Evidence of climate change is all around us. Rising temperatures, rising sea levels, and the hundred-year mega storms that have become almost commonplace, serve as visible reminders that population growth and industrialization are having an irreparable impact on our fragile planet. It is widely accepted that shipping’s own contributions to annual GHG emission are ~3% and despite an increasingly stringent regulatory environment, ship-based emissions are on the rise due to the lengthy re-routing of vessels around the Red Sea, and changes in trade flows due to increased sanctions and tariffs.
Following the post-Covid boom, climate change and the march towards net-zero gained substantial momentum across public and private sectors. The need to address climate change was evident, but most importantly the money was there to drive energy transition forward. Weak global demand, eroding margins, and tightening fiscal policies had been creating headwinds for energy transition, but the latest pushback comes from the world’s largest economy and key stakeholder in the U.N., providing significant financial contributions and holding a permanent seat on the security council.
The recent announcement by the Trump Administration has now put the U.N.’s climate agenda squarely in the crosshairs. Following the joint statement from the U.S. State Department and Secretary of Commerce, retaliatory threats were made towards any nation that backs the plan when the U.N. General Assembly convenes in October to vote on the Global Emissions Tax on shipping.
A Global Emission Tax on Shipping
During the 83rd session of the IMO's Marine Environment Protection Committee, the panel focused on crucial environmental issues, particularly addressing greenhouse gas (GHG) emissions and marine pollution. Key outcomes of the session included the approval of mid-term measures to reduce GHG emissions from ships as from 2028, a 2025 action plan to combat marine plastic litter, and the designation of the North-East Atlantic as an Emission Control Area.
The overarching objective of the proposed regulation is to force owners to adopt the use of more sustainable fuels, while making cheaper fuels “cost prohibitive”. Notable takeaways from the previous sessions were the shift away from tank-to-wake (TTW) to well-to-wake (WTW) emissions and the establishment of a Global Fuel Intensity (GFI) Standard.
Touted by the committee as a landmark decision, the vote was largely seen as symbolic with several key member-states (most notably the U.S.) walking out on the vote. Further guidelines on the administration and management of the system including calculations, reporting, verification, and certification remain largely undefined. Broader questions remain about the availability of the necessary fuels to achieve the targets and some of the staunchest proponents expressed concerns that the penalties will be cheaper than the cost of compliance, casting doubts about the effectiveness of the plan.
Walking back Net-Zero Commitments
The topic of climate change had been at the forefront of discussions globally, be it public, private, local, national, and international levels. The U.S.’s noticeable shift from the policies of the prior administration, which used its Inflation Reduction Act (IRA) to drive the nation’s clean energy agenda, is not necessarily unique. Several high-profile corporations have walked backed their net-zero commitments in an apparent return to traditional oil and gas exploration. Outside the EU and China, central Governments are cutting funding and subsidies to support energy transition projects as they look to tackle their own fiscal issues. In the US, the change in administration and the “Drill baby, drill” policies could see at the very least a partial repeal of the Inflation Reduction Act (IRA) which was instrumental in expanding the US’s own contributions to energy transition.
Despite ~$9 trillion in global investment since 2010, global consumption in renewable energy is only increasing by ~0.5% annually. Europe, by far the most progressive in terms of renewable energy, is at least 20 years away from achieving 30% renewable energy.
The fact remains that growth in renewable energy remains linear given the high costs. Further proliferation cannot be sustained without economic incentives. The Voluntary carbon markets are today quite small and without a broader mandate towards compliance, the marketplace is unlikely to grow. It is widely accepted that without the proliferation of a larger carbon economy, the drive in advancements (investment) in renewable energies, carbon capture will stall. A smaller carbon marketplace will mean weaker markets for credits and offsets.
Despite Political Gyrations, Shipping must play a critical role:
While many climate commitments on land have been walked back, the regulatory landscape mandates that shipping continue to make advancements. Alternative fuels such as Methanol, Clean-Hydrogen, and Biofuels are once again taking a backseat to the more widely subscribed LNG. A fuel long accepted as a bridge technology, but also something the U.S. has a lot of giving some potential insight into the thought process of the current administration.
Despite the potential regulatory changes, a large percentage of the orderbook is being built for conventional fuel raising clear questions about the effectiveness of a global emissions tax and whether it will provide the necessary incentives for further advancements in the space achievable only through innovation, or will it simply be an additional cost that gets passed through to consumers.
The strong freight markets of 2022-24 enabled carriers to pass through the EU ETS and Fuel EU costs to the shippers, but as freight markets re-align, that ability to pass through the additional costs for CO2 becomes increasingly more difficult.
Climate change is very real, and it is not going away unless something decisive is done on a global scale before it becomes too late. Shipping can and will play a vital role in the transition, however the freight markets must support the additional capital expenditure if the necessary innovations to be made and scalable solutions put in place.
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By Patrick Quincannon
President and CEO
Quincannon Associates