associated challenges, particularly for shipowners lacking operational control under time charters.

Published on 17 July 2023
Camilla Søgaard Hudson, Bech-Bruun
Camilla Søgaard Hudson
Johannes Grove Nielsen of Bech-Bruun
Johannes Grove Nielsen
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Climate change initiatives from the International Maritime Organization (IMO) and the EU have aimed to reduce greenhouse gas emissions in the shipping industry. The CII is one such measure. However, under time charters, the CII rating poses new challenges as shipowners lack operational control. The Baltic and International Maritime Council (BIMCO) has introduced a CII Clause to assign contractual responsibility for compliance under time charters, but there are valid concerns about its fairness.

An Operational Measure – the CII Rating

The CII is an annual rating system for ships above 5,000 gross tonnage (GT). Ships receive a rating from A to E each year, with E being the lowest. If a ship receives an E rating for one year or a D rating for three consecutive years, a corrective action plan must be implemented.

The CII measures a ship’s efficiency in terms of CO₂ emissions per cargo-carrying capacity and nautical mile. The yearly CII rating is calculated based on reported data from the Data Collection System (DCS), and ships are assigned a rating accordingly. Achieving or maintaining each rating will become increasingly more challenging by 2030, and the first ratings will be issued from 2024, based on the data from the preceding year.

In most cases, efforts to improve the CII rating involve either adopting slow steaming practices or optimising fuel consumption by extending the planned voyage.

CII and its Impact on Charter Parties

The CII rating is based on how efficiently a ship transports cargo, making it dependent on the vessel’s trading or usage patterns. For example, a ship that spends more time on demurrage while still burning fuel may receive a lower CII rating compared to a ship that has not been on demurrage. Similarly, a ship choosing to deviate for a longer voyage due to tailwinds and favourable currents will sail longer on the same fuel consumption and thereby receive a better CII rating.

If a ship achieves a D or E rating, the shipowner is responsible for adjusting the Ship Energy Efficiency Management Plan to ensure a minimum C rating.

How Serious is the Problem?

The potential losses resulting from a lower-than-expected CII rating should not be underestimated.

Many banks and financial lenders have a focus on green loans and set different thresholds for lending rates based on CII scores. If a shipowner fails to maintain a decent CII score for their fleet, it can lead to less favourable loan conditions and put pressure on liquidity.

When a shipowner charters out the majority of its fleet, they lose control over the operational usage of those vessels, including their CII rating. If chartered vessels experience unfavourable weather conditions or are inefficiently operated in terms of fuel usage, the vessels’ CII rating may be negatively impacted.

This situation can have a significant financial impact on the shipowner. A reduced CII rating may lead to higher interest rates and difficulties in securing financing for new engagements. Furthermore, the lower CII rating may also decrease the value of the vessels, as they will be more expensive to finance and hence it will have a direct impact on the value of the assets themselves for going concern purposes as well as in a second-hand sale situation where the vessels are likely to be more expensive to finance.

The CII Clause – a Properly Balanced Approach?

Shipowners can partly mitigate these consequences by reaching an agreement with the charterer regarding the attainment of appropriate CII rating targets.

To facilitate this, BIMCO released a CII Operations Clause For Time Charter Parties 2022 (the “CII Clause”) in November 2022, intended for use in standard time charter parties. The CII Clause assigns the risk and responsibility for a vessel’s CII rating while under a charter party and allows the owner to intervene in the vessel’s nautical control if these targets are not met.

Essentially, the CII Clause places most of the responsibility for achieving the agreed CII rating on the charterer. Additionally, the CII Clause includes the following indemnity clause that provides further protection for the owner:

  • “(j) The Owners shall be entitled to claim from the Charterers any losses, damages, liabilities, claims, fines, costs, expenses, actions, proceedings, suits or demands suffered by the Vessel and/or the Owners which have been caused by any breach by the Charterers of their obligations under this Clause.”

In the explanatory notes, it is stated that the clause allows for claims of general damages for breach of contract, provided they can be proven as resulting from the charterers’ failure to fulfil their obligations under the CII Clause.

"Many disputes may arise concerning claims for losses stemming from reduced CII ratings."

While it may be reasonable for the charterer to bear most of the losses resulting from a decreased CII rating, particularly if the charterer is at fault, some observers had anticipated a more balanced clause from BIMCO. For instance, the clause lacks mechanisms to address scenarios that may impact a CII rating, even if the vessel had been operated by the owner itself and are beyond the charterer’s control.

In addition, clause J in the CII Clause is very wide, and it must be established, in all important maritime jurisdictions, how wide it is under local law. For instance, can a charterer be held liable for the shipowners’ expenses relating to higher interest rates from its banks, if such increase is a direct result of a lower CII rating? Or what about a lawsuit from a recent green fund investor in a shipowner who wants its money back because the shipowner is no longer considered green?

As a result, it is likely that many disputes may arise concerning claims for losses stemming from reduced CII ratings. Ultimately, it will be determined by future cases in prominent shipping jurisdictions to establish the extent of liability for which the charterer will be held accountable under the CII Clause.


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