Carbon pricing: Have we reached the tipping point?

The discussion on carbon pricing in the maritime industry is heating up, as industry stakeholders urge for a market-based measure to finally incentivize the sector’s decarbonization journey.

In a nutshell, carbon pricing would impose a cost on emitting greenhouse gases (GHGs), pushing the sector to opt for alternative fuels and energy efficiency tools to decarbonise.

Two key options are being considered at the moment: a carbon tax/levy on shipping fuels and an emissions trading scheme (ETS).

In 2018, the member states of the International Maritime Organization (IMO) agreed to reduce shipping’ emissions by at least 50 pct by 2050 compared to 2008, which the industry called a milestone, even though the target itself was not in line with the Paris Agreement ambitions.

Three years after the major breakthrough, there seems to have been little progress on the concrete measures on achieving this goal, as focus has been put on the short-term measures to reduce emissions and not really how to transition to low and zero-carbon solutions.

“I think we all would have hoped to be a lot further along in the IMO. When it was adopted in 2018, the IMO strategy was ambitious at the time, but we have to ask ourselves whether it remains ambitious right now,” Simon Bergulf, Regulatory Affairs Director, A.P. Moller Maersk, said in a recent webinar released as part of Maersk Decarbonisation Series.

As explained by Bergulf, the IMO needs to look at the global measures in the form of carbon pricing, because without it, it would be difficult to push alternative, zero-carbon fuels into the market.

Finally, he believes the industry needs to revise its level of ambitions on the decarbonization front, adding that they should only go one way, which is up.

According to the Fourth IMO GHG Study, 13% of GHGs from international shipping could be reduced by 2030 thrugh the introduction of relatively low carbon prices of $100/tonne of CO2, combined with investment in wind propulsion solutions and adoption of slow steaming.

A higher carbon price of $416/tonne of carbon would be needed to reduce shipping emissions by 64% by 2050 and spur the adoption of zero-carbon fuels.

Trafigura, one of the world’s largest ship charterers, has proposed that the IMO introduces a carbon levy between $250 and $300 per metric tonne of CO2 equivalent on shipping fuels, which would be a medium option. The system would be overseen by the IMO, and it would be adjusted as the competitiveness gap narrows.

Trafigura believes the revenue raised from this levy could be partly used to fund further research and development into alternative fuels. Some portion of the revenue should be used to help developing countries to manage the energy transition processes and to help them mitigate the consequences of climate change.

The IMO is already looking at the industry-led proposal for the establishment of a $5 billion research and development fund aimed at accelerating the introduction of zero-emission technologies into the shipping industry.

The fund is being proposed as the shipping industry attempts to centralize and streamline investment into research and development of relevant projects and scale them up in order to avoid significant amounts of money becoming stranded.

Under the proposal made in 2019, the core funding would be collected over a ten-year period via a mandatory $2 R&D contribution per tonne of fuel oil purchased for consumption. 

The UN body is expected to take a final stance on the R&D fund at the upcoming meetings scheduled for November this year.

If approved, it would provide a major building block to drive the development of zero-carbon technologies and fuels that will enable the shipping sector to meet its decarbonization goals.

The reality is that the industry lacks available low‐carbon options on the market on a commercial scale. Therefore, it needs to bridge this gap between what is available and how to spur the uptake of those and future solutions to make business sense.

Nevertheless, the process at the IMO has been rather lengthy and has so far failed to produce clarity for the industry on the next steps causing frustration and inaction within the sector.

Meanwhile, efforts to include shipping into the EU ETS are gathering pace, with final legislative proposals set to be made in July this year.

Under the proposal, GHG emissions from ships over 5,000 gross tonnes are scheduled to be included in the EU’s emissions trading system by January 1, 2022. However, it remains unclear how shipping carbon emissions will be calculated, especially with regard to the international voyages in/out of the EU.

One thing is certain though, the measure would push up costs for the sector.

“Whist it is still uncertain whether EU ETS will apply to intra, just the EU component or the whole voyage, assuming just intra EU trade and ETS price at €50, the carbon cost of shipping 80,000 tonnes of crude from Mongstad to Rotterdam (slow steaming non eco vessel), could reach €46,000 or €0.58/tonne. On a longer haul voyage, for example shipping the same cargo from Mongstad to Trieste, the carbon cost is higher, assessed at €$138,250 or €$1.73/tonne.

“For smaller tonnage, absolute carbon costs of shipping on a like-for-like basis are lower due to reduced bunker consumption; yet, smaller cargo sizes are keeping the $/tonne cost elevated. Using the same carbon price assumption, the emissions’ cost of shipping 37,000 tonnes of clean products from Cartagena to Lavera could reach €21,750 or €0.59/tonne. On a longer haul voyage from Cartagena to Rotterdam the cost is higher, nearly €54,000 or €1.46/tonne,” Gibson Shipbrokers estimates.

The price tags would depend on a lot of factors including distance travelled and bunker consumption of ships. As such, Gibson believes that a greater focus will be put on eco vessels, as these units have lower bunker consumption and produce less emissions.

“Overall, the inclusion of shipping in the EU ETS will reduce arbitrage opportunities for voyages involving European ports and potentially price certain routes out of the market, particularly longer haul trades, if this aspect is not addressed by EU regulators. A greater exposure to currency risks is also to be expected as both tanker shipping and the underlining commodity is priced in US dollars, while ETS is traded in Euros,” Gibson said.

From a tanker perspective, the most critical question is who will be liable to pay extra costs, and the answer is likely to be the charterer as was the case with the introduction of emissions control area in the North Sea and the Baltic.

“The situation today could be no different. After all, tanker supply/demand conditions and the resulting TCE earnings are the main market drivers, and if the owners’ spot returns for trading in Europe are lower than elsewhere, the migration to more profitable trades is inevitable, raising costs for intra EU trades,” Gibson said.

Even though the industry insists it needs a global measure, and that regional measures of this sort could backfire as they would add to trade complexity, costs, and even retaliation measures from other regions, the truth is that the EU is driving the discussion forward at the IMO.

“The EU is a fundamental block inside the IMO and they are actually pushing the IMO in the right direction when it comes to setting ambitions,” Bergulf believes.

“What we really need right now is a clear timeline as to what is it that we want to achieve, and for us, we need a framework for a market-based measure to be introduced by 2025 at the IMO level.”

“We know that we have an ETS system coming up and if we assume that it can be adopted by 2023 (…) we would have a period of two years, between 2023 and 2025, where we would run an emission trading system intra EU. We would keep the seat at the IMO table for the EU member states to enable them to continue having these international negotiations, and if by 2025 the IMO hasn’t delivered, then, by all means, the EU should go at full scope ETS.”

Clearly, development of alternative fuels and their scalability have to go hand in hand with the market based measures and the regulatory framework in order for the process to make sense.

One thing is clear, the IMO and the shipping industry have shown that global, complex regulations can be adopted and enforced without causing major disruptions to trade. The most recent example is the implementation of the IMO 2020, which banned the use of high sulfur fuels except for ships with installed scrubbers on board.

Hence, the clock is ticking for the industry to act as soon as possible and finally address the issue of introducing carbon pricing, which is viewed by many as the only likely pathway for shipping to push forward with its decarbonization.