Back in August, Quincannon Associates wrote an article asking the question, “Could Energy Transition Really Be Hanging in the Balance?” Last Friday, the IMO's Marine Environment Protection Committee had a major setback when it failed to ratify the proposed global carbon emissions tax on shipping, or Net Zero Framework (NZF). Following a week of intense debate and stiff resistance from key member states, most notably the U.S., the IMO reluctantly elected to “delay” the vote by one year.
It came as no surprise that the U.S. was such a vocal opponent to the proposed Net Zero Framework. The current administration has made “energy dominance” a high priority as the nation looks to capitalize on its extensive gas and oil reserves. The U.S.’s LNG (Liquid Natural Gas) output alone is expected to more than double by 2029 to 29.3 billion ft³/d, demonstrating a seismic shift away from the green policies of the Biden administration.
On one side, last Friday’s vote was seen as a major win for Owners who have invested heavily into LNG fueled vessels, despite LNG long being accepted as a bridge technology due to the release of methane, a potent greenhouse gas and key contributor to climate change. On the flip side, the biggest setback comes for bio-fuel producers who were relying heavily on the IMO’s mandates to strengthen the business case for these more costly alternative fuels.
The U.S. was not alone in their opposition. 49 of the 106 voting members of the IMO backed the delay, potentially underlining the imperfections of the NZF. For example, under the IMO’s proposed framework, shipping would contribute $10-15 billion annually to IMO’s Net-Zero Fund. The Fund would then be used to reward low-emission ships, fund research into new fuel-types, and build infrastructure in developing countries, but it remains largely undefined as to how the funds would actually be applied and the level of oversight that would exist.
Critics of the initiative challenged the basis of a global emissions tax as just another charge on consumers. In the days and weeks leading up to the vote, the EU said that they would not forfeit their own emissions tax on shipping (EU ETS) should the NZF be ratified, effectively meaning yet another tax for European imports and exports. And with other nations like China considering their own emission trading schemes, the effectiveness of the Net Zero Framework as a singular “Global” policy was seemingly up against serious hurdles.
Politics versus policy
Tasked with overseeing global maritime safety, security, and pollution prevention, the IMO has been effective in implementing international rules and standards for the benefit of shipping. In recent years, the scope has expanded to include ship-based emissions, which are responsible for nearly 3% of global emissions annually. However, policies are often eclipsed by politics, and the political chasms within the U.N. are perhaps greater today than at any point over the 80 years the U.N. has been in operation.
Case and point is in late 2023, when the Houthis began their attacks on merchant vessels, shippers and operators were left with no other option but to reroute around the Cape of Good Hope, adding a minimum of ten (10) days of additional sailing time to voyages. With thousands of ships being directed around the danger zone, global ship-based emissions increased by more than 4% or 40+ million tons annually, solely because of the rerouting. The U.N. has condemned the deadly attacks on merchant shipping but has otherwise done very little to make the route safe for commerce. Key members of the security council (Russia and China) have abstained from voting on any resolution involving the Red Sea, thus calling into question the U.N.’s effectiveness as a governing body. The IMO, established under the auspice of maritime safety and security, seems hypocritical to tax ship-based emissions when the same emissions can be reduced by 4% by just making the Red Sea passage safe again.
What lies ahead?
The NZF vote comes at a time when the global economy remains shrouded in uncertainly due to a multitude of issues; high inflation and geopolitical instability just to name a few. These factors have manifested into trade tensions, the most impactful being the tit-for-tat trade war between the U.S. and China. Specifically for the chemical industry, weak demand across nearly every sector, overcapacity due to China’s over-expansion, and high energy costs have created a perfect storm as production is continually being taken off-line, and companies aggressively work to address their balance sheets. This has become the most evident in Europe where high production costs and carbon taxes have rendered much of Europe’s industries uncompetitive. As a result, under the current circumstances, delaying some of these additional costs may not be the worst decision.
The recent failure to launch underscores the dissenting factions within the U.N. and calls into question whether the IMO (on behalf of the U.N.) can implement these policies, especially if key member states are intent on running their own parallel programs. The committee has vowed to regroup and rebuild coalition within the member states; however, it is becoming increasingly evident that the world may not yet be on board with such a global emissions policy.
The shipping industry has a history of innovation. Most of the advancements in the last two decades have been achieved to save costs on fuel. Owners and operators will certainly continue to innovate, test new fuels, and develop ways to reduce ship-based emissions. While last week’s vote may have been a setback, it will hopefully be just another bump in a long road, and one that may have given the industry more breathing room to develop more sustainable and scalable solutions.
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By Patrick Quincannon
President and CEO
Quincannon Associates