UN climate conference comes amid shipping’s choppy path to decarbonization

SINGAPORE — The fast-approaching COP 28 United Nations Climate Change Conference, to be held in Dubai Nov. 30-Dec. 12, will bring with it inevitable reflection on what remains a very uncertain pathway to decarbonization within container shipping supply chains.

The situation could be summed up largely as follows: a handful of pioneers among carriers, shippers and forwarders are blazing an ambitious and high-profile decarbonization trail. Shipowners have ordered 125 vessels able to run on methanol upon delivery, according to S&P Global Market Intelligence, despite a lack of available fuel supply. And a few beneficial cargo owners (BCOs) are taking the lead, such as Norwegian retailer Europris, which committed to move all its inbound cargo shipped with Maersk via a product offering 80% greenhouse gas (GHG) reduction at an undisclosed premium to market rates.

But such trailblazing, at least so far, is attracting only a limited following among the vast majority of market participants despite at least 4,000 companies, representing one-third of global market capitalization, having made public commitments to reduce Scope 3 emissions, which include outsourced maritime and other forms of transportation, according to S&P Global Sustainable1.

But the scenario will likely be profoundly altered by a two-year regulation writing process at the International Maritime Organization (IMO) set in motion in July, when IMO member states agreed to an ambitious revised GHG policy. The policy calls for the virtual elimination of GHG emissions by 2050 with checkpoints along the way, including at least a 20% reduction by 2030 and at least a 70% reduction by 2040, as well as zero-carbon fuels representing at least 5% of total energy used by international shipping by 2030.

'Willingness to pay is not there yet'

A key component of what was agreed to in July is a pledge to adopt by 2025 new zero-emission fuel standards as well as "market-based measures" such as a carbon tax by which to ensure the more ambitious goals can actually be met.

But until those rules are adopted, the container shipping sector, responsible for 45% of maritime trade by value, according to the United Nations Conference on Trade and Development (UNCTAD), will likely remain in limbo. That will mean speculative investment in zero-carbon ships in the absence of fuel sources like methanol at scale, and marginal updates of zero-carbon solutions for BCOs offered by carriers and forwarders who still see freight transport primarily as a cost to be minimized.

"The willingness to pay is not there yet," Hapag-Lloyd CEO Rolf Habben Jansen said during a recent panel discussion hosted by the carrier, referring to its ShipGreen product that offers shippers the ability to reduce CO2 emissions associated with their cargo transport by up to 100%.

The point was similarly acknowledged by Port of Los Angeles Executive Director Gene Seroka, who told the Journal of Commerce that it doesn't make sense currently to lean on shippers to pay the higher costs of green fuel associated with a proposed China to Southern California green shipping corridor.

"It may be too early to have a BCO levied a per-box fee as we're experimenting, and it may just be in fact that other players, including ports, have to invest in the technology and see what works and see what doesn't," Seroka said.

That most BCOs aren't willing to voluntarily commit to higher costs, especially in the absence of similar moves by competitors, underscores the need for a regulatory regime that makes rules applicable to everyone.

Seeking clarity

Still, how the new regulatory regime will affect the container sector remains highly uncertain. Some believe the only way the 175 nations of the IMO will achieve consensus around a carbon tax will be to keep the tax low to avoid overly increasing transport costs for remote nations like those in the South Pacific. But a carbon tax that is too low, in turn, would discourage use of zero-carbon fuels by leaving the cost potentially much higher relative to traditional CO2-burning bunkers.

And over-reliance on a fuel standard as a way to meet the revised GHG goals could saddle carriers with costs that are difficult to pass along to shippers. In a possible prelude, two senior forwarding executives told the Journal of Commerce they believe the market is currently so weak that carriers will face difficulties passing along the cost of the European Union's emission trading system (ETS) to shippers.

"In essence, the IMO has agreed [in the revised GHG strategy] to a market-based measure, but the two primary carbon pricing mechanisms [a bunker levy and cap and trade] are facing significant opposition," said the environmental director at a leading classification society.

The need for certainty in the rules adapted by the IMO to encourage necessary investment by shipowners, fuel suppliers and ports is leading carriers to speak out.

"As ONE and the industry we strongly request that any such future IMO 'fuel standard' and 'market-based measure' regulations … be defined and regulated in a manner where they are transparent, universal and predictable in application," Jeremy Nixon, CEO of Ocean Network Express, told the Journal of Commerce. "This would give the energy companies, vessel owners, shipyards and suppliers as much lead time as possible to make the right capital investment decisions and be able to share the inevitable higher capital and operating costs of green shipping through the entire supply chain."

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.