Shipping’s Growing Carbon Gap

sinking_container_ship

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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Think the emissions scandal is all about Volkswagen? Think again.

The Volkswagen emission scandal is rocking the corporate world and it’s just the beginning. The CEO is gone, the workforce shamed and Germany’s flagship industry is a national embarrassment. But if you think it’s all about Volkswagen, think again, because it seems the system has been open to gaming by vehicle manufacturers for years.

Dodgy Test Regime

A new article from the The International Council on Clean Transportation (ICCT) exposes systemic flaws in the European vehicle testing regime. Poor regulatory oversight allows vehicle manufacturers to exploit tolerances in vehicle test procedures with impunity. By showing better fuel consumption and emissions ratings, the market rewards them as consumers vote with their wallets to save fuel costs and reduce environmental impacts. It results in a perverse incentive for manufacturers to spend as much of their efforts perfecting the test as they do improving efficiency of the vehicle itself.

Vehicles are tested in laboratories and on special test tracks to assess their various performance characteristics, including fuel consumption and CO2 emissions, to show the vehicle meets legislated minimum performance standards and support marketing claims. Volkswagen vehicles are now found to be compliant under test conditions but not in ordinary use, with software installed to let the vehicle pass the test yet operate in service with much higher emissions.

Clearly illegal and unethical, Volkswagen is deservedly copping the brunt right now, but the scandal reveals a culture among vehicle manufacturers who can potentially ‘game’ a system that has holes in it so great you could drive a B-Double truck through, completely legally of course. The integrity of all European vehicle fuel consumption and emissions claims are now in doubt because benchmarks can be set on test tracks with downhill slopes with favourable cambers to improve performance and specially-prepared tyres hardened in an oven beforehand to provide the least rolling resistance during the test. Hardly real-world driving conditions. You can’t blame manufacturers for using the most economical drivers, tuning vehicles to suit a track of their choosing and any other methods to give the best test score, because the score influences sales. The point is, however, vehicles cannot repeat these high standards when used by you and me on public roads.

We don’t accept wind-assisted track and field times for world athletics records because it’s a not a true measure of human capability. Likewise, we shouldn’t accept these vehicle performance figures.

The ICCT found the gap between test figures and real-world in service performance is ‘ever-growing’ – from 10% in 2002, to 35% in 2014 and is on track to be 49% by 2020. What confidence can the public – private consumers and businesses alike – have in a score that could be 50% out?

Implications for Australia

Australians are vehicle technology takers, relying on the standards of Europe, USA and Japan to drive fuel and emissions efficiency improvements. Without our own minimum fuel efficiency standards we become a dumping ground for the world’s noncompliant vehicles. With Canada, China, Brazil and Mexico implementing their own minimum fuel efficiency standards, this gap is growing too. As an island continent there’s no secondary market for used vehicles, so the impacts of inferior fuel and emissions performance of “hand-me-down” technology will be felt in Australia for years.

Data is the key constraint in this aspect of the road vehicle industry. People rely on the integrity of performance claims in sales brochures, and expect the protection of regulatory oversight. Buyers of passenger cars can check the Green Vehicle Guide to compare vehicles, yet the ICCT suggests green vehicle ratings are based on desktop review of now dubious test calculations.

Trucking companies already have difficulty believing the fuel efficiency claims of manufacturers because Australian conditions are so different to the test tracks of Europe and America, so large transporters invest in their own R&D by testing trucks themselves before purchase because they know the value of getting their fuel figures right before committing to substantial investments with huge running costs over a truck’s life driven by fuel usage and volatile fuel prices.

Small and medium transport companies may not have the resources or skills to test new vehicles properly before buying. There’s no green vehicle guide for heavy vehicles. The closest offering is the NSW government’s Green Trucks Partnership which brings together vehicle users and manufacturers to test various fuel saving technologies in real-life Australian applications with independent reporting on benefits achieved against claims made by technology proponents. The information is shared in case studies on the Green Trucks website.

Australia needs its own standards

Transport is the second largest user of energy in the Australian economy after electricity and is growing faster. Introducing minimum fuel efficiency standards is one of the easiest, cheapest and most effective ways we can save energy costs, reduce carbon and air pollution emissions, and improve fuel security. Australia must take charge of its destiny and develop its own minimum fuel efficiency standards for light and heavy road vehicles. We can learn from Europe’s woes and stringently test vehicles prior to service then follow the USA’s lead and actually test each vehicle type once in service to validate real world performance. Regulation without enforcement provides only a false sense of security and blind faith in marketing claims which, as Volkswagen has shown, fail under scrutiny.

Transport Energy Audit Standard : seeking your views

Implementing energy audit recommendations usually achieves significant cost savings. However the current Australian Standard for energy audits is based on auditing commercial buildings and is not practical for transport.

Transport operations have characteristics that produce variability in energy performance and make fleet energy use difficult to model:

–          Very high variation in routes, loading and traffic conditions;

–          Vehicle operators strongly influence energy performance;

–          Regulations, such as noise or load limits, provide constraints.

A new transport-specific standard, AS/NZS 3598.3 Energy Audits-Transport Sector, will be the first of its kind internationally. It is intended to help transport operators find the approach best suited to their business for assessing energy efficiency and reducing costs .

To develop a standard of practical value, the consultation process seeks additional expertise to address the specific data measurement and analysis needs of the road, rail, aviation and maritime industries.

You can contribute at the Standards Hub Website as referenced in the inside cover of the draft standard, available here.

Comments close on 10 April 2014.

Shell’s Geelong Refinery – Can we turn Doom & Gloom into a Clean Fuel Boom?

With Shell seeking buyers for its 59-year old refinery, deemed uncompetitive in the traditional hydrocarbons market due to its small scale and old technology relative to Asian competitors, what innovative options can Shell and the Geelong community explore to develop a sustainable asset for long term community wealth?

California provides a guide. A petroleum refinery there is being revamped as an advanced biofuel refinery, with United Airlines underwriting the investment through commercial commitment to buy its renewable jet fuel.

The lesson for Geelong is that partnerships between large fuel users, refiners and biofuel technologists offer the opportunity to use waste and non-food organics to produce low-carbon “drop-in” fuels. Feedstocks would be sourced locally. Ready-made pipeline and terminal infrastructure will efficiently get product to market. Victoria positions itself as renewable fuel hub for international and domestic airlines, land and sea transport operators, miners, farmers and industrial customers.

Sounds like win-win-win, but who can pull it together?

Carbon Neutral Transport

Australia has its first carbon neutral trucking company! Congratulations to Transforce Bulk Haulage in Dubbo who achieved this feat by saving fuel to reduce their carbon footprint then buying carbon credits to offset the remaining emissions.

So what’s stopping other transport firms from going carbon neutral?

Market Incentives & Barriers

Any emissions reductions need to be profitable to motivate action. According to Carbon War Room, heavy trucking can achieve huge emissions reductions using simple technologies with proven savings that are available today. Yet there are three formidable market barriers to get over:

  • access to capital for high upfront costs;
  • good information operators can trust;
  • principal-agent split incentive problem, where in a fragmented industry often those with incentive to save fuel don’t have the cash or the control. This can occur where prime movers and trailers have different owners, where fleets are leased, where freight companies hire sub-contractors, and where customers contract dedicated trucking services with operators paying for fuel.

Shipping also has cost-effective measures to reduce emissions available now. A DNV report points to 16 technical and 8 operational measures, as well as adopting alternative fuels such as biodiesel and LNG. Similar market barriers apply for Shipping as for Trucking. For both transport modes, shippers appear to be at the heart of environmental improvements, for freight owners are more likely to have the power as well as the appetite to pursue environmental improvements above basic regulatory compliance.

Cleaner fuels

There is no single solution to finding a cheap clean diesel alternative. Emissions regulations and oil price volatility will encourage the switch from diesel to a mix of cleaner fuels that need increasingly costly and complex equipment.

For the maritime industry the viability of LNG and biofuels has a longer time horizon than for Trucking, which has its challenges to overcome. As it is, Shipping will struggle with the low sulphur fuel mandate in 2015 due to insufficient refining capacity to make the cleaner grade. Biofuel refining capacity is far below what the shipping industry would need to make the switch.

Information Sharing

Sharing better information on fuel- and carbon-efficiency opportunities will help break down barriers, especially when this improves transparency at an organisational or even a vehicle level. Here are some current initiatives:

  • The Green Freight Europe program addresses the information barrier in Trucking through collaborative learning, reporting and comparative benchmarking
  • Carbon War Room has a shipping efficiency website which rates 60,000 existing ships on their specific fuel efficiency performance, enabling benchmarking against like vessels.
  • Three major shippers are choosing only to charter the most fuel efficient ships available in a demonstration to ship owners that the market will reward investments in sustainable fleets. Such environmental leadership is supported by a vessel fuel efficiency ratings system that uses reliable data from a respected technical specialist.

Measuring emissions to improve the bottom line, reduce risk and discover competitive advantage is a developing science. The ‘art’ of good information sharing may lie in real-time data by company – or by vessel, vehicle or aircraft – so that full supply chain awareness of Carbon Efficiency and Carbon Productivity become the mantra throughout all transport modes.

Accessing Funds to Invest

Trusting good information is important but the key to widespread adoption of fuel efficient technologies and clean fuels is funding the up-front costs.

How can we better link those with cash and the desire to save environmental resources, with those who want to save money but have little capital to invest in improvements? Carbon pricing on Transport helps the business case to finance fuel efficiency improvements, and incorporating carbon offsets helps even more, as Transforce Bulk Haulage has shown.

One maritime proposal wants a new bunker levy to contribute to an international fund so that ship emissions above set reduction targets can be offset by purchasing carbon credits. But who wants another fuel levy that may only be passed along the supply chain anyway?

New developments in California may point the way for Road Transport. Clean Mobility Centres embrace alternative fuels and enable drivers to offset the carbon emissions from their fuel purchases at the pump. Offset dollars go to the Carbon Fund Foundation to directly fund clean air projects.

What if we could offset Transport’s greenhouse gas emissions at the point of sale for all goods and services? Just like booking an airline seat where you choose to pay a little extra to offset your share of the flight’s emissions, imagine if you could offset the transport emissions of any delivery or purchase?

Imagine creating a clear transactional link between the consumer or organisation at the end of a supply chain and the transport operator needing funds to invest in fuel saving measures with economic as well as environmental benefits. It might work like this:

  • consumer chooses to offset the transport component of the emission profile of any goods purchase by paying a bit extra
  • that offset spend goes to a Transport-specific carbon finance fund
  • the fund is accessed by transport operators to finance precisely measured emission reduction projects with real financial paybacks
  • a strong transparent measurement methodology where integrity of data is key underpins emission reduction valuations for the consumer (investor) and transport operator
  • web, mobile and social media technologies enable ‘one click carbon offsetting’ as well as ‘real-time climate friendliness’ tracking of personal emissions savings to inform consumers

Yes – It’s Possible

Transport operators need better access to capital so they can make fuel- and carbon-saving investments, and operators, their customers and ultimately consumers must be able to have faith in the integrity of the emissions savings. Challenging, yes, but the unleashing of such incredible capital liquidity through ‘one click carbon offsetting at point of sale’ may generate huge Transport footprint reductions.

Look at what Transforce has achieved with its fleet of 11 trucks in regional NSW through fuel savings measures that save them money, supplemented with carbon offsets to neutralise their footprint. Yet it’s a question of immense scale to ask:

How can this approach be expanded throughout the mosaic of Australian supply chains?

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.