The Carbon War Room Convenes in Berlin Over Efficient Shipping

– Carbon War Room

Global fuel prices are rising inexorably, while extraterritorial bodies are putting forth new and stricter environmental legislation year after year. These forces are driving significant growth in the demand for technologies that can deliver real cost savings and simultaneously move the shipping industry towards full regulatory compliance with emissions standards. As the shipping industry cannot make the necessary progress towards a fuel-efficient, low-emissions global fleet with new builds alone, retrofit efficiency technologies are now more important than ever.

Over 90% of the world’s trade cargo spends time on the ocean during its journey to market, carried by any one of approximately 50,000 commercial vessels. If global shipping were a country, its emissions would be roughly equal to the annual emissions of the nation of Germany – the sixth largest producer of greenhouse gases today. Only the US, China, Russia, India and Japan emit more carbon dioxide than the world’s commercial shipping fleet, and ships also emit substantial amounts of other greenhouse gases and pollutants, including nitrogen oxide, sulfur oxide and black carbon. Global shipping was responsible for 3.3% percent of annual global anthropogenic carbon emissions in 200770 (over one billion tons) and estimates suggest that that figure could triple by 2050 if no action is taken.71

However, in July 2011, the shipping industry did take one big step towards reducing its emissions by adopting a regulation which mandates energy efficiency standards for all new-build ships. As well as sending a signal to the world that the sector is serious about decarbonisation, the regulations reinforced the role that credible information and metrics will need play during the sector’s transition towards a low-carbon economy. Applying similar standards and ratings to all ships would allow the world to move even further towards effi  cient, profi table shipping.

Although the shipping industry, relative to other freight modes, is already very energy efficient, the widespread adoption of additional market-scale clean technologies which improve hull, engine and propeller design will produce further reductions in fuel consumption. More radical technologies have also been proven effective but are not yet to market scale as they lack trust in the industry, including alternative fuel types and a variety of ultra-low-carbon concept vessels, such as sail-powered ships.

Barriers and Key Challenges

Shipping companies have a very strong economic incentive to reduce their fuel consumption and thus reduce their CO2 emissions: bunker fuel costs represent an increasingly significant proportion of ships’ operational expenses, having increased by about 300% in the last 5 years alone. Recent studies confirm that the shipping sector has $70 billion of overpaid fuel bills – in other words, unrealized profit – which could be rapidly freed up by investments in clean technologies proven to offer substantial fuel savings and rapid payback.73 In spite of this potential, commercial shipping’s opportunity for low-carbon growth persists in being unexploited and undeveloped into commercial advantage.

The slow uptake of clean technology can be attributed to a number of market barriers pervasive throughout the global commercial shipping sector:

• Little incentive for owners of chartered fleets to invest in upgrades as they likely will not directly benefi t from the savings derived from reduced fuel consumption (the ‘principal-agent’ or ‘split-incentive’ problem)
• Lack of awareness of the benefits of efficiency measures
• Lack of upfront capital to invest in fuel-reduction technologies, even with short, proven payback periods
• Concerns about the validity of performance data
• Difficulty getting stakeholders to adopt new models and behaviors
• Unwillingness to share information and partner with competitors
• Limited additional asset values assigned to ships with higher fuel efficiency
• Shipyard capacity for low-carbon technology and preference to stick to standard designs.

The German Shipping Industry

Germany is a major player in the global shipping industry. In 2009, Germans could claim ownership of 35% of all of the cargo ships in operation worldwide. The sixth largest private container shipping fleet was German and the Port of Hamburg was one of the busiest in the world. Hamburg was additionally a global headquarters for the financing and outfitting of new ships, with nearly 60 shipping banks and financiers based in that city.

While Hamburg is still a major world port, the success of German shipping from 2000 to 2009 has slowed substantially in the years since, as the national market got hit by the global financial crisis and the most severe contraction the shipping industry has seen in 25 years. At least ten German shipping funds became insolvent between 2010 and 2012, while investments in shipping funds slumped across the board. Banks in Germany and around the world have already begun to approach financing for commercial shipping in different ways.

The opportunity is ripe to leverage the contraction of the industry and the new direction of industry finance in a way that is both cost saving and sustainable by developing new financial models which support investment in clean technologies.

With a global surplus of state-of-the art efficient ships now entering into service, retrofit technologies offer the comparatively young fleet of existing German ships the chance to remain active and economically attractive to owners and operators. Such eco-efficient technologies will not only help the environment but will also benefit the bottom line of the entire shipping industry by allowing German charterers and freight forwarders – who ultimately pay for 70% of fuel – to respond to rising fuel prices, a potential two-tier future and pressure from their customers interested in minimizing the carbon footprint of their supply chains.

“The opportunity is ripe to leverage the contraction of the industry and the new direction of industtry finance in a way that is both cost saving and sustainable”

The Plan of Attack

Over the years, the CWR has sucessfully built a global coalition of shippers and their clients, port authorities, financiers, technology providers, NGOs, and industry experts.  By working in unison, they aim to bridge the gap between the adoption of a shipping efficiency standard and the complicated business of operating, chartering, insuring, and financing ships at sea.

There are five critical components in their approach:

Rating System – Introduce a practical, web-based “beta” efficiency labeling system that differentiates vessels based on their pollution levels and creates a benchmark efficiency that influences key stakeholders decision patterns in renting and purchasing vessels;

Policy Innovation — Accelerate adoption and enforcement of new national and international regulations on shipping efficiency reporting;

Science — Improve understanding of the link between black carbon from shipping and accelerated arctic ice cap melt; support research of alternative technologies that can reduce emissions and optimize drydock capacity and availability;

Early Adopters — Secure letters of intent from leading ship-owners and shippers to send a clear signal to industry that businesses will embrace the new standards; and

Unlocking legal barriers — Re-write key agency contracts. Charter party agreements date back 150 years. Shipyard contracts are also dated and do not reflect the lifespan efficiency economics of a vessel