Could doubling freight rates hasten carbon-free shipping?

Paul Gunton

Paul Gunton · 18 September 2019

ShipInsight


I don’t usually like headlines that are questions, because their answer is usually ‘No’. But I have made an exception here because the answer this time is a definite ‘Maybe’.

In one of the more memorable moments of the excellent conference organised by the International Chamber of Shipping (ICS) during last week’s London International Shipping Week (11 September), Lord Adair Turner – chair of the UK’s Energy Transitions Commission (ETC) – said that if shipping was to meet a target of zero carbon emissions by 2050, freight rates would have to double. There was an audible murmur in the room as he said it.

“Shipping is one of the most expensive sectors of the economy to decarbonise,” he said, and will have to generate additional revenues to cover the costs of more expensive carbon-free fuels and related technology. That will mean charging more for shipping services, he argued.

I have to confess that I was not familiar with the ETC or its report Mission Possible, published last November, which explores how “harder-to-abate” industries can reach net-zero carbon emissions by mid-century. Those include shipping and the report includes a 33-page appendix devoted to shipping that sets out the arguments behind its recommendations.

It is not just these hard-to-abate industries that the ETC believes should aim for zero-carbon emissions. “We have said that it is technically and economically feasible for the global economy to reach net zero carbon emissions [by 2050],” Lord Turner said. And he is not relying on carbon-offsetting measures, such as planting trees; he means “real zero”.

Lord Adair Turner chair UKs Energy Transitions Commission ICS Conf Sept 2019 GPG Pic
Freight rates should double to meet ETC’s emissions target, says Lord Adair Turner

This goal is far more ambitious that IMO’s target of at least a 50% reduction by then but Lord Turner believes ETC’s target is necessary if global warming is to be kept below 1.5°C. And achieving it is affordable, he said: “less than about 1.5% of global GDP.”

Also on the panel during this session was Emanuele Grimaldi, managing director of the Grimaldi Group and vice president of the ICS. He knows how freight rates work and responded to Lord Turner’s prediction by saying that a 100% increase in freight rates “is going to be extremely difficult to explain to our customers.” “It will be more than that,” interjected Peter Keller, chairman of the SEA\LNG industry coalition, who was sitting alongside him.

Grimaldi 190918 110052
Doubling freight rates will be difficult to explain, warned Emanuele Grimaldi

But “this is an industry where freight rates vary significantly year by year, decade by decade and the global economy absorbs it,” Lord Turner countered, adding that “the cost of shipping has little impact on the consumer buying 1kg of sugar or an iPhone.” In the five years leading up to the 2008 financial crisis, the Baltic Dry Cargo Index had increased six-fold and then fell by about 90% in a couple of months, he recalled. At the time of writing, it is up over 80% since the start of the year.

Panellists taking part in a later session of the conference picked up on the same theme and generally agreed with Lord Turner’s analysis. For example, Lasse Kristoffersen, president and CEO of Torvald Klaveness and vice-chair of the ICS, said that so far this year a Capesize bulk carrier had gone “from US$4,000/day to nearly $40,000/day.” Yet “I’ve not seen any strikes; we are still running cars; no problem.” The same applies to fuel costs, he said. Over the past 10 years, fuel prices in Singapore have ranged between US$150/tonne and US$750/tonne, but “there is still food on the table. So this system is totally able to adapt to these costs.”

And Michael Parker, chairman of global shipping, logistics and offshore at Citigroup, did not rule out freight rate increases to pay for the transition to zero-carbon shipping. “I think cargo owners understand they have to play a part in this. … Collaboration is what will enable the owners to double their freight rates to pay for it.”

Michael Parker chair global shippg logistics offshore Citigroup ICS Conf Sept 2019 GPG Pic
Michael Parker believes that cargo owners understand they have a role in tackling emissions

But shipowners are not good at collaboration and competition authorities would have something to say about collaboration intended to increase freight rates. There is also a difference between specifically doubling freight rates and the large variations in the index. Like the tide, the index lifts and lowers all ships but if one owner were to double its rates today, it would be going against the tide and would get no charters tomorrow. Mr Grimaldi was right.

To be fair, in his session, Lord Turner had acknowledged the problem: The industry is fragmented and no-one has an incentive to act, he said. So he wants IMO to consider upping its 2050 target to match ETC’s zero-carbon ambition and “we need regulation to drive all new ships to greater levels of efficiency and to make sure that all of them can burn the new fuels.”

But “we will also need some category of carbon pricing or regulation that forces all shipping companies together to move towards forms of zero-carbon fuel”, prompting the chair of that session – Fiona Harvey, environment correspondent of the UK’s Guardian newspaper – to ask Mr Grimaldi whether he would prefer to be taxed or regulated.

Neither, of course. His biggest cost is fuel, “so we don’t need to be taxed to improve our performance. We need to improve our performance irrespective of the tax.”

Mr Kristoffersen, however, seemed to back some form of carbon tax on fuel. He referred to the EU’s Emissions Trading System, which has established a ‘cap and trade’ approach to reduce emissions over time. Last week he estimated the carbon price to be about €20, or roughly US$25, per tonne and noted that burning a tonne of fuel creates about three tonnes of CO2, which would raise US$75 in carbon tax at his estimated figure. At the time of writing, a tonne of CO2 is priced at €27; not far off its all-time high.

If his estimated figure were applied to all ship fuel, this would raise about US$20Bn per year that could be spent on developing zero-carbon technology and infrastructure, he said. “I’m not saying [we should] start with US$25; maybe US$1 or US$2. But the point is: how do you create the financing [for] transition? Collectively we can; individually we can’t.”

His was not the only voice last week to support some sort of emissions tax. Class society ABS held a seminar to plot the ‘Journey to 2050’, during which one panellist – Rasmus Bach Nielsen, global head of wet freight at ship charterer Trafigura – wondered how ship emissions could be policed. “We need to set up a system where all ships on all voyages are tracked and then you put a tax on emissions.”

In fact, he said that Trafigura now asks its shipowners to report how much CO2 they have emitted while transporting its cargo. That information “will become very valuable when we have enforcement,” he said, which could involve ships contributing towards a “CO2 fund” based on their emissions, he suggested. Mr Nielsen was then asked by that seminar’s chairman how he would feel if his annual bonus was linked to how much he had decarbonised the company’s operations. “It may be the next step,” he replied.

That was not the response I was expecting, but it adds another dimension to the debate. Perhaps there is a way in which individual companies – and even individual executives – can have an impact on CO2 emissions.

After attending these events, I was left with the impression that there is more willingness to consider market intervention as a way of meeting carbon targets than I had expected. What is your view? How can the shipping industry best reach IMO’s 2050 emissions target? Should Lord Turner’s more ambitious goal be adopted as our aim? Email me now with your thoughts.

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