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Shipping is charting a course to a greener future

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Shipping is charting a course to a greener future

As the deadline for the most dramatic fuel regulation change since the turn of the millennium nears (IMO 2020), Ocorian Executive Director, Gary Bowman, who heads up the Ocorian Maritime team, draws on discussions from September's London Shipping Week (LSW) and recent industry comment to highlight how the shipping world is adjusting to a greener future.

You can read our IMO update from April here.

As with the London and Hamburg Marine Money events earlier in the year, conversations about IMO 2020 - reducing sulphur content of ship fuel oils from 3.5% to 0.5% m/m from 1 January 2020 - occupied much of the discussion at the week's events, albeit with an added sense of urgency. Yet the more immediate complications of the adoption of IMO 2020 fed into a wider narrative; an increasing shift towards a greener industry and its potential impact on all those associated with ship ownership, operation and management.

Shipping's green ambitions

Designated emission control areas (restricting suphur content to 0.1% m/m) already exist in places such as in the Baltic Sea, the North Sea, the North American ECA and the US Caribbean. However, for the wider global shipping industry, IMO 2020 will be felt throughout the entire value chain.

If shipping were a country, it would be the world’s sixth-biggest greenhouse gas emitter

IMO 2020 is the nascent stage of efforts to meet ambitious targets outlined in the IMO's 2023 and 2050 decarbonisation goals. Scheduled to introduce binding legislation to further reduce greenhouse gasses by 2023, the IMO then aims on looking at ways of decarbonising the entire shipping industry - with the hope of seeing reductions of at least 50% by 2050.

In full support of these ambitions, a number of traditional shipping banks have agreed to adopt the 'Poseidon Principles' (PP). Dubbed the world’s first sector-specific, self-governing climate alignment agreement amongst financial institutions, they are hoped to catalyse the transition to zero-emission vessels. Applicable to lenders, lessors, and financial guarantors, the PPs establish a global framework for assessing and disclosing the climate alignment of ship finance portfolios. This will bind signatory banks to withdraw financing for vessels that do not adhere to IMO 2050 guidelines.

The IMO hopes to reduce greenhouse gas emissions by at least 50% on 2008 figures by 2050

As banks and financiers show more interest in their clients' environmental credentials, the global drive to go greener is intensifying pressure on ship owners. Sentiment at LSW seemed to suggest that those already prepared or making preparations for the switch to low emissions will have a better chance of long-term success. But is the industry ready for the switch?

All aboard IMO 2020?

Interestingly, a Tradewinds Knowledge survey of industry figures revealed that 45.7% think shipping is unprepared or little prepared for the implementation of IMO 2020. Roughly speaking, of the 60,000 vessels on the seas, just 4,000 are predicted to have had the necessary emission abatement technology (or 'scrubbers') fitted that enable ships to continue using high sulphur fuel oil by January 2020. Yet there is also concern over the use of a particular type of scrubber called open-loop scrubbers. Although one of the cheapest options for meeting IMO 2020 guidelines, the systems pollute the sea by discharging treated water (containing sulphur) overboard. They have already been banned by China, Singapore and Malaysia amongst others.

However, initial concerns over the undersupply of viable alternatives such as low sulphur fuel oil (LSFO) and marine gasoil (MGO) seem to have subsided. There have instead been calls for policy makers to reduce the costs of LSFOs through subsidies. Yet, the major mood point centred on whether or not IMO 2020 will result in an uneven playing field. Ultimately, how much shipping companies, owners and the wider market benefit from going green rests with a consistent global adoption of regulation.

The IMO itself has no authority to enforce the regulation and instead relies on those states that have ratified it into their own law, with fines for those failing to comply. The unpredictable level of enforcement has led many countries such as Egypt, Pakistan, Mexico and Argentina to take a passive stance as they wait to see how IMO 2020 implementation unfolds.

It is clear that enforcing the new regulations will require expertise and additional resources that enforcement authorities in some of the poorer flag or port states simply cannot afford. Therefore, as many feared, there is unlikely to be consistency across the world; inconsistency that puts some at a significant financial advantage.

A change for the better

Despite concerns over the enforcement of IMO 2020, there was optimism over the long-term effects of a greener shipping industry. Analysts at Swiss bank UBS estimate that the green shipping market could be worth at least $250 billion over the next five years. New energy-efficient ships may also hold their value better and the benefits for the environment and coastal communities are significant. A Finnish Meteorological Institute report estimates that an on-time IMO 2020 implementation would prevent 570,000 premature deaths globally. It is also anticipated that it will trigger an increase in freight rates, resulting in ship owners passing incremental fuel costs onto clients and therefore receiving higher earnings in the process.

Ship sulphur emissions for 2020-2024 will drop by about 77% due to IMO 2020

It will be interesting to see how the beginning of 2020 unfolds. Ship owners need to take urgent action in advance of the 01 January deadline whilst port and flag states need to be adequately prepared along with all those across the shipping value chain. How IMO 2020 is enforced in terms of whether nations are ready and willing to comply could set an ominous precedent for future decarbonisation initiatives.

Ocorian provides corporate administration for many vessel owning structures in the maritime industry and we will be monitoring developments with interest as 2020 fast approaches. Where the refinancing of vessels is required to cover the costs of compliance, especially where syndicated loans are favoured, Ocorian can provide a tax neutral offshore platform to facilitate this. To discuss this further, get in touch with Gary below or to find out more about our maritime offering, click here.  

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