Sink or swim: how decarbonisation will reshape shipping forever

Andrew Tunnicliffe 5 November 2019 (Last Updated November 6th, 2019 12:33)

What is good for the world isn’t necessarily good for shipping as we know it. That, arguably, is the key takeaway from a recently published study looking into the effects of carbon reduction on the global shipping industry. We talk to the report’s author, Stuart Nicholl of MSI.

Sink or swim: how decarbonisation will reshape shipping forever
How will decarbonisation impact shipping? Credit: International Maritime Organization.

Nations of the world have, in recent years, embarked on concerted efforts to meet the challenge of climate change. Those that haven’t do so at their peril, argue the growing many to have enrolled in the fight to protect against a future seemingly more dire by the day.

Truthfully it is difficult to counter the conviction with which they speak; this year has already borne witness to some of the biggest ‘climate change’ events ever recorded. Therefore, it is fair to say the political, commercial and social climates need to change too if we are to address these issues.

In December 2015, almost 200 countries signed up to the United Nations (UN)-led Paris Agreement, committing to tackling climate change in a way the UN said would bring “all nations into a common cause to undertake ambitious efforts to combat climate change and adapt to its effects… As such, it charts a new course in the global climate effort”.

Decarbonising will hit sea trade

It is a noble and wholly supported ambition, but it does have ramifications perhaps not first anticipated. For the global maritime shipping industry, those consequences are potentially already on the horizon according to a recent study. “Rapid decarbonisation of global energy supplies will have radical implications for the global shipping industry,” said a report by Maritime Strategies International (MSI) on behalf of the European Climate Foundation.

“Rapid decarbonisation of global energy supplies will have radical implications for the global shipping industry.”

However, the report’s author and MSI director Stuart Nicholl warns that it is vessels carrying the world’s fossil fuels which look set to see the most change. Today, that amounts to 40% of global seaborne trade in tonnes, a figure that will fall considerably if the Paris Agreement is met. The agreement requires human-related greenhouse gas emissions to be limited in the coming decades, with the aim of the world becoming carbon neutral beyond 2050 and to limit global temperature rises to no more than 2°C above pre-industrial times.

At the COP24 summit in Katowice in 2018, countries agreed on a raft of measures they said would allow for the implementation of the Paris Agreement in 2020.

Will the Paris Agreement reshape the industry?

Nicholl based his work around these aims. Looking at the potential impact of a reduction in fossil fuel usage on the shipping industry over the next 30 years, the initial focus was to generate a projection for global consumption of key energy commodities over the period. He explains the team developed a ‘Reduction Scenario’ using the latest academic thinking on global warming. This scenario projects an 80% reduction in coal consumption, 50% fall in demand for oil and around a 25% cut in gas usage by the middle of the century.

“Global energy consumption, in this scenario, is largely based on projections made for pathways consistent with limiting warming to 1.5°C above preindustrial levels, as described in the IPCC SR1.5 report and discussed at the COP24 meeting. This represents the most radical call to action yet to mitigate global warming,” Nicholl says, adding a second, ‘Reference Scenario’, was constructed based on the Intergovernmental Panel on Climate Change’s (IPCC) 2.6 Wm-2, a less aggressive target for greenhouse gas emission reduction.

“The idea is to highlight that what is best for the planet may be worst for the global shipping industry.”

Stating the aim of his work was to “stimulate debate” within the shipping industry over the implications of climate change, but that the report was “not intended to provide an indication of the likelihood of the projected scenarios”, Nicholl says: “The idea is to highlight that what is best for the planet may be worst for the global shipping industry.”

The report looked at the impact a significant shift away from fossil fuels, in favour of renewable technologies, would have on the global shipping, concluding that whilst some sectors of the industry would escape unscathed, others wouldn’t. In particular, vessels traditionally tasked with carrying such cargo faced an uncertain future.

Nicholls says the focus was oil tankers, dry bulk carriers and gas carriers as those were the areas of greatest exposure to changes in the flow of trade in a decarbonised world. The impact, he says, would be significant, potentially resulting in multi-decade declines in fleet capacity, earnings and asset prices across the affected sectors. Shipowners would be forced to slash new ordering and scrap uneconomic vessels. “The threat is clearly most severe under the most radical targets, but even under the Reference Scenario we constructed there would be a severe impact on coal carriers,” he adds. “For most sectors, weaker action on climate will likely mean stagnation rather than decline.”

The climate change conundrum and shipping

Clearly, the implications will be profound for some within the industry. It will mean a complete overhaul of the types of vessels selected, and total reshaping of the way investment is sourced and assets valued, as well as the potential loss of some vessels before their natural end of service.

“This is now very much on the agenda at the IMO and the focus will only intensify over the coming years.”

“Under the Reduction Scenario, it would be likely that finance would be difficult to secure, other than in cases where owners could demonstrate access to cargoes,” Nicholls explains. “It would also be necessary that new ships include some potential features that would enhance their earning potential in what are likely to be periodically weak markets.” The feature he spoke of included fuel innovations and other energy efficiency capabilities.

Arguably that is happening already, Nicholls suggests, saying current regulations are focused on changing propulsion technologies to reduce the industry’s carbon footprint. “This is now very much on the agenda at the IMO and the focus will only intensify over the coming years,” he says. It appears shipbuilders and owners are already responding. Danish shipowner, DS Norden, recently announced the creation of what it called a “new, dedicated decarbonisation position to drive Norden’s decarbonisation efforts and meet the company’s ambitious emission reduction targets”, with the intention to develop CO2 neutral vessels in the future.

Ship financing and assets will take a hit

However, the implications for securing finance would still be challenging. Nicholl warns that the current focus for traditional shipping banks – reducing emissions from shipping under the Poseidon Principles – will increasingly turn to the potential obsolescence of a ship on both the propulsion technology used and the future prospects for its cargo base.

“The timing and financing of newbuilds will become increasingly difficult if the earnings environment remains weak post-2030.”

“The timing and financing of newbuilds will become increasingly difficult if the earnings environment remains weak post-2030,” he says. “Choosing the right asset class – for example, small bulkers with access to grains and other ‘minor’ bulks –  may be more advantageous than choosing vessels that are best suited to coal trades.”

For a number of factors, he also believes vessel lifespan may be impacted too, largely due to the ongoing vagaries of markers. However, he sees those conditions will be “exaggerated” further as fossil fuel use declines.

Shipowners must prepare for the future

Asked what shipowners could be doing now to prepare for this future, Nicholls says it’s difficult to say. “The best solution would be to either focus on new energy-efficient ships that may hold their value better, or alternatively hold off on further investment on new ships until the outlook becomes clearer, both in terms of future propulsion technology, the energy transition and the trade outlook.”

“The best solution would be to focus on new energy-efficient ships or hold off on further investment on new ships.”

For now, he encourages the market to sit tight and monitor the situation. Currently, the focus is on what he says are the more immediate problems presented by issues such as the IMO2020 regulations on sulphur. But, he adds, the time will come where attention has to focus on the future of the industry in a cleaner world. “Once the dust has settled from [IMO2020] it is likely that the IMO and the wider shipping industry will shift their focus to decarbonisation.”