How to decarbonize shipping

If global manufacturers and retailers are to reach their goals of net carbon neutrality by 2050 it will be crucial that shipping lines also decarbonize their operations. However, the industry is presently undecided on the best way to reduce its dependency on fossil fuels.

The momentum towards decarbonization in the logistics industry – not just shipping – is gathering pace as an increasing number of service providers are being prompted by their customers to demonstrate their commitment to net zero operations. According to Maersk, around 200 of its largest customers have set or are setting science-based or zero carbon targets for their supply chains and, to be able to meet these targets, out-sourced transport operators, not least shipping lines, need to play their part.

However, despite years of discussion, the shipping industry is undecided about how it should go about reducing the levels of carbon emissions it generates – about 2% of the world’s total. Whilst there has been talk about including shipping within Emissions Trading Systems, such as those in operation in the EU, many industry executives would prefer a Carbon Tax or Levy approach.

In an interview with Bloomberg, Soren Skou, Chief Executive of Maersk, suggested that a $150 a ton carbon tax should be levied on the shipping industry bringing the cost of fossil fuels more into line with the cost of renewables. The purpose of the tax would be to create revenues which would subsidise and promote the use of cleaner but more expensive fuels as well as to support developing countries in their efforts to mitigate climate change. This suggestion is an extension of an earlier proposal presented to the International Maritime Organization by two Pacific islands – the Marshall Islands and Solomon Islands – for a $100 a ton tax on greenhouse gas emissions. This will be discussed, alongside other proposals, at the IMO’s Marine Environment Protection Committee in June, 2021 in London ahead of the COP26 meeting.

However, Maersk’s view is certainly not representative of the entire industry. Speaking after the Maersk announcement, MSC’s Chief Executive, Soren Toft, reiterated his support for an alternative proposal of a much smaller $2 a ton carbon tax which would provide $5 billion for research and development into new fuels. This would be undertaken by an IMO-governed, ‘International Maritime Research and Development Board’ (IMRB).  ‘Despite our huge investments into our fleet and operations, scalable long-term solutions simply do not currently exist for us to deploy on our ships. There is a gap in R&D to bring these alternative fuels and technologies to the market and the industry wide research fund will help us achieve the UN IMO’s policy targets.’

Another major difference in approach by these two shipping lines is over whether to introduce tried and tested lower carbon emitting fuel technologies, such as LNG, or take a gamble on new technologies, such as ammonia, which would require significant subsidy; the former strategy is that being adopted by MSC and the latter, Maersk. This relates closely to their public pronouncements on the best policy to encourage the reduction of carbon emissions. One advocates using and improving the only existing fuel technology which can significantly reduce emissions at this time, already available at scale, whilst the other believes that by choosing a sub-optimal route to carbon reduction now would only consolidate investment in old technologies and make it harder for the industry to make the green transition. Both shipping lines have made commitments to back up their words – MSC has chartered 11 LNG-fuelled ships whilst Maersk has placed an order for an ammonia-powered ship which will be delivered in 2023.

Other shipping lines seem to favour MSC’s pragmatic approach. CMA CGM has already ordered six 15,000 TEU dual fuel LNG vessels, the first of which is due to be delivered by the end of the year. By the end of 2022 it will have 32 LNG-powered containerships in operation, which it claims will generate 20% fewer carbon emissions than existing technologies as well as providing major improvements in air quality. Hapag Lloyd, meanwhile, has ordered six 23,500 TEU dual fuel LNG vessels in a $1 billion investment.

A carbon levy of the magnitude suggested by Skou would provide Maersk’s strategy with a considerable boost – whilst negating the advantage of bunker fuel/LNG. If Maersk’s faith in new technologies is rewarded, it would then provide it with a huge head start over rivals when costs eventually decrease, leaving competitors needing to renew their ships before they have paid back their investment.

The fundamental difference of opinion between Maersk and other shipping lines revolves around the speed of ‘creation destruction’ (a term coined by academics Adner and Kapoor). It is usual for innovative technologies to exist in parallel with old technologies before they are abandoned once the necessary innovation ‘eco-system’ has been developed and scale achieved. In what might be called ‘usual times’ it is only when old technology has no more room for improvement and when the infrastructure that supports the innovation is in place that substitution can start to happen in a meaningful way.

The problem for companies making investments is that it is difficult to judge how quickly infrastructure or ecosystem issues will be addressed, especially as the dynamic is continually shifting. Not only are there business investment and technological developments to take into account, but also government intervention. Subsidies for green energy initiatives, which may kick start a technology (or skew the market depending on your perspective) depend on public policy and can vacillate depending on the administration and thinking of the time.

The low risk strategy – in commercial terms – is that being employed by MSC, CMA CGM and Hapag Lloyd. However, it is no longer publicly acceptable just to measure outcomes solely in financial terms. ‘Old’ technologies such as conventional bunker fuels and LNG, with all the advantages that they have in terms of infrastructure and cost, will dominate for years to come unless there is intervention in the market along the lines suggested by Maersk. In order to meet carbon reduction targets being set by governments, many would argue that there just isn’t the time to adopt a wait-and-see policy. However, even this is a simplification of the difficult investment decisions which shipping lines face. Even with government support, there is no guarantee that the carbon-neutral technologies favoured by Maersk would be an appropriate substitute. Millions of dollars could be wasted backing the wrong option – whether ammonia, hydrogen or even electric – whilst LNG, a less carbon emitting alternative, is ignored.

There is also an added complication. The new Minimum Global Corporation Tax Rate being proposed may well be extended to shipping lines which have in the past enjoyed a tax regime specific to the industry and based on tonnage rather than profits. This will mean that there will be a greater degree of financial uncertainty involved which could impact on investment in new, greener ships. Whilst many are looking askance at the huge profits presently being made by global shipping lines, there is no doubt that they will facilitate and accelerate investment in cleaner technologies.

At the end of the day, this additional levy will, of course, have to be borne by all the supply chain actors. Shipping lines will no doubt attempt to pass these costs on to their customers who would then take the decision as to whether to pass them on to the final consumer. Who bears the costs will only be determined by the state of the market at the time, although it has to be said that shipping lines have been very effective at passing on fuel surcharges in the past. Maersk argues that due to its huge economies of scale even such a large rise in the cost of fuel would only result in a small increase to the price of an individual item for the end consumer. A pair of training shoes, for example, may only increase in price by a few cents. Unfortunately, this argument has been used to justify tax increases of all types over the years, the problem being that this is not the only ‘green tax’ being suggested or levied at the moment. Governments will have to be upfront with consumers that the cost of food, clothes, furniture, electronics, fuel and anything else moved globally will have to increase if climate change targets are to be met.

What is clear that the shipping industry will have to coalesce quickly around a single carbon emissions strategy or risk one being imposed upon it. Under pressure from their electorates, governments are determined to address climate change and are unlikely to put up with a protracted discussion process as the IMO attempts to achieve consensus amongst its members. If patience runs out, an administration, such as the US, is likely to impose its own regulations which the entire global industry will then have to adhere to, like it or not. [/pc-pvt-content]