Shipping Sector Comes Under Increasing Pressure To Cut Its Carbon Footprint
The shipping industry burns the world’s dirtiest fuel to move cargoes and passengers around the world. It is one of the biggest contributors to climate change yet for years it dodged any responsibility because of its international nature.
Shipping accounts for up to 3% of global emissions and 10% of transport emissions – roughly the same as aviation – and is an integral part of the global economy, transporting around 80% of the world’s trade in physical goods. Marine freight is the least emissions intensive way of moving cargo, but freight demand is on the rise, and “emissions will rise by between 50% and 250% by 2050 if nothing improves,” according to the Organization for Economic Co-operation and Development. “And yet, maritime transport was excluded from the Paris Climate Agreement.”
However, the spotlight is now firmly on the industry, with regulators and investors pressuring shipping groups to step up their ambitions on cutting their emissions. The International Maritime Organization, the sector’s governing body, has introduced targets to cut GHG emissions by half by 2050, but is widely seen as having dragged its feet on the issue for years and the companies in the sector have displayed a similar lack of urgency, with ageing and polluting ships set to remain in the fleet for years to come.
A new report from environmental non-profit CDP, A Sea Change, says that shipping companies are failing to push for the critical technologies that are needed to reduce their carbon footprints, such as emission-free ships. The report ranks 18 of the largest publicly listed shipping companies, representing US$62 billion of market capitalization, on business readiness for a low-carbon transition.
Companies can cut emissions immediately, by up to 30%, simply by sailing more slowly, and 13 of the 18 shipping lines the report analysed have slow steaming policies, but this is not always commercially viable, it could result in more voyages and it is only a short-term solution.
The report says that Denmark’s Maersk and Norden, along with South Korean group HMM, are leading the way in setting targets to reduce their impact in line with the IMO targets, but on the whole, there is a gap between the carbon-neutral technologies that are available and what companies are actually doing.
“Shipping’s decarbonization will require unparalleled innovation,” said Søren Toft, chief operating officer of AP Møller-Mærsk, the world’s largest container shipping company. “A modern ship is a highly capital-intensive asset with a typical life span of 25-30 years. To deliver on ambitious climate targets, zero-emission vessels will need to enter the fleet by 2030. This leaves us only 10 years to develop the new marine fuels, propulsion technologies and infrastructures that will be required.”
Only three companies, Maersk, Norden and Japan’s NYK, are developing technologies that could transform the industry. NYK is looking to develop zero-emission vessels by 2050, while the Danish groups are working on second-generation biofuels produced from waste such as cooking oil. Other companies are generally looking at technologies and fuels that deliver only marginal improvements, CDP says.
The increased scrutiny affects container companies and bulk and tanker shippers differently – container companies that carry consumer goods such as clothing and food are facing pressure from their customers, who are looking to reduce the emissions from their supply chains. For bulk and tanker groups, which transport fossil fuels and other carbon-intensive commodities, the risks are much greater – they face a loss of demand as the wider global economy decarbonizes.
“Shipping companies are facing a sea change on the horizon,” said Carole Ferguson, head of Investor Research at CDP. “Based on current technologies, marine freight is one of the least emissions intensive modes of transport, and therefore critical to the low-carbon transition. But as the global economy grows, the industry could account for 17% of global emissions by 2050, if nothing is done.
“Against the backdrop of the IMO’s targets, the industry needs to drive collaboration with the manufacturers of vessels and shipping technologies to develop the step change innovations needed to have any chance of meeting these goals,” she added.
In the short term, retrofitting existing ships could be the most effective option with technologies such as derated engines, which can be run at lower speeds, and new propellers to improve efficiency and cut emissions while waiting for truly transformative technologies to come onto the market.
Low-carbon fuels, including biofuels, hydrogen and ammonia, could cut emissions significantly, but only Norden and Maersk are supporting their development at the moment. LNG could also be important as a transition fuel to wean the industry off the dirty bunker fuel that they currently use.
One of the industry’s key issues is that transparency on its climate change efforts is very low – only five of the companies in the study disclose emissions information to CDP and only four support the Task Force on Climate-related Financial Disclosure (TCFD). Board level oversight of climate issues is also very low compared to other sectors.
CDP’s report follows the recent launch by 11 banks with a combined shipping finance portfolio of $100bn of the Poseidon Principles, an initiative to increase transparency and speed up the decarbonization of the sector.
The banks, including Citi, SocGen, DNB, ABN Amro and ING, represent around a fifth of global shipping finance and will for the first time integrate climate considerations into their lending to the sector and disclose the alignment of their shipping portfolios with the IMO’s 2050 emissions reduction target.
“ Shipping will shortly undertake a rapid technology and fleet change as it inevitably shifts away from fossil fuels in order to decarbonize ,” said Dr Tristan Smith, reader in Energy and Shipping at the UCL Energy Institute. “That change exposes many in the shipping industry, but particularly the banks, to risk. If banks discover too late they have invested in ships that will become undesirable or even obsolete because of this change, they could see valuation write-downs or even defaults in their portfolio. The Poseidon Principles are a tool to demonstrate that these key stakeholders are acting responsibly and allow them to compare climate risk with each other, but also a tool that will allow them to manage critical investment risks.”
There is hope that investors may be able to raise the pace of decarbonization in shipping, just as they have in other sectors such as automotive and oil and gas, where regulators and policymakers have failed.