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Shipping players lash out at IMO for slow negotiations over global carbon pricing

03 March 2022 Max Tingyao Lin

International Maritime Organization (IMO) member states have been debating on a global pricing regime for GHG emissions from shipping for more than 15 years. And some industry players believe their failure to reach any conclusion contributed to the slow decarbonization process of maritime transportation, which accounts for 2-3% of the world's annual total.

Negotiators have in general deliberately left out international shipping and aviation from the UN Framework Convention on Climate Exchange's discussions, which focus on national ambitions to limit emissions.

While the International Civil Aviation Organization has put in place the Carbon Offsetting and Reduction Scheme for International Aviation, which functions as a carbon market for aircraft operators globally, the IMO has yet to agree on any market-based measures for emissions form maritime transportation.

In the World Ocean Summit this week, container line Ocean Network Express' CEO Jeremy Nixon said shipowners lack the incentives to invest in vessels consuming low-carbon fuels if there are no costs for their emissions.

While oil-based bunker prices are hitting all-time highs due to surging crude prices lately, breaching the $800-per-metric ton (mt) market in some markets, Nixon expects green fuels to cost much more.

"These new fuels are probably going to be about $2,000/mt in the initial period, and then when we get to scale up production, we may be able to get the prices down to $1,500," Nixon told the virtual conference.

"We need to have market-based measures of some sort [for shipping emissions]," he said, adding that the first movers investing in ships using more expensive low-carbon fuels should not be put at a high disadvantage against those with vessels fueled by traditional fuels.

Speaking at the same panel, Danish Maritime Authority Director General Andreas Nordseth agreed that the industry would struggle to kickstart decarbonization without having to pay for emissions.

"We need a market-based measure for the first movers to eliminate the price differences. I see no other way," Nordseth said. "We have to have some mechanisms that assist in the right direction."

Slow regulatory process

Since 2006, the IMO has been mulling over various proposals over how to price shipping emissions, including a carbon levy and cap-and-trade systems based on absolute emissions or energy efficiency standards.

But member states could not form a consensus over what would be the best way forward, and how to spend the revenue from such a pricing regime.

With the negotiations dragging on, the European Commission has proposed gradual cuts in marine fuels' GHG intensity and the inclusion of shipping in the EU's Emission Trading System.

But many shipping executives argue regional emissions regulations would create an uneven playing field, as vessels can trade internationally with limited restrictions.

"Our customers are trading everywhere around the world. We can't have lots of different bilateral-type arrangements," Nixon said. "We need to have one multilateral framework."

Gyorgyi Gurbán, head of projects implementation at the IMO, also suggested only international regulations can help the industry decarbonize on a global scale.

"It's a global business. It's the backbone of global trade. So I think that solutions will also need to be found globally," she said.

UN agencies are notorious for their slow decision-making, but Gurbán admitted that the IMO could take even longer in reaching conclusions than others.

"The UN is known for soft law like setting targets and setting ambitions. But the IMO is different in this," Gurbán said. "It has a long-standing history of setting technical standards and hard law.

"So that may be also the reason why negotiations take a bit longer, because once they [IMO members] conclude, the regulation has a concrete impact on how shipping is done straight away in international waters."

Uncertain outlook

In recent months, the momentum appears to be building for the IMO to expedite its discussions over the pricing regime.

Th International Chamber of Shipping (ICS), which represents 80% of the world's merchant fleet via national shipowners' associations, called for a carbon levy applicable to global shipping last October without specifying an amount.

During the COP26 summit in November, the Climate Vulnerable Forum (CVF)—composed of more than 50 countries—said the IMO should establish a GHG levy on international shipping. The Marshall Islands, one of the CVF members, joined hands with the Solomon Islands to propose an initial levy of $100/mt.

IMO member states still could not agree on any proposed carbon pricing mechanisms during the Marine Environment Protection Committee meeting 22-26 November, but they promised to continue their discussions in the two coming meetings of Intersessional Working Group on Reduction of GHG Emissions from Ships. They will be held 14-18 March and 16-20 May, respectively.

Some debates have centered around how to spend the proceeds from a pricing regime, and how to govern the spending. The IMO is not experienced in managing funds, and the amount of money involved could be large: a levy of $100/mt could raise $90 billion a year based on shipping emissions estimates.

Some countries want to use the proceeds to help developing countries adapt to climate change, while others believe they can fund shipping decarbonization. "We are aware governments don't always see eye to eye … There are different views amongst the countries," Nixon said.

While admitting each pricing regime has its pros and cons, Nixon suggested he would likely favor a fuel levy over others.

"It's universal. It's paid at the point of bunkering … It's totally transparent," he added. "It's easy to pass on from the shipowner to the charterer, to the shipper, through to the final freight payer."

Quah Ley Hoon, CEO of Maritime and Port Authority of Singapore, shared a similar view but urged the industry to begin decarbonization before any regulation is finalized.

"We need market-based mechanisms to reduce the price differential and catalyze the uptake of low- and zero-carbon emission [fuels]," she said. "A good, global carbon levy on marine fuel consumption is actually very straightforward. It's easy to implement.

"But it will take time for discussions at the IMO on a global level," said Hoon, adding that shipowners need to find ways to fund pilot decarbonization projects in the intermediate period.

Difficulties in green ship finance

So far, the IMO has only committed to cutting the carbon intensity of all ships by 40% by 2030 and halving emissions from international shipping by 2050 against 2008 levels.

The UN agency lowered sulfur limits in marine fuels for all ships from January 2020; alternatively, shippers can fuel with LPG or LNG, or they can install an emissions-cutting technology called scrubbers. Some limits on vessels' carbon intensity and energy efficiency are to be introduced in 2023.

Several countries, including Japan, are pushing for a net-zero target by 2050 at the IMO. The ICS has already pledged to this goal.

But this will be costly—the Global Financial Markets Association and Boston Consulting Group estimated $2.4 trillion in funding is needed for shipping to achieve net-zero emission by midcentury. Only a small number of shipowners, including A.P. Moller Maersk, have started to make large investments in low-emissions vessels.

Alexandre Amedjian, head of shipping finance for Europe, Middle East, and the Americas at French bank Societe Generale, said financiers tend to steer away from the shipping industry because vessels are expensive—usually costing tens of millions of dollars for common cargo carriers—and do not enjoy stable earnings.

"Shipping companies needs to borrow a lot of money to finance this type of asset and they have then a lot of debt on their balance sheets," he said. "When you mix a high level of debt with instability of cash flows and revenue, that's usually a combination that financers do not like."

Furthermore, the debates over what will be the future low-, zero-emissions marine fuels are still ongoing. Ammonia, methanol, and synthetic gas have emerged as strong candidates, but there is no clear frontrunner.

"As a shipowner and as the financer of this shipowner, you want to make sure that the investment is going to last 25 years, 30 years, which is the asset life of vessel," Amedjian said. "The problem right now is that which [fuel] should we choose? There is no agreed pathway."

Before supply chains of future fuels are established and the technological choices are clear, shipowners probably won't "take a strong view on what they need to do," Amedjian added.

He sees an even bigger issue for financiers to fund low-emissions retrofits for existing ships compared with newbuilding projects for vessels consuming green fuels.

"Shipping lenders will require a security. That's fine when you finance a newbuilding" because the ship can be used as a collateral, Amedjian said. But few vessels are mortgage free, so financiers have no collateral security when funding retrofits, he added.

Posted 03 March 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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