Charter Parties Holding Back Industry Decarbonization Efforts

[By: Nautilus Labs]

Nautilus Labs, the technology partner pioneering the decarbonization of the ocean supply chain, and BIMCO, the world's largest international shipping association, today released a white paper imploring the maritime industry to rethink prevailing charter party frameworks.

The white paper explores how current ways of working in the shipping industry have entrenched “sail-fast- then-wait” behaviors, resulting in major inefficiencies that produce excess emissions and increased costs. Using data from live charter agreements, the white paper demonstrates that this “sail-fast-then-wait” behavior can produce substantial excess fuel consumption and emissions even on a single voyage.

With regulations such as the Carbon Intensity Indicator (CII) and the impending European Union Emissions Trading Scheme (EU ETS), there is an urgent need for the industry to address the inefficiencies causing excess greenhouse gas emissions. The white paper outlines the potential for 15-20% of the industry’s emissions to be eliminated by changing current approaches to charter party frameworks without a negative impact on fleet capacity. For an industry that emits approximately 1 billion tonnes of carbon emissions annually, these savings equate to approximately 150-200 million metric tonnes of emissions and tens of billions of dollars in fuel.

To hasten emissions reduction, the white paper proposes key changes in charter party terms to drive better alignment of incentives between owners and charterers, removing the focus on claims and encouraging collaborative ways of working towards vessel efficiency. This new approach to charter parties and dynamic performance tables is now possible due to advances in machine learning software and high- frequency data from ships. With these foundational technologies in place, the industry can then optimize berth planning to reimagine “first-come, first-served” port operations that drive operators to race to queue up for a berth, leading to fuel waste and unnecessary emissions.

“In the age of decarbonization, traditional key charter party clauses are no longer fit for purpose and need to be reviewed to address these systemic inefficiencies,” said Grant Hunter, Director of Standards, Innovation and Research at BIMCO. “BIMCO is committed to helping our industry achieve its Net Zero targets. By realigning incentives between owners and charterers and removing the barriers to collaboration, we can ensure we’re all on course towards a more sustainable future for the maritime industry.”

“Charter party agreements create misaligned incentives between owners and charterers; with financial penalties at the center of their relationship, a zero-sum dynamic emerges,” explained Matt Heider, CEO, Nautilus Labs. “Voyage charters do not incentivize optimal arrival times. Instead, they encourage sail-fast- then-wait behavior or require uneconomic static speeds. On the other hand, time charters often result in suboptimal performance: owners are not incentivized to make proactive improvements to vessel efficiency, while charterers are constrained by static speed clauses. Across all charter party agreements, the need for more data-driven collaboration is core to our industry achieving Net Zero.”