Shipping’s Growing Carbon Gap

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On the face of it, Shipping is the most efficient of freight transport modes. Intermodal shipping containers kick-started rapid growth in trade globalisation 60 years ago, and container ships, tankers and bulk carriers have been getting bigger ever since. Carrying more freight with less fuel on a tonne-mile basis, shipping has the highest energy productivity of all transport modes.

Yet looks can be deceiving. While international shipping contributes 2.4% of global greenhouse gas emissions, business-as-usual could see this explode to a whopping 18% by 2050. As trade growth increases demand, today’s fleet burns the dirtiest transport fuels, and a new report shows the market doesn’t reward ship owners who invest in the latest fuel- and carbon-efficient technologies.

When you consider the scale of the sector’s emission reductions that need to start now to contribute to the COP 21 Paris Agreement target of 1.5°C to 2°C global warming, there’s clearly an enormous decarbonisation gap that threatens to strand shipping assets in a nightmare of devaluations if potential regulatory policies come into play. Current freight flow stoppages due to Hanjin Shipping’s bankruptcy show the disruption shipping company failures can cause.

Markets don’t reward efficiency

The UCL Energy Institute report paints a sad 10-year picture of free-market myopia that finds the latest fuel efficient ships have no better market performance in terms of revenue or usage than vessels with decades-old technologies.

So why wouldn’t cheaper-to-run ships be used more than old ones? Well, today’s record-high shipping capacity drives a low freight rate market, so owners of highly efficient ships must match reduced market rates while passing on fuel savings to charterers, who get the win-win all to themselves.

OK, with fuel prices low the past few years I can understand fuel efficiency has less profile now, but back when capacity was less, charter rates higher and fuel through the roof the report shows it still didn’t seem to get much consideration from charterers. And operating speeds were found to be slower for the more efficient ships, when I would’ve thought the opposite. If fuel cost is barely being considered, maybe its significance in vessel operating cost structures isn’t as big as you’d think, especially in the charterers’ or cargo-owners’ total end-to-end cargo delivery costs.

Market inaction breeds future risks

Shipping customers doom themselves to higher costs over the long term by not incentivising efficient newbuilds and retrofits now.

Current regulation such as the Energy Efficiency Design Index will take forever to have much effect, so if the International Maritime Organisation can’t show improvement in the industry then a UN/State/regional-level carbon price may be forced upon it.

The RightShip GHG Emissions Rating system aims to fix information barriers but the information’s importance needs to influence charterers so they demand GHG ratings or validated fuel efficiency numbers from owners before contracting. Charterers and brokers need to understand the value/net benefit in whole-of-contract-life cost terms, and clearly now only Cargill, BHP Billiton, Rio Tinto and others who use the RightShip ratings system do.

But do these customers actually pay a premium for the good GHG Rating ships they’re using? Their market power allows them to screw rates down as well as anybody. Given GHG Rating users handle 20% of world trade, the report shows no benefit is flowing through to ship owners in better rates or utilisation, leaving little incentive for new fuel efficiency investments or substandard vessels to leave the market.

Who will lead change?

Community expectations to close the decarbonisation gap will come to bear on shipping from governments, investors and from within.

While further regulation may be justified, a mandatory efficiency standard will be difficult to apply to old vessels. Ultimately it might take a carbon price passed directly to charterers supported by voluntary Energy Efficiency Operational Indicator and Existing Vessel Design Index measures with in-service validation and benchmarking to force and help charterers change their decision-making.

Investors increasingly vote with their wallets to make boards respond to green preferences that are rationally based on financial sustainability and managing risks in a zero carbon future.

Owners of efficient ships must better promote their value proposition that reduces costs, positions for green demand and lowers regulatory risk for customers and the industry. Cargo owners, charterers, brokers, ports, banks, industry associations, suppliers and employees can all influence fuel efficiency improvements in the shipping fleet.

The oversupply of ships that helped take down industry giant Hanjin Shipping can only be fixed by scrapping old inefficient vessels, and the shipping market must take the lead now for its long term benefit.

What does a COP21 goal of net zero emissions mean for Freight Transport?

Business leaders are calling for a goal of net zero emissions to be set at the UN Climate Change Conference COP21 in Paris this week. With 7% of global emissions coming from international freight transport, and growth in globalisation expected to increase such emissions nearly fourfold by 2050, the response from the logistics industry will be fundamental to meeting that goal. Yet for Freight Transport to achieve zero carbon, a key constraint is having good information all supply chain players can trust.

The Volkswagen saga shows how gaps in emission measurement standards or their application can shatter our faith in claims regarding emissions or fuel performance. Transport operators make a variety of statements about their environmental credentials, but how can freight buyers compare options with confidence?

A new non-profit, the Smart Freight Centre, is leading a collaboration of the world’s biggest shippers and transport companies to create a transparent, universal method of calculating logistics emissions along supply chains so people can make better decisions on how to move freight in the greenest way.

Data Drives Emissions Down

Transporters act in various ways to reduce energy use and emissions intensity across all logistics sectors to save money, reduce risk and meet growing customer demands for green transport services.

Good information is crucial for transporters to understand the real costs and benefits of potential emissions savings opportunities. It can be difficult to isolate gains produced by a single initiative given the amount of variables that affect fuel economy. Uncertainty about the environmental performance of alternative fuels and engine technologies is compounded by the lack of reliable case study information on their effectiveness for each transport mode. The integrity of external information sources relies on what exactly was measured, how and by who, and how the data applies to a specific task, the equipment configurations and local conditions.

In response, a growing number of collaborative groups are assessing technologies and practices that enable low carbon transport and share information on what works and what doesn’t.

Measuring the Whole Supply Chain

At a broader level we must consider a supply chain’s end-to-end profile. Measuring emissions from a train, truck, plane or ship is one thing, but allocating shares of those emissions to each freight item carried gets complicated across all legs of multi-modal freight movements criss-crossing the globe.

Online retail is creating exponential growth in single-item deliveries direct to homes and workplaces from worldwide sources. Growing consumer demand takes priority over the efficiencies of traditional logistics models, where bulk shipments via distribution centres to retail stores provide economies of scale for more energy- and emissions-efficient freight. Light commercial vans are the fastest growing traffic category in many countries, yet vans are second only to aircraft in energy consumed per tonne kilometre and generate over four times more CO2 per tonne-km than the average 44 tonne truck. This restructuring of supply chains affects the environmental footprint differently across geographies and logistics sectors.

Increasingly, freight buyers need to better understand the sources of logistics emissions along their supply chains, where freight can account for 25% or more of a product’s lifecycle emissions.

One Common Standard

The Smart Freight Centre hosts a collaboration of business and associated stakeholders creating a global framework for logistics emissions accounting. In 2014 they established the Global Logistics Emissions Council (GLEC) to develop a universal and transparent way of calculating logistics emissions across global multi-modal supply chains so that shippers and logistics providers can include carbon footprints in business decisions, alongside costs, time and reliability when selecting modes, routes and carriers.

GLEC will harmonise existing methods and address gaps to devise an assurance standard in freight logistics emissions that enables more accurate and reliable benchmarking and realistic emission reduction strategies. Its’ framework builds on:

To better understand how it will operate for both shippers and logistics service providers in real world supply chains, a series of case studies is underway to gauge the practical availability of data and how it can be used to optimise low carbon freight movements. By simplifying a complex business with a common standard everyone can use to compare green logistics options, people can confidently use good information to reduce both environmental impact and cost.

Towards Zero Carbon Transport

Achieving net zero transport emissions requires using less fuel in tonne-kilometre terms (a key energy productivity metric) and using the cleanest fuels that suit particular freight tasks. The unavoidable residual emissions can then be neutralised by purchasing carbon offsets based on precise and trustworthy emissions measurement.

As global freight emissions rise, a harmonised method for emissions accounting becomes increasingly necessary. Supply chain players large and small must have good emissions information to maintain competitiveness and prepare for the complexity of a carbon-constrained world.

Consultation workshops in the USA, Latin America, Europe and Asia are inviting public comment on the GLEC Framework, so download it to learn more. If you think about how this tool can improve your freight decision-making, you can help develop a logistics emissions methodology that assists Freight Transport to realise the net zero emissions goal.