There have been many articles on the Carbon Intensity Indicator (“CII”). We first reported on this issue in February 2022. It’s worth reading the penultimate paragraph of that article as we correctly predicted the dilemma facing the industry as it seeks to adapt to a world where compliant CII ratings are going to be important.
Although 1 January 2023 is important, being the date when carbon intensity monitoring begins, the full impact may not in fact be felt until 2024 or later when “D” or “E” rated ships may need to comply with a Corrective Action Plan (“CAP”). The likelihood, however, is that it will become more difficult to trade ships that fail to attain a minimum “C” rating. The enforcement system remains murky but there are indications that the IMO will review the system again in 2026 and, to the extent that the industry has not self-regulated, they may take further steps such that non-compliant vessels may eventually become untradable.
Ship owners are now considering how to deal with the CII issue in their charterparties. BIMCO finally released their CII trading clause in November 2022. Those interested can read the clause and commentary on the BIMCO website.
The BIMCO clause is a framework. There are various stages. The first is for the owner to monitor and alert the charterer if the CII rating deteriorates from the agreed rating (likely in most cases to be the minimum “C” rating but not necessarily so). The second is for the parties to agree on a plan to correct the CII performance. There are other stages that deal with adjustment of the plan to correct the CII performance.
There are obvious problems with any clause that requires the agreement of the parties. What if they don’t agree? What if the charterers’ commercial requirements for the vessel don’t fit in with the owners’ desire to reverse any decline in the CII rating? We anticipate that the provisions will be unacceptable to many charterers as it may require them to alter their trading of the vessel to reduce fuel consumptions. The BIMCO clause does not transfer responsibility to charterers for the consequences of a failure to comply with the CII minimum standard, but it does enable owners to bring a claim against charterers for the losses caused by charterers’ failure to adjust their trading. That is very open-ended. It potentially exposes charterers to huge losses. “C” rated ships being delivered into long-term charters today may be redelivered with a “D” or “E” rating which may make that ship commercially untradable in the future. One can see the potential for disputes as the parties fight over who was responsible for the decline in the rating and who should bear the losses associated with that decline.
We will have to see how the industry reacts to the new BIMCO clause and to what extent it is modified in practice. We expect, however, that this area will be a fertile ground for the disputes of the future. As always, our team endeavours to remain ahead of the curve so that we can respond to these issues as they arise.