On the Horizon: The Shipping Industry’s Choppy Waters

Authors

• Peder Michael Pruzan-Jorgensen

  Former Senior Vice President, BSR

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By all accounts, the shipping industry has an enormous economic footprint. It transports more than a third of the value of global trade and provides more than 4.2 million jobs. At any given point, the largest shipping lines transport more than 3 percent of the globe's gross national product. And because shipping routes—as a means to connect goods with markets—play a huge role in regional growth and the development of today's complex supply chains, the industry’s economic reach is even greater.

Not surprisingly, this economic footprint is joined by a heavy environmental footprint, with the industry's biggest environmental impacts felt in the air and water:

• Carbon-dioxide (CO₂) emissions: The industry’s total carbon emissions comprise between 3 and 4 percent of global emissions—more than those of Germany. In general, carbon emissions represent the most material impacts from container shipping today and have garnered the most attention from carriers and their customers in working groups like BSR's Clean Cargo.
• Particulate matter and sulfur emissions: By some estimates, annual particulate matter and sulfur emissions from the shipping industry contribute to the premature deaths of more than 60,000 people globally, with concentrations in Europe, East Asia, and South Asia. According to these same reports, they also cause respiratory and other health illnesses for millions of others worldwide.
• Nitrogen-oxide (NOx) and black carbon emissions: NOx contributes to a wide variety of health and environmental issues, including respiratory problems and ground-level ozone or smog. Black carbon—a particularly harmful substance—is considered by some to be the second largest contributor to global warming after CO₂, particularly in the Arctic regions. One study reports that the elimination of black carbon generated by fossil fuel use would reduce total global warming by 8 to 18 percent within three to five years.
• Ballast water: Ocean carriers and other big ships use a large amount of ballast water, which is collected in the coastal waters of one region and discharged at the next port of call. Ballast water, which contains biological materials, can impact biodiversity in the new region as the invasive species overrun the native ones. This can bring equally high economic costs. For example, the introduction of pest mollusks to U.S. aquatic ecosystems alone costs more than US$6 billion a year.

As a result of the shipping industry’s evolving market landscape and related environmental impacts, environmental performance expectations are increasing via regulation and supply chain requirements primarily from customers. This will impact the way the industry does business—and how it approaches sustainability.

New Regulation on the Horizon

In the next five to 15 years, regulatory changes could become the biggest cost driver for the shipping industry. The International Maritime Organization (IMO), the industry’s own international regulator, is expected to adopt a set of regulatory measures that will address some of these environmental impacts.

In 2010, the IMO is expected to adopt a regulation that will bring the limit for sulfur content down from 4.5 to 3.5 percent by 2012, and possibly down to 0.5 percent by 2020. By comparison, long-haul trucks in the United States are only allowed to use fuel with a sulfur content of 0.015 percent. At the same time, the IMO and a number of local and national governments are establishing “emission control areas” (ECAs) close to shore and population centers. The current sulfur content limit in ECAs is 1 percent but could possibly be reduced to 0.1 percent within the next five years.

The failure of COP15 to reach a binding agreement on greenhouse gas (GHG) emissions also means that the GHG emissions from shipping remain unregulated; however, in the near future, the IMO is looking to develop appropriate regulation that will most likely come in the form of either cap-and-trade or a fuel tax. IMO regulation is also addressing NOx emissions and ballast water policies that will ensure that no invasive species can be discharged into “foreign waters” after 2016.

Notably, neither the IMO nor the shipping industry’s global organization, the World Shipping Council, has taken steps to regulate black carbon. However, recent reports indicate that black carbon will be discussed at the next IMO committee meeting in September. With 2 percent of globally emitted black carbon stemming from transportation marine vessels, BSR's research suggests that this topic will move into the spotlight as environmental NGOs turn their attention to the impacts of the shipping industry.

Getting Ready for Regulation

Many shipping lines are already taking steps to prepare for these new requirements by streamlining their operations, redesigning and retrofitting ships, reducing the speed of their vessels, and partnering with customers and others along the supply chain.

By 2050, NYK plans to operate a carbon-neutral ocean carrier partly powered by solar panels, wind turbines, and other technologies. Maersk Line, the world’s largest shipping company, has decided to reduce speed on multiple routes and, in some cases, use so-called “super slow steaming.” In such cases, a 20 percent reduction in speed can yield up to a 50 percent reduction in carbon emissions.

While slow steaming and other operational efficiency measures aimed at reducing GHG emissions can lower costs for shipping lines, reducing emissions of particulate matter, sulfur, NOx, black carbon, and ballast water are unlikely to yield any direct economic benefits. And the costs associated with these initiatives are significant. According to a recent study by the European Community Shipowners’ Association, reducing sulfur to 0.1 percent in designated ECAs will increase operating costs between 25 to 40 percent.

But as media reports from trading hubs indicate that local communities and decision-makers are becoming more aware of the negative health and environmental impacts from shipping, it's likely that we'll see the formation of new ECA zones over the next few years. This is despite concerns from ports in existing ECA zones that the increased costs will have a negative impact on trade volumes, since some carriers are already responding to the new requirements by choosing cheaper routes.

Are Customers Ready?

The impact of these new regulatory requirements suggests that customers should prepare not just for increased shipping costs but for longer shipping times. Yet in today's fast-turn market, customers are asking for just the opposite: lower costs, shorter lead times, and greater reliability. In fact, according to a recent BSR research study for a major shipping line, most customers are not yet willing to assume the costs associated with more sustainable shipping.

Likewise, there is concern within parts of the industry that carriers using slow-steaming ships risk losing customers to high-emitting air transport firms that can accommodate shorter lead times. While this applies to only a few select products, it illustrates the need for closer collaboration between shipping lines and their customers. Nonetheless, most customers, retailers, and cargo owners fail to include transportation as a key part of their supply chain sustainability strategies.

However, there is a slow-changing tide, as some customers are asking carriers to go beyond providing a service and instead become partners in innovation for sustainability. They are inviting carriers to help them tackle issues such as packaging waste and empty containers on return trips. Together, they are looking for ways to improve performance and solve these complex sustainability challenges.

For reduced carbon emissions in the freight sector as a whole, cargo owners are looking to shift to more carbon-efficient modes: Road freight is the principle contributor to freight transport emissions globally, air freight is a highly carbon-intensive mode, and ocean and rail freight are the most carbon-efficient modes.

Ultimately, shipping is, by far, the cheapest and most environmentally friendly mode of transportation. However, a thriving economy demands increased global shipping, and customers and consumers need to realize that cleaner shipping will not happen unless everyone is willing to share some of the costs—and that requires a shift in values from speed to reliability and responsibility.