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.

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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.

Clean Transport Fuels – What are the Real Options?

Australia’s carbon price is here, so how can transport operators gain from cleaner fuels?

As a retailer, manufacturer, miner or farmer, where in your supply chain can clean fuels bring real benefits, now?

Biofuels win under Carbon Pricing

Biodiesel and ethanol now have a carbon price advantage over other transport fuels. While gaseous fuels (LNG, LPG and CNG) have lower greenhouse gas emissions than diesel and petrol, on July 1st they copped a tax “double whammy”:

  • Gas excise duty now rises each year while biofuels don’t pay excise until 2021.
  • Gaseous fuels attract a carbon price; biofuels don’t.

But costs continue to rise

Biodiesel and ethanol are made from agricultural commodities and organic waste materials. Rising demand in many industrial uses is pushing up prices of these feedstocks, and some are caught in the “Food versus Fuel” debate. The promise of offsetting society’s dependence on oil is now staged against our ability to feed growing populations. As food prices rise around the globe, economic, environmental and social trade-offs are made in a complex arena. Government support for biofuels in Europe is weakening as new laws narrow the choice of feedstocks.

Our small demand in global terms competes for inputs with big biofuel producers overseas. Australia has only a handful of biodiesel and ethanol plants, and none are world scale. Soaring Asian demand  consumes feedstocks and raises prices, challenging the viability of Aussie producers.

On a positive note, one Queensland company already produces an ultra clean synthetic diesel  and says they can do it for only 20 cents per litre.  20 cents! Is that a typo?

Biofuel blends

In practice, biofuels gain only a small carbon price advantage over other transport fuels. That’s because biodiesel and ethanol need blending with regular diesel and petrol to comply with fuel quality standards and excise rules. This reduces their carbon price advantage by 80% in the case of a B20 blend (20% biodiesel and 80% mineral diesel) down to 1.2 cents per litre. Then the logistical challenges in getting blended products to end users can pretty quickly gobble that up!

Market Reality

Market entry remains the biggest challenge of all:

  • it’s hard to supply biofuels at a competitive price due to the infrastructure and volumes needed
  • business models face rising production costs and can’t rely on government support
  • many people just don’t trust biofuels
  • lack of demand means local plants can’t expand to world-scale
  • fuel retailers need to invest in storage tanks to offer alternative fuels at the bowser

Playing with the Big Boys

Despite volatile prices, oil-based transport fuels dominate the market. Major oil companies have supply networks, production technologies and retail models they have refined for more than 100 years. While a few officially support alternative fuels, their practical steps have been tentative at best.

Getting traction

There’s no silver bullet for introducing cleaner transport fuels – a portfolio of fuels is needed. Today, both biofuels and gaseous fuels are used successfully in various light and heavy vehicle applications. Depending on a vehicle’s work task – it’s payload capacity, speed, stop-start intensity, distance range and fuel efficiency to name a few variables – each fuel has its’ “pro’s and cons”. Thorough due diligence is needed, and the clean fuels industry could better educate and communicate the sweet-spots to end users.

Meanwhile, trials of cleaner jet fuels show that biofuels can be safe, reliable and are ready for use, but would not meet immediate demand if large airlines make the switch. Yet such trials are vitally important, especially with the support of engine makers who remain critical to clean fuels take-up. Truck manufacturers like Scania run ethanol trials in their own operations to prove new clean fuel technologies.

Test & Invest

Yet even with government support, some avid users and a few keen oil companies, all clean fuels have their own market entry challenges. Carbon pricing may help some clean fuels, but it will fall short of what’s needed.

To make real progress, all supply chain partners must work together to understand which clean fuels can help their particular situation. Only through collaborative testing can the right clean fuels be chosen for each supply chain. Then clean fuel producers must make their fuels available at retail and industrial points of use – reliably and cost-effectively.

So if you want to win from cleaner fuels, you’ve got to make it happen. Get with your supply chain partners to test and invest in clean fuels now.

How can Freight Buyers minimise carbon tax in their supply chains?

Moving freight around Australia will soon attract carbon tax.  You can reduce this new cost in 2 ways:

  1. Use less fuel
  2. Use cleaner fuel

While they control fuel use, transporters need their customers’ help to manage carbon liability. Moving the discussion past who carries the carbon tax burden, the question now becomes: How can Freight Buyers minimise carbon tax in their supply chains?

Carbon Tax = More Fuel Tax

Carbon tax on Transport will be applied through the fuel tax system. Fuel tax is a consumption tax, and fuel tax credits are needed to ensure that fuel tax is not burdened on transport businesses, but rather the final consumer. This is consistent with Australia’s tax system more broadly, where consumption taxes are intended to apply to final consumption rather than business inputs.

If transporters pass on carbon tax (that is, reduced fuel tax credits), Freight Buyers wear the cost; and if carbon tax is not passed on, their transport partners may become unviable. So, as a consumption tax based on Freight Buyers’ demand for transport services, carbon pricing gives Australian shippers a clear incentive to make their supply chain buddies improve fuel efficiency and switch to cleaner fuels.

How Transporters improve Fuel Efficiency & Switch Fuels

Using Less Fuel requires efficient equipment and efficient operations. The Australian government’s Energy Efficiency Exchange reviews a wide range of fuel saving measures for rail, road and air transport. If you total the high side of the energy savings estimates, you’d think that 50% fuel savings or more are there for the taking. But it’s never that simple. The success of each measure depends on its operational setting and many only deliver long term results if adopted systematically. For instance, vehicle eco-driving improvements which promise 10% fuel savings need all drivers to have specific training in expected behaviours, backed up by regular refresher training and constant performance management to always maximise fuel savings.

When it comes to Cleaner Fuels, so-called ‘drop-in’ fuels such as ethanol, biodiesel and renewable diesel are the easiest to introduce because they can use existing fuel delivery infrastructure (with some adaptations). And these Biofuels offer great opportunities for immediate reductions in carbon tax due to their zero rating for carbon emissions under the Clean Energy Future laws. Gaseous fuels like LNG and CNG, however, need capital investment in new engine technologies as well as dispensing equipment and infrastructure to create a reliable and extensive supply network.

Ultimately, Transport firms who thrive under carbon pricing will be those using a myriad of actions that lead to lower carbon and energy use.

How Freight Buyers can help

Freight Buyers across the retail, resources, construction, manufacturing, energy and agriculture sectors increasingly insist on low carbon transport. The next step is to think of carbon tax as a shared liability with joint commercial incentives to improve productivity and fuel efficiency. They can help their transport partners by measuring, co-investing and even “opting-in” to manage carbon in their supply chains:

1. Measure

At minimum, an accurate picture of baseline energy use and greenhouse gas emissions is needed. Partnerships can collect,  analyse and verify such data to develop emission reduction plans. Supply chain carbon profiling is the starting point to reduce risk and gain competitive advantage in a low carbon economy.

2. Co-invest

When Freight Buyers invest time and money in fuel use projects, more knowledge and resources can earn a bigger bang for everyone’s buck:

  • Operational changes can boost productivity dividends from investments Transporters have already made. Changing operating hours so delivery vehicles can avoid peak commuter traffic is one. Another is making greater use of High Productivity Vehicles such as B-Double trucks through local road permit applications as well as site works expanding physical access and storage capacity at load and delivery points to allow ordering in larger load sizes.
  • Commercially, Buyers can specify low emission and fuel efficient technologies in their tenders and contracts. Paying a freight price premium supported by contract commitments allows transporters to secure finance and recover the higher capital costs of advanced emissions technology. Large Freight Buyers can even boost their transport partners’ negotiating power with technology suppliers through joint procurement contracts to reduce unit prices.
  • Capital investment can overcome barriers to adopting new technology which the carbon price – by itself – is unlikely to impact. Supporting R&D trials of latest technologies in local conditions will improve joint understanding. This may require funding which shares risks and puts some ‘skin in the game’ with all stakeholders sharing the rewards. LNG and Biofuels, for example, need to be conveniently available. Large freight users could install LNG or biodiesel refuelling stations at their Distribution Centres, which are hubs for regional & interstate linehaul and urban delivery vehicles. This would complement the emerging LNG and Biofuels distributor networks to speed-up trucking industry adoption of cleaner fuels.

3. Opt-In

What if large Freight Buyers could “Opt-in” to emissions trading so they could directly manage their transport carbon liability?  Freight contracts that pass-on carbon property rights would allow Freight Buyers to manage the carbon tax liability for all the transport services they consume, opening up international linkages and domestic offsets on greater economies of scale than only the largest transport firms could contemplate. It may help achieve the economic goal of any emissions pricing regime: To achieve targeted environmental improvements at the lowest marginal cost to society.

Collaborate to Win!

Intelligence on carbon and energy use within supply chains will improve decision-making and is the first step on the path to gaining competitive advantage in a low carbon world. Shared understanding of carbon and energy reveals business opportunities and manages risks. “Without conducting the study,” says one company MD who has done just that, “I have no doubt we would have targeted projects in areas with less potential for both environmental and financial return.”

Cross functional teams of Freight Buyers, transport operators and other stakeholders can develop more powerful business cases for reducing carbon use. Such teams challenge conventional wisdom by asking:

Are we doing everything right to minimise fuel and carbon use, everyday, on every truck, train, ship and plane?

There is no silver bullet; a portfolio of initiatives is needed. It takes more work to be energy-efficient. Efficient operation requires experimentation. And many measures will only deliver consistent, long-term results if businesses adopt them systematically.

Freight Buyers who want their transport providers to do it all alone will miss out on the substantial opportunities that arise from supply chain co-operation.  In the new low carbon economy, the opportunity cost of not collaborating is competitive disadvantage. Stay tuned!