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Gregory Brew

Gregory Brew

Gregory Brew is a researcher and analyst based in Washington D.C. He is currently pursuing a PhD at Georgetown University in oil history and American…

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Shipping Industry Faces Uphill Battle Against New Climate Regulations

Tanker

The shipping industry, currently in the midst of an over-capacity crisis that has toppled at least one major international shipping firm, must now come to grips with a new demand to reduce sulfur emissions, improve fuel standards and generally take greater action in addressing its role in battling climate change.

The International Maritime Organization (IMO), a United Nations agency tasked with crafting shipping regulations, is meeting in London this week and is expected to discuss new measures to reduce carbon emissions from international shipping. Should they reach an agreement with the shipping industry over new regulations, it would mark the third major development in climate change, after this month’s decision to reduce emissions from refrigerators and air conditions, and the agreement by the International Civil Aviation Organization (ICAO) to reduce emissions from air travel.

Both shipping and air travel, deemed to lay outside of national borders, were largely untouched by last year’s Paris Agreement on climate change. Both are major contributors to global carbon emissions, with shipping contributing 2-3 percent of global CO2 output annually, according to the IMO. Shipping’s emissions are around 1,000m tons of CO2 a year and are expected to increase by 2030, making up some 17 percent of global carbon emissions. Aviation, by comparison, produces about 781 million tons of CO2.

Chief among the IMO’s concerns as it meets this week is the sulfur content in shipping fuels. Ships burn fuel which contains 3,500 times more SOx than the European diesel fuel standard, and the IMO is considering imposing regulations to reduce the SOx content from 3.5 percent to 0.5 percent. The crucial question is whether this requirement would be enforced in 2020 or 2025.

Sulfur is an agent for climate change but it is also perceived as a global health hazard, with the IMO estimating a reduction in SOx emissions by 2020 could prevent 200,000 premature deaths from lung cancer and heart disease, both aggravated by sulfur emissions. Related: Oil Prices Slammed As Dollar Suddenly Breaks Out

For months, action by the IMO was resisted by the global shipping industry, which is suffering from hard times. The building and trade boom of the early 2000s created a tremendous demand for shipping capacity, but that demand has slowed and left the major firms with hundreds of thousands of tons of spare capacity.

The stress drove major firm Hanjin to bankruptcy, leaving its fleet stranded on the world’s oceans. The remaining firms are facing high operating costs and narrow margins; the situation would likely become worse if new fuel standards were adopted, with daily operating costs increasing by $30 thousand a day. Switching to low-sulfur fuel would raise fuel costs by 44 percent according to one broker.

Bimco, a global shipping group, has lobbied to have the sulfur standard pushed to 2025. It has argued that costs on shipping firms will be too high, due to the shortage of sulfur-light shipping fuel.

Yet several major firms have now come out in favor of the new standards. On 21 October, a letter was issued with the joint support of fifty-two leading shipping organizations, including Maersk, Cargill, the Global Shipping Forum and the Danish Shipowners’ Association, calling on governments to take action to combat global climate change.

The EU is pushing for the higher standards to be imposed sooner rather than later. They are joined by China, which already prohibits ships burning fuel with more than 0.5 percent sulfur content from stopping at Shenzen, the world’s third-largest shipping port. Related: Could An Intense Winter Fuel The Oil Price Rally?

The decision of these firms to support climate change measures is likely a reflection of a growing realization in many global industries that state-enforced environmental regulation is something of an inevitability; that the impact can be better managed if the industries themselves participate in the regulatory process; and, with concern over climate change increasing globally, it would suit major firms to appear on the “right side of history,” as it were.

To meet new standards, ships can switch to low-sulfur fuels, install scrubbers or modify their ships to burn liquefied natural gas (LNG), a low-sulfur, low-CO2 alternative. Should this option be adopted, it would represent a massive potential market for LNG at a time when supply is outstripping demand.

Experts have expected new fuel standards for years now and the industry has been bracing for changes in environmental regulation. While resistance will continue, it seems likely that shipping, like aviation and other industries, will have to conform to new state-mandated environmental regulations, as political pressure to combat climate change grows.

By Gregory Brew for Oilprice.com

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