Climate regulations are set to disrupt the global shipping industry. Read on:
It goes without saying that today, maritime trade has cemented its position as the backbone of global trade. However, outside of being the most cost-effective means of moving large volumes of goods such as grains, mineral ores, oil, and other containerised cargo over large distances, it is also the cause of about 3% of global greenhouse gas emissions.
The Harvard Business Review posits that the major problem behind ships burning marine fuel oil is that it produces not only carbon dioxide, but other pollutants as well. A 2015 study from the international Maritime Organisation (IMO) found that the carbon dioxide emissions from the sector could rise as much as 250% between 2014 and 2050.
Given this, even as organisations round the world continue to grapple with prolonged effects of the pandemic and the war in Ukraine on global supply chains, there is yet another challenge for them to now contend with: new climate-centric environmental regulations that promise to change how shipping firms operate on many regional and transoceanic routes.
According to supply chain expert and Harvard University professor Willy Shih writing for the Harvard Business Review:
“…new rules from the IMO, the United Nations agency responsible for regulating global shipping, will have significant implications for how container lines design their services and will have consequences for production location choices that underpin global supply chains.
“Plus, European Union regulations that are likely to be passed before the end of 2022 and whose initial phase would begin in 2023 promise to add additional costs and complexity. Managers in supply chain and sourcing need to start planning for these changes.”
Starting January next year, new IMO regulations will require individual ships to measure and report data to a carbon intensity index in the form of a new metric called the Annual Efficiency Ratio (AER). The AER has been developed as a function of ships’ deadweight tonnage (DWT), i.e., the total amount of weight of everything it can carry in fuel, cargo, passengers, supplies etc, added to the volume of fuel consumed and distance travelled in the previous year.
The AER grades ships on an alphabetical scale from A to E, with vehicles within grade C deemed to be compliant, grade D vehicles given a three-year grace period to reassume compliance standards and grade E vehicles receiving just one year to do so.
Importantly, Shih writes: “the grading criteria will become tougher every year: The IMO is mandating a 2% annual improvement in AER from 2023 through 2030. Thus, a ship may start with a B grade in 2023, but if no changes are made after as few as six years, it could automatically become a D. If the owner cannot comply, the vessel will have to be removed from service and likely scrapped.”
Shipping companies, in this regard, will have three major options to improve on their ship’s grade:
- Switching to fuels generating lower volumes of carbon dioxide: This is easier said than done mainly because there aren’t too many ready alternatives with the requisite energy density that ships need. The world’s second-largest container line, Maersk, for example, is now focusing on alternatives such as biomethanol, with other large firms focusing on alternatives like LNG as well.
- Changing shipping operation standards: This is the cheapest way of keeping a number of ships in compliance. Since carbon intensity is measured in how much weight is moved per unit distance, larger vessels sailing long routes with fewer port calls will earn higher grades than smaller ships making greater port calls.
- Making technical refinements: This includes upgrading engines and controlling emissions such as retrofitting engines for ships to use alternate fuels, making changes to optimise water flow around the hull or upgrading and polishing propellers.
Know more about our Top Ranked PGDM in Management, among the Best Management Diploma in Kolkata and West Bengal, with Digital-Ready PGDM with Super-specialization in Business Analytics, PGDM with Super-specialization in Banking and Finance, and PGDM with Super-specialization in Marketing.