Pricing Carbon at Sea: An Econometric Investigation of Annual Efficiency Ratio and Charter Rates Under CII Regulation

Abstract

This thesis investigates whether carbon efficiency, measured by the Annual Efficiency Ratio (AER), is priced into time-charter rates in the dry bulk and container shipping markets. The analysis is driven by a dual imperative: the tightening regulatory landscape, exemplified by the International Maritime Organization’s Carbon Intensity Indicator (CII) introduced in 2023, and the growing market scrutiny of vessel emissions. Despite these pressures, there is limited empirical evidence on whether operational carbon performance significantly affects charter rates and vessel earnings. Leveraging Clarkson’s SIN dataset of over 1,200 charter fixtures, the study applies a dual-method empirical approach. First, year-specific Ordinary Least Squares (OLS) regressions estimate the relationship between AER and time-charter rates from 2022 to 2024, controlling for both vessel characteristics and macroeconomic indicators. Second, a Difference-in-Differences framework utilizes the 2023 CII implementation to isolate causal effects, comparing changes in charter rates between more and less environmentally efficient vessels before and after the CII publication. This methodological duality provides both correlational and quasi-causal insights. The findings of this study reveal an emergent, but uneven market response to operational efficiency metrics. In the container segment, the analysis reveals no consistent relationship between AER and charter rates, indicating that contractual structures such as time-charter fixtures may not place significant weight on operational carbon efficiency. By contrast, the dry bulk market exhibits statistically and economically significant penalties for vessels with high AER values following the CII regulation—penalties which are most prevalent within the Handysize and Handymax vessel segments. The results indicate an early formation of carbon discounting in specific segments, aligned with increasing sensitivity to fuel cost exposure and regulatory compliance risk. This study contributes to maritime economics by evidencing how environmental performance can begin to shape asset-level pricing and fixture agreements. It offers practical guidance to shipowners, charterers, and policymakers navigating the intersection of freight economics and climate governance and regulation. While operational efficiency is not yet a universal price determinant, its role is evolving from compliance burden to commercial signal.