Environmental labelling of vessels and emission reporting

Environmental labelling schemes aim to encourage a change in supplier and consumer behaviour using market signals without resorting to explicit controls and regulation regarding greenhouse gas (GHG) emissions and other environmental concerns (Hermann et al., 2015). The schemes assign a rating or label to shipping companies or vessels and are meant to highlight 'greener' options for transporting goods. These labels can turn environmental performance into a competitive advantage. Companies may be incentivised to participate if they are included in databases of 'green' shipping companies, incur lower port fees where schemes are recognised, and gain discounts on some maritime services.

Existing schemes are privately managed and evaluate performance with respect to varying criteria such as GHG emissions, energy efficiency, environmental procedures, operations and recyclability of vessels. Private standards to mitigate GHG emissions in shipping emerged as a result of 'regulatory inertia' in the industry and the exclusion of international shipping from the Paris Agreement (Scott et al., 2017). There is a move towards greater regulation in the future. In June 2021, International Maritime Organisation's (IMO) Marine Environment Protection Committee (MEPC) 76 approved technical and operational measures to reduce the carbon intensity of shipping. Effective from 2023, a new regulation will require ships to calculate their Energy Efficiency Existing Ship Index (EEXI). A rating scheme will also indicate the reduction in carbon intensity from the 2019 reference year of ships above 5000 gross tonnage with incentives for ships to improve performance. Separate guidelines on the calculation of the Carbon Intensity Indicator (CII) are expected to be available in 2022.

To date, neither market forces alone nor the regulatory procedures adopted by the IMO are expected to be sufficient to ensure that the shipping sector decarbonises to meet the Paris Agreement goals. Furthermore, voluntary labelling schemes have a limited impact when compared with regulatory measures. The success of these private initiatives depends on their ability to persuade stakeholders (ship owners, charterers, ports, etc.) to implement the standards, provide incentives for high performers, and use the information in decision making (Scott et al., 2017). The numerous private voluntary schemes available mean that shipping companies can participate in multiple schemes. There is no simple way to compare and identify those with better environmental performance (Hermann et al., 2015; Panagakos et al., 2019).

There are several market failures in the shipping industry that limit the uptake of energy-efficient technologies. Split incentives refer to the fact that those making investments in clean technologies - ship owners - are often not the ones gaining the benefits (fuel savings or lower port fees) of the upgrades  - the charterers. There is also asymmetry in the information available to different parties due to inconsistent data collection and reporting requirements that make decision making difficult (Lonsdale et al., 2019). Any assessment of emissions relies on the accuracy and availability of data. For the impact of environmental labelling to be significant, the issue of split incentives needs to be addressed (see Costs section), accurate data must be readily available, and the calculations of various environmental indicators should be streamlined and robust enough to accurately describe the environmental performance of ships and shipping companies.

Emissions reporting: Increasing availability and accuracy of data

While rating schemes are not currently regulated, there are initiatives from the European Union (EU) and IMO in place that aim to improve maritime emissions reporting. However, these regulations are not effective at reducing emissions on their own. The Monitoring Reporting and Verification (MRV) Regulation, introduced by the EU in 2015, aims to provide accurate CO2 emission information for large ships (exceeding 5000 gross tonnage) using EU ports. By making the information public, it hopes to incentivise energy efficiency improvements. The IMO Data Collection Scheme (DCS) was introduced in 2018 and also applies to ships above 5000 gross tonnage. However, it does not make the results publically available. It also uses a different indicator for energy efficiency (calculated using deadweight) than the MRV Regulation (calculated using mass of cargo carried) which underestimates emissions (Panagakos et al., 2019). The IMO DCS is expected to have a lesser impact due to the limited transparency and monitoring procedures. While the MRV Regulation addresses some market failures like availability of information, it alone is not expected to reduce emissions or incentivise efficiency improvements as split incentives still exist. The type of reporting required does not offer adequate information on the fuel consumption patterns for charterers to act on (Panagakos et al., 2019; Lonsdale et al., 2019).

Despite shortcomings and limited evidence of decision making based on these reporting initiatives alone, the move towards greater accuracy and availability of GHG emissions and energy efficiency data is an important one (Lonsdale et al., 2019). The MRV data, for example, comes from an emissions monitoring plan, which must be approved by an accredited verifier. The indicators are checked for conformity and there is a risk of sanctions and expulsion for non-compliance. Access to such data can facilitate rating schemes that evaluate performance and allow the setting of industry targets. Transparency through public access and active monitoring, as required by the MRV Regulation, could provide the information necessary for carbon constraints to be set. For example, reducing EU shipping emissions by 40% (and, if feasible, 50%) by 2050 compared to 2005 levels is a stated goal of the MRV Regulation (Panagakos et al., 2019).

Robustness of environmental labelling schemes and data

For environmental labelling to be most useful, it must consider all constituent factors of maritime emissions and allow global comparisons between shipping companies. Data must be available for all freight activity around the globe and cover ship design and operations. Though publically available, the MRV data is not globally representative. Conditions and requirements are different in other parts of the globe, and the geographic restrictions of the EU regulation introduce significant bias in the published data. If applied outside of the EU, a study comparing the MRV estimates with actual data for the same ships finds that they underestimate non-EU emissions by 38.4% (Panagakos et al., 2019). Although effective at ship-level, the IMO's mandatory Energy Efficiency Design Index is solely concerned with design efficiency rather than operational efficiency and is only applicable to ships built after 2013, which means that merely an estimated 15% of the shipping fleet would have been subject to the regulation by 2020 (Scott et al., 2017). The IMO EEXI regulation, adopted June 2021 and effective from 2023, applies to a greater portion of the international fleet: all ships above 400 gross tonnage.

None of the existing carbon intensity indicators alone are sufficient to adequately support an environmental labelling scheme used for benchmarking the environmental performance of a ship or company. Even the demand-based Energy Efficiency Operational Indicator (EEOI) stipulated by the MRV Regulation and defined as emissions per unit transport work has its shortcomings. Critics of the single indicator point out that there are several influencing factors on emissions, such as load, sea and weather conditions that lie outside the direct control of a ship owner. A grid of fuel consumption-speed curves for different sea conditions (drafts, wind, etc.) would be needed to understand the energy required for a ship in a range of environments and cannot be substituted by an average indicator. A representative test cycle could be developed to compare the technical efficiency of a certain category of vessels under standard conditions using real-world test data and computational modelling (Panagakos et al., 2019). This would help address industry concerns that some ratings may be too high level and misleading if overly simplified (Lonsdale et al., 2019).