Shipping needs to step up and introduce a carbon levy before EU does

With the EU advancing on its plans to include international shipping in its Emissions Trading System (ETS), the pressure is on for the international maritime industry to introduce a market-wide measure to pay for its share of emissions.

Under the plan, the EU wants to include the maritime sector into the trading scheme from January 1, 2022. Shipping companies would have to buy EU carbon permits for their pollution and would have to cut their GHG emissions by 40% by 2030.

The scheme would cover emissions from voyages within Europe, as well as international trips that start or finish in an EU port.

What is more, calls have also been made on the European Commission to set up a fund for the development of climate-neutral ships and the financing of marine protected areas. 

The measure has been met with a lot of pushback from the industry bodies, which insist the solution for greener shipping must be created on a global level ensuring a level playing field.

“The EU ETS risks causing trade retaliation, an increase in emissions and the decline of European ports. There is a danger that trans-shipment centres will be set up just outside EU borders and served by large, efficient bulk vessels. Smaller, less GHG efficient ships will then transport cargoes to EU ports which will lose efficiencies gained through technology and size. In short, carbon leakage will take place,” INTERCARGO said commenting on the developments.

INTERCARGO Secretary General Kostas Gkonis believes the inclusion of shipping in EU ETS is basically a money collection mechanism, fundamentally disconnected from the work at IMO, and risks undermining a global GHG solution.

The International Maritime Organization (IMO) is targeting a 40 percent decrease in GHG emissions by 2030 for international shipping and a 50% cut by 2050 when compared to the 2008 levels.

To do so, the industry needs to introduce zero-emission ships by 2030 and switch to zero-emission fuels.

That being said, the sector also needs to invest trillions of dollars to build a completely new fuel industry and the supporting infrastructure in a couple of decades. Most importantly, the endeavor must make business sense for the switch to be feasible and economically sensible.

To finance the colossal undertaking of decarbonization the industry is required to set up a platform that would incentivize innovation, research and development, and adoption of innovative technologies and alternative fuels.

One way of addressing this is by introducing a carbon levy on marine emissions, which is under an early stage of investigation in the sector.

To remind, in December 2019 shipping associations across the maritime sector submitted a proposal to the IMO for the establishment of a $5 billion worth IMO GHG reduction research and development program.

Under the proposal, cosponsored by BIMCO, CLIA, ICS, INTERTANKO, INTERCARGO, INTERFERRY, IPTA and WSC, the core funding would be collected via a mandatory R&D contribution per tonne of fuel oil purchased for consumption.

It proposes $2 are collected per tonne of fuel over a period of ten years.

The discussion on the proposal has been delayed due to COVID-19 related restrictions. However, the fund will be on the agenda once IMO’s Marine Environment Protection Committee (MEPC) meets in November in a digital setting to discuss pressing matters.

The maritime sector must act quickly if it wants to counter regional policies that are likely to create distortions and multi-tier markets or even trade tensions.

Namely, the European Union is losing patience as it aims to slash greenhouse gas emissions by 2050 under its Green Deal plan.

The pressure from the EU to act might be just the push the industry needs to set in place the carbon levy and launch the process because the clock is ticking and there is not much time to waste.

The shipping industry might be one of the rare sectors that have their own global regulator, the IMO. Nevertheless, the process of introducing bills and enforcing them has been painfully slow.

For example, it took 14 years for the UN body to finally enforce the International Convention for the Control and Management of Ships’ Ballast Water and Sediments (BWM) in 2017, which was adopted in 2004.

Speaking at last week’s Future of Shipping decarbonization webinar, hosted by the IMO and the Maritime Port Authority (MPA) of Singapore, Andreas Sohmen-Pao, Chairman of BW Group, said the industry needed to lead the way on the carbon levy leveraging on its unique global regulatory entity.

The levy is needed to bridge the enormous investments required to switch to alternative fuels.

“One can frame it is as R&D contributions, if not as a levy, to help bridge the price gap and to do so on a global basis. It will be very difficult for the industry if we have this patchwork legislation,” Pao, who is also Co-Chair of the International Advisory Panel on Maritime Decarbonisation, said.

 For one, the industry has been operating on low margins for a very long time, and that makes this cost challenge particularly pertinent, Pao explained.

“We invest tens or hundreds of millions of dollars in ships that last for 25 years, so you can lose a lot of money very fast. In the old days, the lifetime fuel cost of a ship was a fraction of a ship cost. Now the ship cost is a fraction of the lifetime fuel cost.”

For a ship costing $50 million, which burns 30 tons of fuel per day, the incremental cost of which is $300 per tonne, the switch to alternative fuels, results in owners paying over $80 million than their competition, Pao said.

“Who’s going to pay for this? We need a carbon price of $280 per tonne of CO2 to bridge ammonia and if you include engines and retrofitting etc, we need $400 per tonne and the industry is talking about $0.70 per ton of CO2 right now. Therefore, we have a big bridge to build,” he added.

As explained, a global levy rather than a regional traded scheme would help the industry become more predictable, leaning towards a global level-playing system rather than a European or regional one.

BW’s Chairman further stressed that the issue was more about how does the sector achieve this momentum and get on a ‘war footing’ and produce things in record time on a global basis, so individual countries and regions don’t get impatient and push forward on their own terms.

“One of the ways we can do this is by starting small. I did make this point about needing $300 and the huge price gap that needs to be bridged. But, it doesn’t matter. Let’s just get started. If it’s easier for people to accept $2 per tonne of bunkers let’s start with that and then let’s make it a journey and ramp it up, make it palatable, and put all the things in place. Otherwise, I can understand the frustration in Europe, because there is no more time to waste. Do it fast, so that everybody comes along and we don’t have fragmentation, “he commented.

Roel Hoenders, IMO Head of the Air Pollution and Energy Efficiency team in the Marine Environment Division of the IMO Secretariat, said the IMO was ready to discuss market-based measures.

“We note that further negotiations are still ahead among the EU member states before the policy on including shipping in the European emissions trading scheme will be finalised. I just want to stress the 2050 reduction objective in the IMO’s greenhouse gas strategy includes a list of candidate measures that can help us achieve those targets and one of those measures are market-based measures,” he noted.

“We are ready as an organisation to have a discussion on global market-based measures. Of course, the IMO’s preferred option is to have a global regulatory system for a global industry. EU member states are also member states of the IMO and we are eagerly waiting for proposals on possible global market-based measures to reach us and to have a discussion at the IMO this year and next year.“

Hoenders added that during the virtual MEPC 75 meeting in November a set of amendments to MARPOL Annex VI would be discussed. He hopes that one of those amendments will involve embedding of the 40% reduction of the carbon intensity of shipping by 2030 as a binding measure.

“We will also have a discussion on the International Maritime Research and Development Board and that is a concrete proposal put forward by industry which speaks about a levy that can be collected by the IMO and redistributed among member states in order to boost research and development around the world.”

To co-ordinate and spur global efforts, the IMO and Singapore introduced “NextGEN”, a concept for a collaborative global ecosystem of maritime decarbonisation initiatives.

“NextGEN” aims to facilitate information sharing on decarbonisation initiatives across stakeholders such as IMO Member States, industry and academia, identify opportunities and gaps for decarbonisation in the global shipping ecosystem, and create important networks and platforms for collaboration.

Quah Ley Hoon, Chief Executive of the Maritime and Port Authority of Singapore (MPA) said one of the ways governments and international bodies can help spur the development, production and mainstreaming of decarbonization solutions is by serving as a platform for research and experimentation with new technologies.

“Singapore will be the living lab like we have been when we were first started talking about LNG. I see us recreating the process. In 2014 we launched the LNG bunkering focus group, and in 2021 we will be ready to receive our bunker tanker and conduct ship-to-ship transfer. So, it takes 7 years and we should start now,” Ley Hoon said.

“We will put in place a vision, a Maritime Decarbonization Blueprint by 2050 and we have already assigned some funds for its implementation. Whether it is green energy, green technology, we want you to test it here. As a living lab, we will also work with other industry players to do joint industry projects.”

Andrew Losos, Sr. Sustainable Transport Specialist Maritime and Ports Sector Transport Global Practice, at the World Bank, argues that between regulatory measures and first movers like Singapore the industry needs to think about scale and de-risking of first movers.

“We haven’t been very good so far at removing or mitigating technological risk. However, at some point, that’s going to become necessary given the short timeline that we have,” he noted.

“Therefore, we need to look for innovative financial solutions, and ways of removing some of the risks of initial adoptions of these technologies.”

Losos believes the market and the private sector are the only ones capable of delivering the changes and investments required by the energy transition. The key thing is to be ready on a programmatic level.

“We need to get programmes ready, so that when Singapore or country x or y decides to become a first-mover and shows the way, then country A, B or C that are waiting in the wings to see how it turns out can begin to deploy as well.

“Countries need to have programmes within their own borders, but also within regions and all the way up to the global level because we can’t afford to have a project by project CDM type application in this field if we hope to meet our timetables. We need to dream big about the scale that we can achieve, and I think that is a crucial element that we must not forget,” Losos concluded.