International shipping managed to exclude the industry from the Paris Agreement for climate change. However, the International Maritime Organization (IMO) has developed its own strategy to tackle the reduction of greenhouse gas emissions over time.
The shipping industry is one of the greatest contributors to pollution and carbon emissions on the planet. This is because most ships use oil that contains tremendously more sulfur than the typical automotive engine producing sulfur oxide emissions. These emissions cause respiratory symptoms and lung disease in communities around shipping ports, ocean acidification, damage to crops, and even drastic weather changes that trigger lightning storms along highly-trafficked shipping routes. According to the World Economic Forum:
By considering various factors, such as which ship classes, flag states (jurisdiction) and vessel operating phase (cruise, berthing, anchor and maneuvering) emit the most greenhouse gasses, the IMO strategy represents an effort of tackling gas emissions in a targeted and cost-effective way.
Three ship classes accounted for 55% of the total shipping CO2 emissions: container ships (23%), bulk carriers (19%), and oil tankers (13%). Similarly, six flag states (Panama, China, Liberia, Marshall Islands, Singapore, and Malta) account for 52% of CO2 emissions.
According to operating phase graph, cruising accounts for most CO2 emissions across all ship classes, while maneuvering accounts for the least. Note that tankers have significantly higher emissions in berthing phase. Certain emission-reduction alternatives (i.e. shore power) could reduce emissions from tankers in this phase.
Speed as an emission factor?
One of the reasons for the increase in carbon emissions is average ship cruising speeds. While average ship cruising speeds remained largely unchanged, according to The International Council on Clean Transportation reports (2013-2015 period), the largest oil tankers and container ships (capacity over 14,500 TEU) did speed up. As shown below, the largest oil tankers increased their cruising speed by nearly 4% while the largest container ships increased their cruising by more than 11%. As these ships speed up, they cover greater distances in a shorter amount of time which results in consuming more fuel and emitting more CO2.
IMO 2020’s sulfur restrictions were announced in 2016 with a clear implementation date and mandate. Ships are obligated to use marine fuels with a sulfur content of no more than 0.50%S against the old limit of 3.50%S. The Emission Control Areas (ECAs) will remain at the 2015 standard of 0.10%S content. These restrictions are affecting crude oil producers, traders, ship owners, refiners, insurance companies, logistical businesses, banks…Hardly anyone is left out!
Three ways to meet the IMO 2020 regulation
1. Buy cleaner fuel. Ships can make the switch from high-sulfur fuel oil (HSFO) to marine gas oil (MGO). This is the easiest and quickest solution, but will likely lead to a marine gas oil fuel shortage if most carriers choose this option. MGO is approximately 50 percent more expensive than HSFO. The majority of carriers will use IMO 2020 compliant fuels to meet legal requirements since scrubbers are expected to be installed at approximately 10-12% of the global vessel capacity while LNG technology is still in its early stages.
2. Install scrubbers. Vessels can continue using HSFO and install scrubbers to purify exhaust gas. Installing takes 4-6 weeks and is performed by a limited number of manufacturers costing between $5-10 million, depending on the size of the vessel. Few questions are emerging such as the disposal of the sludge produced by scrubbers, the payback period (i.e. heavier, less efficient ships that use more fuel per day have a faster payback period) and even open-loop scrubbers bans. Before planning retrofitting scrubbers, factors like vessel structure – does vessel’s structural design allow installation of exhaust gas scrubbing equipment? – vessel age and size need to be considered by the shipowners.
3. Order liquefied natural gas ships. Ships that run on liquefied natural gas (LNG) will drastically decrease pollutants, however, LNG tanks take up to 3% percent of a vessel’s TEU slots, whereas scrubbers occupy at most 0.3%. The reduction of ships’ TEU capacity is the major drawback of this option.
It’s not all sunshine and roses when it comes to implementation of IMO 2020. Enforcement of the IMO 2020 is the responsibility of the state parties – this includes both flag states in whose registries ships are flagged and port states who are obliged to enforce IMO 2020 within their territorial waters). What if there is no compliant fuel oil available at a port? Shift to low sulfur fuel may result in a shortage of compliant fuel and ships that have not been fitted with scrubbers or are not equipped to use alternative fuel such as LNG, this may result in sudden non-compliance. It is expected that ports will grant waivers in the initial months of IMO 2020 implementation, as long as the shipping companies can demonstrate that best efforts are made to comply.
Bloomberg reports show that in Rotterdam Port preps are underway to use a large, unmanned flying vehicle capable of traveling miles from the shore to detect emissions. These drones will fly into plumes of smoke created by vessels, collecting real-time data that is then used to calculate how much sulfur is in the ship’s fuel. The local enforcement authority calls it a ‘super drone.’
Sharing the Costs
No doubt, costs will rise but the main question is who will bear the additional cost? For context, an Asia to North Europe round trip could cost an additional $1 million once the new regulations kick in.
The Boston Consulting Group infographic shows IMO 2020 affects all players, from shipping liners and freight forwarders to cargo owners and consumers.
- Shipping liners recognized that all-in pricing model makes it difficult to recoup the costs of complying with IMO 2020. With this is mind, separating bunker costs from their base rate and applying a fuel surcharge (referred as a bunker adjustment factor or BAF) seems to be a way out.
- Freight forwarders are ensuring that all client contracts incorporate protective clauses. This enables adjusting rates on the basis of IMO 2020 surcharges thus reducing exposure to fee volatility.
- Large cargo owners are in the best position to negotiate all-in rates (without explicit fuel surcharges) or favorable BAFs because liners cannot afford to lose business.
- IMO 2020 ultimately influences consumer goods prices. However, the impact is likely to be small for individual products – according to an analysis done by “Flexport”, the cost of shipping 40-inch TV sets from Shanghai to Los Angeles will increase by $0.5 per unit.
Impact on e-commerce
If unprepared, IMO 2020 can have far reaching impact on any Amazon (e-commerce) project. Imagine a situation in which slow – steaming could be recognized as an additional way of fighting gas emissions (slow steaming = longer transit times). Now imagine you are already running out of stock and those extra couple of days, caused by slow steaming, will probably hurt your sales and overall reputation.
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