Decarbonization pressures driving changes in container shipping

Decarbonization pressures driving changes in container shipping

There were 356 all-electric or hybrid vessels either in operation or under construction as of July 1, 2019, compared with 318 liquefied natural gas (LNG)-powered ships. Photo credit: Sue Abt/Shutterstock.com.

The container shipping sector has finally begun to acknowledge its impact on the environment, but questions still remain on how to address that impact in the short and long term. Generally speaking, short-term solutions available to the industry such as operational enhancements, shore power, and carbon pricing schemes are easier — and cheaper — to implement, but not as effective in reducing emissions as longer-term solutions such as alternative fuels and new ship designs, both of which require significant investment in research and development before they’re ready for prime time.

Presently, ocean freight accounts for 2.4 percent of global greenhouse gas (GHG) emissions. Under the International Maritime Organization’s (IMO's) initial strategy on GHG emissions reduction released in 2018, the container shipping industry must reduce emissions by a minimum of 50 percent compared with 2008 levels by 2050, pursuing efforts to phase them out completely. Equally importantly, the IMO requires finalized short-term measures by 2023 and mid-term measures to achieve a carbon dioxide (CO2) emission decline of 40 percent by 2030.

For ocean shippers absorbed in the day-to-day management of their supply chains, 2050 probably seems like a long way off, but these ambitious targets are already impacting the cost and functionality of global supply chains. Shippers can look to the IMO 2020 low-sulfur fuel mandate for an example of how even a relatively small measure can have a huge impact on total transport costs. The reduction of the maximum allowable sulfur content in marine bunker to 0.5 percent from 3.5 percent presently will cost the industry an additional $10 billion to $15 billion in annual fuel spend, according to various estimates, the majority of which will need to be borne by shippers. Carriers have one option if they aren’t able to recoup higher operating costs: cutting capacity. 

But even an additional $15 billion in annual fuel costs is just a drop in the bucket compared with the cost of transitioning to a carbon-neutral shipping environment, which will require changes in vessel operation, the development of alternative low-carbon fuels, and the integration of new ship designs, among other things, all of which will result in significant increases in costs for shipowners, carriers, and most of all, shippers.

Taking notice

Morten Møller Weisdal, managing director of Mexico and Central America at Mediterranean Shipping Co., called the need to improve sustainability in container shipping “the single greatest challenge of our lifetime.” In his keynote speech to the JOC Mexico Trade Conference in Mexico City last month, Weisdal said that in addition to carriers, “shippers bear a huge responsibility” for promoting a carbon-neutral industry in that they have the power to prioritize lines that reduce greenhouse emissions.

According to Weisdal, the industry needs a standard way of ranking carriers by how aggressively they are reducing GHG emissions, rather than prioritizing lines by transit times, price, and customer service, as they do now.

“In my experience, a discussion with shippers 364 days a year, they’re willing to talk about sustainability — until the 365th day when we negotiate contracts,” Weisdal said. 

Major container carriers such as Maersk Line and CMA CGM, forwarders such as Kuehne + Nagel (K+N), and a group of financial institutions that includes Citi, DNB, and Societe Generale, are among the industry stakeholders that have already begun working toward decarbonization, launching biofuel powered vessel pilots and frameworks committing to “green” logistics services.

In 2018, Maersk committed to a goal of having net-zero CO2 emissions from its operations by 2050, making it the first carrier to do so. With the average life span of a container ship at 20 to 25 years, Maersk will have to deploy a commercially viable carbon-neutral container ship by 2030 to meet that goal. In late June, the world’s largest ocean carrier took some early steps, piloting a carbon-neutral trial shipment on behalf of clothing retailer H&M Group using biofuel to power the vessel.

CMA CGM, meanwhile, has placed orders for nine 22,000-TEU vessels capable of running on liquefied natural gas (LNG), and in March refueled a 5,095-TEU container ship at the Port of Rotterdam with biofuel in a test with IKEA and the GoodShipping program. During World Environment Day on June 5, CMA CGM committed itself to operating 20 LNG-powered vessels by 2022. 

K+N, the largest freight forwarder in the world by ocean volume, has expanded its sustainability platform by listing the total amount of CO2, sulfur oxide, and nitrogen oxide emissions generated by vessel shipments on invoice statements, also an industry first. Otto Schacht, member of the K+N management board responsible for sea freight, said the company aims to “raise visibility and awareness” among shippers of their own carbon footprint from transport operations to help them make better decisions regarding emissions.

Signaling cross-industry collaboration on the IMO’s climate change mandates, financial institutions have also pledged to play their part in decarbonizing the shipping sector. The Poseidon Principles, launched in June 2019, is a framework agreement signed by 11 major banks that binds lenders, relevant lessors, and financial guarantors to align their existing and future shipping portfolios with IMO climate goals.

“Responsible lenders lending to responsible owners will have a very positive change on the global fleet and its operational efficiency as determined by the emissions it produces,” Michael Parker, global industry head of shipping and logistics at Citi and chair of the Poseidon Principles drafting committee, said in an interview with JOC.com.

Short-term solutions

In the short term, industry experts say enhancing operational efficiencies — slowing vessel speeds; increased use of just-in-time (JIT) shipping, vessel load and route optimization; and hull fouling management, for example — may be the only route to meeting mandated IMO decarbonization targets.

Jasper Faber, an aviation and maritime transport expert at CE Delft, told JOC.com that until alternative fuels such as biofuels or LNG “are more widely available, and we have a feel of what the best fuel will be, in order to address GHG emissions, the only thing that can be done is to improve operational efficiencies as much as possible,” which in many cases will mean reducing ship speeds.

Also referred to as “slow-steaming,” reducing vessel speeds minimizes the amount of fuel burned in transit, thereby limiting GHG emissions on a per voyage basis by up to 30 percent, according to nonprofit environmental advocate CDP, formerly the Carbon Disclosure Project.

Most bulk shipping companies are in favor of slow steaming to reduce GHG emissions, with France proposing mandatory speed limits for ships last April during the May 13-17 meeting of the IMO’s GHG working group.

Container carriers, on the other hand, see mandated speed limits as counterproductive to global decarbonization goals. Emphasizing the need for additional ships to maintain weekly schedules, lines say ship speed limits will have net-zero effects on reducing GHG emissions and could cause delays in new low-carbon ship designs.

According to a report from the American Bureau of Shipping (ABS), increased use of JIT shipping — an inventory control strategy in which materials are delivered to manufacturers precisely when they are needed — would slow-ship speeds without imposing mandatory speed limits, saving 10 to 11 percent of CO2 emissions. However, the high costs associated with a JIT strategy will likely keep it from becoming standard industry practice.

In conversations with JOC.com, industry experts also noted the potential for emissions gains from increased use of shore power, which allows vessels to plug into the local electrical grid while at port instead of running their auxiliary engines. Shore power can reduce dockside GHG emissions up to 98 percent, according to the US Environmental Protection Agency (EPA), but at-port operations account for just 2 percent of total shipping emissions.

Although some operational strategies are less effective than others in terms of overall GHG reduction, they don’t require much in the way of additional research, development, or new technology to be implemented. And as Katharine Palmer, global head of sustainability for maritime consultant Lloyd’s Register, noted, “the earlier we start the transition [to a carbon-neutral shipping environment], the less disruptive it will be, and it can provide business opportunity for shipping.” 

‘Transitional’ measures

Market-based solutions, such as carbon pricing schemes, which essentially “put a price” on fossil fuel consumption, and alternative fuels such as biodiesel and LNG represent promising mid-term measures to supplement operational solutions for reducing GHG emissions from shipping, according to industry analysts.

Examples of carbon pricing schemes include climate levies and emissions trading systems. A climate levy directly sets a price on carbon by attributing a tax rate on GHG emissions, incentivizing vessel operators to spend the additional fees from the levy on switching to low-carbon engines and fuels.

However, Parker cautioned that a carbon levy would only be effective if the money collected is “administered by the industry itself with legitimate, independent asset management, where the funds are redeployed into funding technologies the industry needs,” thereby funding “green” technological investments.

Faber added that the success of such a measure is “highly dependent on the rate of adoption,” noting that “currently, there are only voluntary initiatives in individual companies.” Although he thinks an IMO-facilitated carbon levy is unlikely, a fuel standard or mandate to lower the carbon content of fuels — similar to the 2020 low-sulfur fuel rules — is possible in the next decade.

“Shipping companies could react by translating the mandate into an internal carbon price they can use to evaluate their purchases,” Faber said, pointing to Maersk as one of several companies that have “internal carbon prices” that are applied to separate business cases.

In addition to market-based measures, many industry experts see alternative fuels, including biofuels, LNG, and hydrogen, as a decarbonization solution for the future, arguing that there is insufficient research, development, infrastructure, and availability — as well as high production costs and issues with compatibility with legacy ships — to employ low-carbon fuels in the short term.

“At some point after IMO 2020, there may be another fuel transition in at least part of the industry: the transition to biodiesels,” said Roger Strevens, vice president of global sustainability at Wallenius Wilhelmsen.

Despite shortcomings in industry-scale availability, biofuels are compatible with conventional vessel engines, unlike hydrogen and LNG, which would require completely new ship designs.

Safety and bunkering concerns are also paramount when it comes to hydrogen and LNG fuels. Storing hydrogen fuel requires temperatures well below zero to avoid combustion or flammability which, even then, is not guaranteed, risking the safety of both crew and vessel. 

LNG also requires low temperatures and is susceptible to what is called “methane slip,” where unburned methane is released during combustion. Although methane is not a carbon, it is a greenhouse gas 84 times more potent than CO2, according to the Environmental Defense Fund, resulting in a potential net negative for the environment.

Uncertainty around the price of alternative fuels is another impediment to adoption, as the rate of demand and competition for such fuels, which will largely drive costs in the market, has not yet been determined, leaving the question of overall costs unanswered.

Peter Keller, chairman of SEA\LNG, a multisector industry coalition created to accelerate the widespread adoption of LNG as a marine fuel, said that “regarding the cost of compliant fuel, the one thing we do know — although we don’t know an exact price — is that it is going to be a lot,” adding that most estimates peg the differential over the price of heavy fuel oil at between 40 and 60 percent.

Taking the long view

All-electric, hybrid, and renewable energy-powered ship designs may be the key to achieving a carbon-neutral shipping sector in the long term, but implementation is unlikely in the short term due to the industry’s large global fleet of “legacy” vessels and insufficient technological bandwidth.

According to DNV GL, a provider of risk management and quality assurance services to the maritime industry, there are currently 356 all-electric or hybrid vessels either in operation or under construction as of July 1, 2019, a figure that has grown from zero over the last ten years. By comparison, there are 318 LNG ships sailing or on order today, which has taken about 20 years to materialize.

A DNV GL spokesperson told JOC.com the first large all-electric passenger ferry was able to show a 56 percent reduction in fuel costs, but there are still significant developments to be made to rely solely on batteries for vessel propulsion across the larger distances traveled by international cargo ships without recharging.

“For longer distances, especially oversea[s] trades, battery technology is not mature enough, and this will be the case for many years ahead,” the spokesperson said. “However, hybrid applications in combination with a sulfur-free fuel such as LNG are a promising solution for ships on such trades.”

The most significant hurdle to the development and deployment of new ship designs, however, is the fact that there are over 50,000 vessels in the world fleet, and they cannot simply be replaced or retrofitted overnight.

“The challenge for a ship built today is that this change will take place within its lifespan,” the DNV GL spokesperson said. “Failure to account for foreseeable regulatory and technology developments may render a ship built today uncompetitive at best; in the worst case it may end up being prohibited from operating altogether.”

Contact Danielle Sukharenko at danielle.sukharenko@ihsmarkit.com.

Comments

Excellent article

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