The shipping industry’s response to the climate crisis

According to the EU Commission 2019 Annual Report on CO2 Emissions from Maritime Transport, “if the shipping sector were a country, it would rank sixth in the world in terms of CO2 emissions”.

The shipping industry alone is responsible for approximately 3% of global greenhouse gas emissions. While this may not seem like a big number, when you consider that the ships owned by one major cruise corporation alone emit 10 times more emissions than all European cars combined, it becomes clear that why change – driven by regulation – is a priority area for all those involved in this industry.

Here we look at some of the measures the global regulatory bodies including the International Maritime Organisation (IMO) have taken to tackle the industry’s contribution to the climate crisis, and the impact this has on vessel owners and their insurers.

Desulphurisation

From 1 January 2020, the cap on the sulphur content of ships’ fuel oil was cut to 0.5% (from 3.5%). Known as IMO 2020, this mandatory limit is expected to reduce harmful sulphur oxide (SOx) emissions from shipping by 77%, which should bring huge environmental and health benefits.

In order to comply with IMO 2020, vessels can switch to natural or blended low-sulphur fuels or fit so-called “scrubbers” (which remove SOx from exhaust gases for vessels using heavy marine fuel).

While the sulphur cap is a positive step, it is already evident that it is not the perfect solution:

  • Open loop scrubbers (which discharge sulphur contaminated wash water into the sea) face restrictions and bans in many ports and waters, including in the US, Europe and parts of Asia.
  • Scrubber waste is corrosive and there have been incidents where this corrosion has caused wastewater to flood engine rooms, ballast tanks and cargo holds.
  • Natural low-sulphur fuels can block filters and cause engine damage.
  • Insurers have seen a number of machinery damage claims arising from the use of ‘blended’ low-sulphur fuels (there have been instances of aviation fuel being added to bunkers in Asia to produce blended low-sulphur fuel).
  • Bunker quality disputes have already arisen from the use of incorrect fuel mixes.

Decarbonisation

The IMO promotes the ‘decarbonising’ of shipping, which is even more challenging than reducing the SOx emissions. In April 2018, the IMO adopted Resolution MEPC.304(72), to reduce global shipping industry greenhouse gas emissions by at least 50% (from 2008 levels) by 2050.

To support the IMO’s goal, the regulator’s Marine Environment Protection Committee (MEPC) adopted amendments to MARPOL Annex VI which are expected to enter into force on 1 January 2023.

These amendments will require all ships of 5,000 gross tonnage and above to calculate their Energy Efficiency Existing Ship Index (EEXI) following technical means to improve their energy efficiency and to establish their annual operational carbon intensity indicator (CII) and CII rating.

Ships will get a rating of their energy efficiency which will be incorporated in their mandatory Statement of Compliance. The first annual reporting on carbon intensity will be completed in 2023, with the first rating given in 2024.

This means that a large part of the global fleet may need to implement significant, technical modifications to comply with the new regulations. In response, BIMCO has issued the EEXI TRANSITION CLAUSE FOR TIME CHARTER PARTIES 2021 for inclusion in both existing and future time charter parties.

Towards a zero-emission shipping fleet

The IMO and others have found that the sector’s emissions intensity has decreased in recent years. But that drop was primarily due to increased ship size, and design and operational improvements such as decreased traveling speed (slow steaming), and not the result of switching to lower-carbon fuels.

To create a zero-emissions shipping fleet, new fuels will need to be developed along with novel propulsion systems, upgraded vessels and an entirely new global refuelling network. This will require a huge investment in research and development if the industry is to meet the challenging targets being set by the IMO and national governments. One suggestion includes the implementation of ‘green corridors’, specific trade routes between major port hubs where zero-emission solutions are supported.

Individual operators have, however, responded positively. For example, A.P. Møller - Mærsk A/S, aims to achieve net zero carbon emissions by 2050 and has an interim target of a 60% reduction by 2030.

The insurers’ role

Insurers and financial institutions are increasingly subject to ESG reporting requirements, which will require insurers to incorporate ESG principles and the green credentials of vessels into their underwriting practices.

A good example are the Poseidon Principles, a global framework for assessing and disclosing the climate alignment of financial institutions’ shipping portfolios. Signatories are required to measure the carbon intensity of their hull and machinery portfolio and their scores are published annually.

The potential risks to insurers

It is already evident that scrubbers and low-sulphur fuels are just an interim solution and ultimately the industry will need to invest in cleaner vessels - meaning a revolution on marine propulsion. If incidents involving scrubbers and low sulphur fuel persist then insurers might have to consider machinery deductibles or additional premiums.

The implementation of new propulsion technologies and the improvised retrofitting of current vessels in order to adapt to new alternative fuels will create new risks that are yet to be assessed by the experts. There is little doubt that the transition from dirty and cheap energy to cleaner and more expensive energies will pose challenges yet to be ascertained from the technical and insurance standpoint.

Investors, banks, insurers and customers will all require information on the environmental impact of shipping companies. Failure to do so could be costly in relation to potential claims, access to investment and financing - and to the company’s reputation.

Regulators, owners, operators and insurers are all responding to the call to reduce the harmful emissions caused by the shipping sector. However, the changes will require huge investment and will create new risks.

Read other items in Marine Brief - February 2022

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