Ramping up the rhetoric on carbon and trade

Malcolm Latarche
Malcolm Latarche
ShipInsight

12 October 2018


Although it is shipping related news that most concerns those within the industry, few cannot have missed that so far through October world attention has been focussed on the impact of tariffs on trade and the SR15 Report from the UN’s IPCC climate change panel.

Both subjects do affect shipping both directly and indirectly and at a time when the shipping industry is staging a fragile fightback against several years of poor performance across most sectors, the implications of them could be a major setback.

The trade war that has blown up between the US and China is viewed differently depending upon political and philosophical points of view. Certainly the ordinary people of the western world and especially those involved in manufacturing have suffered greatly from globalisation and may well welcome any move that repatriates some of the jobs lost in recent decades to Asia.

From the shipowners point of view, the immediate impact is a noticeable trend towards less traffic but it is to be hoped that this will rebalance over time as workers are re-employed in the west and will therefore have a growing disposable income that will eventually work its way into growing consumer demand. In addition, the latest tariffs mean there will be some changes in trade patterns that may offer opportunities to ship operators. For example, China’s imposition of tariffs on US soybeans has seen more purchases of the product from South American producers.

The IPCC report however, is quite a different matter and its impact will depend upon when or perhaps if, politicians see fit to act upon it. This year has already seen the IMO adopt a strategy for decarbonising shipping over the coming decades and it is quite likely that some more flesh will be added to the bones when the IMO’s environmental committee meets later this month at MEPC 73.

The move to decarbonising shipping is a slight change of tack from the IMO which although it has for some time now been debating the best way to achieve a reduction in greenhouse gases has looked most likely to follow up the EEDI initiative with some form of levy on CO2 or carbon as it is now most commonly referred as.

Carbon taxes have been promoted with varying degrees of enthusiasm for some time and were particularly prominent during the drawing up of the Kyoto Protocol. The concept of carbon levies gained even more backing this week when the Nobel Prize for Economics was awarded to William Nordhaus and Paul Romer.

Nordhaus is a professor at Yale University and is considered as the father of climate change economics. In presenting the shared award, the Nobel committee praised Nordhaus for showing that “the most efficient remedy for the problems caused by greenhouse gas emissions would be a global scheme of carbon taxes that are uniformly imposed on all countries.”

Carbon levies also featured strongly in the IPCC SR15 report saying that pricing carbon will be central to keeping the temperature growth in check and said “a complementary mix of stringent policies is required.” It will however take very brave politicians to implement those stringent policies.

Various interpretations of what level of levies may be required are in circulation. While some talk of figures below $50 per tonne others are very much higher. The report itself says “Policies reflecting a high price on emissions are necessary in models to achieve cost-effective 1.5°C consistent pathways. Other things being equal, modelling suggests the price of emissions for limiting warming to 1.5°C being about three four times higher compared to 2°C.

One interpretation that is circulating widely and which has not been dismissed by advocates of carbon levies, suggests that limiting warming to 1.5 degrees C above pre-industrial levels would take a carbon price of at least $135 per ton by 2030 — and possibly as high as $5,500 per tonne. If the 2030 date was delayed until the end of the century and assuming a business as usual case for most of that time, the price for carbon would be somewhere between $690 to $27,000 a tonne.

Translating those figures to current ship technology and practice where each tonne of oil bunkers consumed releases around three tonnes of CO2, would suggest that in addition to the bunker cost itself, somewhere between $405 and $16,500 per tonne consumed in 2030 (just over a decade from now) would be charged as levies.

Of course shipping will not be the only industry or human activity affected. The SR15 report suggest that all areas of life will need to change. The UK Broadcaster BBC has recently suggested in a documentary that the modern obsession with fashion is unsustainable. As well as pollution caused by the production of fabrics, the rapid disposal of last season’s garments produces even more pollution especially as many are synthetics and plastic.

Presumably fashion is not the only aspect of life that is unsustainable in a throwaway age as evidenced by the growing problem of plastics in the world oceans – a subject also on MEPC 73 agenda.

Of course if shipping is obliged to pay carbon levies, as a service industry those costs will inevitably be passed on to shippers and in turn on to the final consumer. The combined effect of all of those levies will inevitably mean that disposable incomes will shrink dramatically and in turn that will lead to reduced trade volumes and less demand for shipping space.

However, whether politicians will be able or willing to take the IPCC report at face value will only be able to be judged as countries elections inevitably roll around and the population as a whole has its say.

It is well known that the US president is not overly concerned with demands for saving the planet having already committed the US to ditching the Paris Agreement. It will be 2021 at the earliest and possibly even 2025 before the next US president has the opportunity to reverse Trump’s policies.

Other governments are also rolling back on past commitments. The Australian government has turned down the IPCC’s call to phase out coal power by 2050, saying that Australia will continue to tap into its coal reserves and that renewable energies could not replace coal-fired power. It further said that Australia is fulfilling its targets under the 2015 Paris Agreement, i.e. cutting emissions by 26% to 28% on 2005 levels by 2030, and even though it would consider the report, it rejects the possibility of coal being phased out in the near future. Coal will continue to play a significant part of the Australian energy mix along with renewable-based power generation.

For shipping, the reality is of course that owners are actually quite powerless in reducing the impact of the industry beyond a small saving in efficiencies. The big reductions in CO2 emissions require a technology revolution that needs others to bring about. As long as any new technology is reliable and robust enough for marine use it will eb considered and adopted, but like politicians shipowners must also weigh up the cost on the viability of their business.