Climate Iceberg Threatening International Shipping LinesAfter a decade of Carbon Footprint discussions in oil and gas, hitting the energy markets, financial institutions and oil and gas producers with hefty devaluations and higher risks profiles, another major sector is facing an iceberg of destruction.
International media has been obsessed with the possible negative impact on the environment of hydrocarbon producers, but has forgotten to take on one of the world’s most vital but also polluting sectors, international shipping.
The International Maritime Organization (IMO), based in London and responsible for setting global environmental standards for shipping, has put in place a possible iceberg decision that could easily sink some of the international shipping “Titanics”. The IMO has last week approved rules designed to curb the industry’s carbon emissions, even that environmental agencies and NGOs criticized the organization by stating that its measures won’t do enough to help tackle climate change.
International shipping is one of the world’s most undervalued sectors, as it is transporting 90% of total global physical trade. At the same time, mainly due to the use of rather unclean sources of fuel, the sector is also spewing out as much CO2 as France and Germany combined each year. With its new regulations the IMO steps up its efforts to improve the shipping vessels’ carbon efficiency and footprint.
With a strong message, the IMO has now put in place a 50% emissions reduction target by 2050. The targets are green, but as some international shipping organizations, such as the Danske Rederier, already warned the measures will not be applicable and reach the set targets. As Maria Skipper Schwenn of Danske Rederier said, “the regulations are a stumbling block for a real transition to carbon neutrality because they don’t reward ships for performing well”.
The IMO measures are meant to hit not only its 40% reduction target for 2030, but increase the total level for 2050. Where main criticism of the sector is that vessels already have achieved most of the set savings, as since 2008, which is the goal’s baseline year, ships have gotten bigger, better designed and slowed down, meaning much of the required savings have already been achieved. Taking this into account, most of the former targets were in reach for 2030.
The real risk or target at present is the fact that now overall shipping emissions need to be cut. Having more efficient ships, as is increasingly the case, will not reach these targets anymore, not due to the vessel emission, but mainly due to evergrowing and booming international trade and transport. If the IMO would like to comply with the the Intergovernmental Panel on Climate Change (ICPP)’s 1.5 degrees Celsius scenario, man-made CO2 output needs to almost halve, versus 2010, by 2030. This will include an outright cut of vessel emissions.
Analysts agree that if the IMO wants to reach 50% cut in greenhouse gas emissions by 2050, almost the total fleet need to switch to zero-emission fuels. The latter is a fairy-tale as they don’t exist at present on commercial scale. In a statement made by the Global Maritime Forum, it is assessed that this would cost around US$1 trillion in investments.
Regulatory demands will be supporting this, as the EU already is expected in 2021 to propose rules to put a price on emissions from shipping, likely by bringing maritime transport into its emissions trading scheme. . Several large players, such as Maersk Tankers and commodities trading giant Trafigura, are supporting the latter approach already. It however is not expected that the IMO will soon put in place the same legislation. Some new legislation is expected from the IMO in June 2021.
NGOs, activist investors and governments however are now threatening a new kind of approach, based on the “Divest Hydrocarbon Fuels” approach. Warnings have already been given that inn light of the success reached with oil and gas companies, activists are planning to target international shipping lines and owners.
This will not reach the same impact as with oil and gas, but the threat of divestment from banks and finance companies supporting global shipping, could be a real crisis scenario. International maritime trade and shipping both are heavily dependent on large banks and ship insurers that provide low cost financing to shipping companies.
If now parties are able to force them to include environmental conditions to the requirements or costs, survival of several giants is at stake. Scenarios are already discussed between shareholders, NGOs and activists, that a list of potential targets, such as Berkshire Hathaway, Blackrock, Bridgewater Associates, Goldman Sachs, Nordea, Bank of America Merrill Lynch, are targeted. These financial giants all have positions in shipping and shipping finance.
One of the largest divestment activist groups, Carbon Disclosure Project, said that already the threat of disclosure works. Companies, investors and especially institutionals, are likely to take action. Via disclosure, companies or organizations, such as the IMO, will act as they are confronted by failure. Until now, international maritime operators have been able to get away with it. If now the focus of groups like Carbon Disclosure Project, 350.org and others, is going to be on shipping, there will be a shock to the system.
CDP already has been producing damning reports, showing that with only 60,000 major ocean-going ships, global shipping makes up 33% of global freight emissions (1 billion tons compared to 3 billion tons of global carbon emissions from transportation). In its global report, CDP targeted 2604 companies to disclose carbon emissions in 2019. Only 110, or less than 5%, that disclosed were transport operator or logistic providers.
The lack in transparancy and levels of disclosure is maybe seen by companies as their own business, but could now backfire and become costly if investors and insurers become reluctant to finance any longer. It becomes even more a threat to maritime providers when realizing that 40% of global shipping is used to transport fossil fuels, while all are using fossil fuels. To be hit from both sides would have sunk Titanic much quicker even.
The lack of urgency in the global maritime sector is amazing. With the current approach, based on the current assessment, less than 10-15 companies will be able to get through the discussion without scars.