Cutting Emissions

At an economic moment when cost pressures on shippers are particularly intense, it’s tempting for many to shrug aside much thought about environmental issues. “Green” supply chains for the most part are those that help produce profits, not environmental benefits.

Some of the biggest shippers, like Wal-Mart and a few others, have made a priority of environmental stewardship throughout their supply chain, and Wal-Mart has stressed that its green initiatives must make financial sense. And most who are shipping large volumes are clearly focused on the bottom line.

Container lines, for example, are not being pressured heavily by shippers to clean up their act environmentally. Surveys of shippers we do as part of organizing the TPM Conference in Long Beach, Calif., consistently point to low levels of interest.

But if customers for the most part are not demanding change from carriers, governments are. In July, the International Maritime Organization approved new global rules to limit greenhouse gas emissions from all new vessels. Whether a similar rule will be implemented for existing vessels, which would be a much bigger step, is caught up in politics. Developing nations are resisting what they say would amount to a bill for problems the industrialized world created.

Regardless of the outcome of the CO2 debate, another huge change is barreling down on the industry: regulations limiting sulfur dioxide emissions, which are responsible for acid rain and human respiratory problems.

By 2015, vessels operating within 200 miles of North America will be required to use fuel that contains 35 times less sulfur content than fuel burned today. In other words, in 2015, the sulfur content of ship fuel can be no greater than that emitted by automobiles on American roads. The big question is how the industry will respond. The rules creating the North American Emissions Control Area, or ECA, which takes effect in an initial phase next August, is enshrined in global treaty and American law and so is “certainly going to happen,” said Bryan Wood-Thomas, vice president of environmental policy at the World Shipping Council.

Next August, sulfur content of fuel burned within the 200-mile limit will have to drop from 3.5 percent today to 1 percent (and 0.1 percent when ships are at port). In 2015, it will have to drop again, to 0.1 percent within the entire ECA area, leaving it at the level of a clean distillate, or the equivalent of gasoline.

The cost impact on carriers is unknown, but could be enormous. Today, the cost differential between bunker fuel containing 2.5-3 percent sulfur content, priced at $650 to $725 per ton, and clean distillate, at about $1,000 per ton, is a few hundred dollars, representing the premium carriers will have to pay to be compliant within the ECA area. The question as we get closer to 2015, when only clean distillate can be burned within the ECA, is how high the price of distillate will rise based on growing demand from the shipping industry. Will the differential be $300 as it is today, or could it approach $800 or $1,000, as some oil companies suggest?

“The difference between distillate and (bunker) varies over time,” Wood-Thomas said. “We know that distillate will cost more. It might cost 40 percent more per ton. It could cost 90 percent more per ton. We don’t know.”

The issue is related to questions of supply and demand: how much refining capacity is on-line to meet the growing demand. “If you switch over an appreciable amount of marine transportation needs to clean distillate, it’s not available,” said Peter Toombs, president of Prince Edward Island-based Marine Exhaust Solutions, a manufacturer of scrubbers. Toombs’ company is one of several pursuing one solution, which is to “scrub” vessel emissions with seawater, which is high in alkaline and neutralizes the sulfur.

When the seawater used to scrub the emissions is dumped back into the ocean, it is absorbed with no impact. Toombs says at $3.5 million to $10 million per ship to install scrubbers, the investment will quickly pay for itself given the expected higher price of distillate.

But scrubbing is a new technology. Of the total global fleet of some 50,000 ships, fewer than 10 are using scrubbers today. Further, many ships are highly leveraged, and major sectors of the industry, especially tankers and containers, face highly unfavorable supply-demand environments, so credit for investments can be exceedingly hard to come by. “Preparing their ships for 2015 is not on their radar today,” Toombs said.

Wood-Thomas said scrubbers could be viable technology, but many haven’t been tested at full scale and he said some jurisdictions might seek to limit the discharge of the used seawater. “To put it in a nutshell, a lot of people are confident that the basic engineering issues will be resolved and so it comes down to whether the system can handle the effluent so there isn’t a discharge issue,” he said.

Peter Tirschwell is senior vice president of strategy at UBM Global Trade. Contact him at ptirschwell@joc.com, and follow him at twitter.com/PeterTirschwell.

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