The global shipping industry is the engine of global trade. With 90 per cent of goods travelling by sea, it remains the fundamental mode of transportation from a macroeconomic perspective.
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Shipping accounts for just over 2 per cent of global emissions–equivalent to Germany, the world’s sixth most greenhouse gas-intensive nation. Despite this, it sits outside of the Paris Agreement, and is regulated by its own governing body, the UN-mandated International Maritime Organisation (IMO).
The regulatory framework
Pressure is mounting on the industry to contribute its fair share to the global ambition of the below-2°C future, laid out in the Paris Agreement. For its part, the IMO has pledged to put in place a strategy to reduce greenhouse gas emissions for the industry from 2023.
What this regulation will look like won’t be known until at least April 2018. Regulators are erring on the side of caution, explaining that monitoring and reporting on fuel consumption will gather data for “decision-making on what further measures, if any, are needed”. The face and teeth of future regulation is uncomfortably uncertain given shipping’s emissions profile.
Despite the uncertainty, we join the majority of the shipping industry in advocating for a solution created by the industry, for the industry. A patchwork of national and local regulation will not suffice for an industry as broad and as interconnected as our own. A patchwork approach will only increase the regulatory burden on companies and disincentivise their cooperation with an industry-wide decarbonisation ambition. However, while the IMO deliberates, forward-looking industry leaders and influencers can and must act.
A business-first pathway to decarbonisation
Timing is critical. Shipping must reduce its emissions by 70 per cent from 2008 levels by 2050 to effectively contribute to a below-2°C future. In the current business climate—amid a recovery from the industry’s most persistent downturn in living memory—decarbonisation may seem daunting. But demand is growing from customers, stakeholders and supply chains for a tangible decarbonisation pathway to be laid out and adhered to.
A robust pathway would give focus to the collective work of the industry, and would outline clear objectives and measurement mechanisms to ascertain success. It needs to be ambitious and challenging, and ideally, support for the pathway must be unequivocal.
At Carbon War Room, we are collaborating with partners across industry to support the development of this roadmap. There is evidence that key stakeholders are already acting. For example, our work as part of the Global Maritime Forum is helping to shift mindsets, as companies and NGOs of all shapes and sizes come together to plan a decarbonisation pathway.
By recognising the role of innovation in shipping and the opportunities it presents, every sector, supplier and corporation can afford to be ambitious. From digital innovation, which is reshaping the way companies do business and increasing cost efficiencies, to new fuel developments that will be able to keep the industry running in a more sustainable way, there are a plethora of means with which decarbonisation can be achieved profitably.
Collaboration is key as we look to broaden and accelerate the development of supporting tools and platforms. Meanwhile, high-level, industry-led forums will build an appetite for ambitious emissions reductions targets that are based in scientific rigour and rationale.
All of these developments, if enacted over the medium-to-long term, will help us realise a truly profitable, low-carbon shipping industry by 2050. By deploying an array of solutions, momentum will continue to grow.
Fuelling innovative change
A transition off of fossil fuels, including LNG, is necessary sooner rather than later. We believe this transition can be managed through effective planning and the staged development of the infrastructure required to proliferate renewable and low-carbon fuels across the market. An increase in capital flow towards research and development is also crucial.
In the short term, there are proven physical and digital technologies on the market today that—when used individually or in tandem—can realise significant fuel efficiencies. These vary from physical alterations like wind-assisted propulsion and air lubrication, to changes in performance management, like using software to optimise the loading, speed and route of a ship. These measures, available today to owners and operators, can affect immediate environmental and commercial benefits.
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With a 30-year lifespan, vessels built today may need to operate with close to 90 per cent more efficiency than on delivery, or risk losing their asset value.
Forward-thinking finance
The financial backing of the industry can be decisive in incentivising and driving both energy efficiency and the low-carbon technology of the future. For charterers and financiers, ambitious policy changes to reassess which ships get hired or which projects get financed should be informed by the win-win of reducing greenhouse gas emissions by lowering fuel-costs. However, while charterers transporting 20 per cent of the global shipped tonnage do commit to using vessels with higher design efficiency, few banks assess climate risk associated with the ships they finance.
Banks have a wider role to play. By working with the Carbon Pricing Leadership Coalition and Global Maritime Forum, we are helping major global financial institutions understand and mitigate the risks decarbonisation poses to their accumulative $355.25 billion shipping loan book. These risks will emerge in line with IMO regulation—as early as 2023—and in line with the global shift in demand for the transportation of commodities like coal and oil, as Paris Agreement countries work to drive down their emissions.
The reality is that a new-build vessel being financed today will, in likelihood, need to compete under a carbon price before its first five-year drydock, when modifications can be made. And with a 30-year lifespan, vessels built today may need to operate with close to 90 per cent more efficiency than on delivery, or risk losing their asset value. Banks should factor these circumstances into lending decisions and pre-empt the material risk of potential write-downs and conversions to liabilities.
Bringing it all together
To realise decarbonisation within a 2°C context, shipping must pursue a multifaceted approach. We must embrace disruption—as other industries have—and we must engage with stakeholders from across shipping’s sectors to pursue ambitious, transparent, achievable goals together. These goals should not be informed by rote adherence to regulatory GHG emissions controls. Rather, they should reflect an industry-led commitment to a vibrant, profitable and decarbonised future.
Accelerating these ideas requires strong leadership, an innovative spirit and a preference for transformative shifts. By taking a bold approach to the adoption of market-ready solutions, and by favouring investment in those with promise, we can build the momentum required to make this change. There is no time to falter: shipping can and must forge its own path towards a profitable, low-carbon future.
Maurice Meehan is Director of Shipping Operations at Carbon War Room. This article was written for Eco-Business.
