The Shipping Forecast: Regulation and innovation on the horizon
This is one of the most challenging sectors to decarbonize, but with real financial consequences without change.
☁️ TL;DR
If shipping were a country, it would be the world’s eighth-biggest emitter of CO2. Climate change is already creating liabilities for the industry, and new aggressive maritime regulation will further increase costs. Shipping companies need to proactively look for ways to future-proof their fleets, or risk not being able to recoup their investments.
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🗺️ Firstly, what’s shipping got to do with me?
Good question. As individuals, we give little thought to shipping in comparison to other modes of transport, like cars, planes, and trains.
But shipping plays a large backstage role in the lives we lead, carrying everything from food to clothes to oil and raw materials around the world. 90% of the world’s traded goods are carried by sea at some point in their journey, and volumes are rising. Maritime trade is set to triple between 2020 and 2050.
Also, nearly 2 million people worldwide are directly employed on ships, whilst maritime activity also supports considerable other economies including shipbuilding, ports, and logistics. There are a lot of flow-on effects!
🚢 How does shipping contribute to climate change?
Shipping is one of the last, hard-to-abate sectors along with aviation, steel, and cement. Hard-to-abate emissions are those which are either prohibitively costly or impossible to reduce with currently available technology.
So whilst other sectors face a challenge of scaling identified solutions (think Electric Vehicles for the automotive industry), shipping is a sector where we have yet to exactly crack what the solutions will be.
The issues:
Today large ships run on so-called “bunker fuel” which is literally made of leftover dregs from refining processes. This incredibly nasty stuff releases ‘Black Carbon’ (tiny black particles of soot) into the environment
Shipping represents 2.9% of total greenhouse emissions including 30% of total global Nitrous Oxide emissions, which has 300x the warming potential of carbon dioxide
By 2050 the industry’s emissions could be 30% higher than they were in 2008
Electrification just isn’t an option for seas, because vessels need to travel thousands of miles, and weeks at a time, with no means of charging
🌊 How is climate change creating financial liabilities for the shipping industry?
There are approximately 100,000 commercial vessels worldwide, and they face serious headwinds.
🧭 Firstly, operations are being disrupted.
Turbulent weather is disrupting shipping routes and causing longer, more expensive journeys: ship fuel spiked to a historic $1,000/ton last year so travelling additional distances is
There’s a greater risk of cargo loss due to extreme weather events like typhoons: 3,000 containers literally fell overboard in 2020 carrying high value items like smartphones
Damage to vessels is also increasing: bad weather accounted for one in five losses in 2019
Sea-level rise is impacting port terminals like Itajai, Brazil, where in 2017, the floodwaters produced currents strong enough to prevent ships from berthing. The majority of ships bunker in <10 ports around the world, so damage to ports creates serious disruption and backlogs
Source: Allianz Safety & Shipping Review 2020
📋 Secondly, a whole lot of aggressive, costly regulation is now in play.
As of January 2023, the International Maritime Organisation (IMO) made it mandatory for all ships to report their annual carbon intensity indicator (CII). Ships are graded A-E depending on their pollution levels, and any ship rated D or below must present plans for improvement
Another IMO regulation is that the carbon intensity of ships must be reduced by 40% by 2030 compared to 2008 standards. The IMO itself is under pressure to increase its ambition, because it's currently at roughly half the level of what the Paris Agreement mandates
In addition, by 2027, shipping companies dropping goods at EU ports will need to pay a carbon tax on every tonne they emit. With carbon prices hitting €100 ($105) per tonne, that is the equivalent of another 10% on fuel prices based on the cost above
The World Bank is also looking into a carbon levy for shipping companies, with the revenues used to help countries less able to adapt alone to climate change or shipping regulation
📦 Finally, customers are getting demanding.
Major retailers like Amazon, Ikea and Unilever, have signed a pledge to only move goods on ships using zero carbon fuel by 2040
They are already demanding that some of their goods are only transported on ships rated A-B or have certifications in marine pollution prevention
💳 All of this is adding up to an expensive problem for ship-owners.
A new VLCC (Very Large Crude Carrier, the largest type of oil tanker) can be bought today for around $100 million. This is usually funded through an 80/20 combination of debt (provided by banks or private equity) and equity financing (provided by ship owners or investors). Investment is mostly recouped through the sale of cargo space.
VLCCs have a lifespan of 20-25 years, and the average age of ships is currently 10.1 years, meaning they should be around for at least a decade.
But the incoming regulation is about to make many ships unusable in their current format, or making it harder to sell ships with poor CII ratings. This is throwing the traditional investment plans out of the porthole.
⏩ The takeaway?
Shipping owners need to move fast to protect their revenues and secure business long-term. So what options are available for them? Firstly, upgrading their existing ships and operations. And secondly, looking into ships with design innovations, to future-proof their portfolios.
👀 Coming up…
Diving into some of the solutions in development for the maritime industry, and an interview with Alisha Fredriksson, CEO of Seabound, to discuss how carbon capture devices will be a crucial part of the solution.