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Zero-carbon shipping will double freight rates

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Shippers should prepare for 100 percent hikes in freight costs in pursuit of global climate change goals, delegates at an International Chamber of Shipping conference were warned earlier this week.

Lord Turner, chair of the U.K.’s Energy Transitions Commission, said shipping was one of the hardest sectors in the global economy to decarbonize. Even so, he argued that technology and the use of zero-carbon fuels such as ammonia and green hydrogen could make shipping zero-carbon by 2050 if shippers and consumers accepted a doubling of transport costs.

Turner believes that because the cost of shipping constitutes such a small component of the retail price of most products, consumers will easily swallow such a marginal increase.

And he adds that, as the shipping industry already copes with highly volatile rates, a doubling in freight rates over 30 years would not be outside existing norms.

“This is an industry where freight rates vary very significantly year by year,” he added. He noted that during the global financial crisis, the Baltic Dry Index (BDI) lost over 90 percent of its value in 2008 (it reached a record 11,793 May 20, 2018, before sinking to just 700 points in November of that year), but “then increased sixfold.”

These fluctuations, he said, “are absorbed by the economy. Over 30 years we will have to accept higher prices to get to zero-carbon shipping.”

To ensure a level playing field and no first-mover disadvantage, Lord Turner believes new carbon taxes and/or International Maritime Organization (IMO) regulations will be required, insisting that “gradually over time higher rates will be accepted.”

But will shippers accept higher costs?

Emanuele Grimaldi, managing director of Italy-based ro-ro giant Grimaldi Group, countered that shippers were unlikely to accept higher prices. Explaining a 100 percent increase in costs to customers would be “extremely difficult.”

However, Lasse Kristoffersen, vice chair of ICS and CEO of Norway-based shipping company Torvald Klaveness, said shipping could easily absorb higher freight rates. “The idea that there won’t be any money on the table if freight rates double is absurd,” he said, adding that capesize earnings had surged this year and, over the last decade, fuel prices had also varied enormously.

“No one starved, there were no strikes, there was still food on the table,” he added.

The International Maritime Organization is already targeting the phase out of greenhouse gas (GHG) emissions “as soon as possible this century,” and a reduction in GHG emissions from international shipping by at least 50 percent by 2050 compared to 2008.

To tax or regulate?

When asked if owners would prefer new regulations or new taxes if they were to be compelled to lower carbon emissions even faster than IMO targets, Grimaldi said the market was already encouraging operators to cut their carbon footprint. And new taxes on shipping, he warned, could prompt a modal shift to air and road which would increase net emissions.

“Fuel is our biggest cost, so we are already working extremely hard to reduce this cost. The cost of finance and people and the vessel equals the cost of the fuel. We don’t need to be taxed to improve our performance. We need to improve our performance irrespective. We are still the most efficient mode of transport. More tax could see more air and road transport, so we have to be very careful.”

Why cutting carbon matters

The freight rate debate during London International Shipping Week took place after renowned climate scientist Anders Hammer Strommen outlined the difference between a world that sees a 1.5°C increase in global temperature by 2050 versus an increase of 2°C. Under the former scenario, for example, ice in the Arctic would melt completely once a century. Under the latter scenario, this would happen during the Northern Hemisphere summer once a decade.

Baroness Bryony Worthington, executive director for Europe, Environmental Defense Fund, UK, told delegates “it’s clear that change is coming” to shipping and she argued that having a global regulator would make reform easier.

“One of the hardest things with climate change is getting everyone to act together,” she said. “Having a level playing field and one voice on rules is a great way to drive change.”

Lord Turner said he welcomed the IMO’s commitment to target a 50 percent GHG reduction by 2050 but “our argument is that it should be zero carbon.”

“How do we get to that? I think the shipping industry starts with one major problem in terms of the transition, and one major advantage. The problem is the fragmentation of the industry. The complexity of owners and operators, short-term contracts etc.”

He argued that this results in what economists call “principal-agent problem”, essentially a reluctance of operators to be the first mover in case competitive advantage is lost to rivals. In many industries, this makes it difficult to incentivize individual market participants to act, particularly when rules vary by geography.

The IMO must drive zero-carbon reform

“But, the great advantage that the shipping industry has, is that it is a regulated industry and it has the IMO,” he added. “And the IMO is capable of setting regulations for the design of new ships, how energy efficient they have to be, and eventually of what the cost of fuel should be, or whether the fuel has to be from zero carbon sources.

“So what do we need to do? We will say we will encourage the IMO and the shipping industry to move beyond the fantastic commitment to 50 percent and to envision that it is possible to go to a 100 percent reduction. We need a clearer sense of what the different technologies might be and guidance on what the road map is going to be.”

He called for more investment in research into energy efficient shipping and marine engines that can burn alternative fuels such as ammonia and green hydrogen.

“We need regulation to drive all the new ships to greater levels of efficiency, and to make sure that all of them can burn the new fuels,” he added.

“On a whole that’s not as much a challenge as it is in aviation. In aviation an airline engine is so specific, it’s so precious that it has to have the precise chemical equivalent of conventional jet fuel.”

By contrast, he noted that marine engines are more robust and can manage variety in fuel inputs, which can be further developed.

“We will also need, I believe, some category of other carbon pricing or regulation of fuel mandate which forces all the shipping companies together to move toward forms of zero carbon fuel,” he added. “And we will also need coordination from the ports to be providers of either the electricity or the hydrogen or the ammonia which will be required to drive zero-carbon shipping.

“Provided we get all that, however, we are absolutely confident that in shipping, as in other sectors of the economy, we can have a zero-carbon industry by mid-century.”