EA Gibson ZAS0008

Submitted by E.A. Gibson Shipbrokers Ltd

Contact: Richard Matthews, Director – Consultancy & Research

About E.A. Gibson Shipbrokers Ltd (Gibson) & reason for submitting evidence:

Gibson is a leading international shipbroker. We help clients move millions of tonnes of cargo around the world every year. Through our Gibson Consultancy & Research (GC&R) division we advise clients on trading and investment strategies in the shipping industry. Due to growing momentum to decarbonise shipping, GC&R initiated research into shipping decarbonisation in 2018. Gibson are involved negotiating shipbuilding transactions, sitting between the shipowner (investor), charterer (vessel end user) and ship builder. This gives us a unique insight into end user demand, technological options and investment appetite to decarbonise. We advise our clients on what type of vessel to build, which is increasingly focused on future fuelling options and the wider EU/IMO regulatory landscape. We believe this positions us well in understand the commercial and technical barriers/challenges faced by the industry which a supportive regulatory framework could help overcome.

 

Executive Summary

 

Operational Efficiencies:

  1. Operational efficiencies encompass a very broad range of measures from port level, to vessel level, to trade level.
  2. Operational efficiencies can have a marginal benefit in terms of reducing emissions from shipping as ship operators are already incentivised to operate efficiently in order to reduce fuel consumption and minimise costs.
  3. Ship operators could be further incentivised to improve operational efficiencies if the penalties were increased through taxation or other means. A carbon/GHG tax would further encourage operational efficiency, as each tonne of emissions would carry a financial penalty.
  4. Efficiency at the port could also lower emissions. Improved scheduling to allow vessels to arrive just in time could lead to fuel savings. However, commercial practices in some shipping sectors may need to change for this to be viable (e.g. contract speeds and demurrage practices).
  5. Other initiatives at port, such as offering cold ironing (using shore power) could lower emissions in port if the source of power came from renewables.
  6. Within Europe and EU waters, operational efficiencies are already higher than most parts of the world due to existing legislation (e.g. emission control areas), hence the limited role operational efficiencies could play.
  7. New IMO legislation around the carbon intensity indicator (CII) should encourage vessels to improve efficiency over time.
  8. Care should be taken to ensure increased regulatory pressure on shipping does not ‘push’ cargo onto less efficient modes of transport.
  9. Vessel design is perhaps a more impactful means towards lowering emissions.
  10. Due to high fuel costs, ship design has continued to improve as ship owners focus on fuel efficiency. Over the past decade fuel consumption in the tanker sector has improved by 25% (depending on vessels characteristics) on average as ship owners have opted to order fuel economic ‘eco’ ships.
  11. Such gains in efficiency in the future are expected to be smaller unless the industry is willing to accept major changes in vessel dimensions and hull forms, which appears unlikely.
  12. As older vessels are less efficient, putting in place measures to discourage older vessels from trading would have a positive impact on emissions.
  13. Increased use of wind assistance could play a role, particularly on transatlantic trade, although practical issues remain.

 

  1. Zero carbon fuels are unlikely to be available in commercial quantities until at least the 2030’s with the first deep sea zero emissions vessels (ZEVs) coming to market in the late 2020s.
  2. A key issue will be price. Zero carbon fuels like green ammonia may be available in commercial quantities, but without taxes on higher carbon fuels, they are unlikely to be cost competitive. It is also important to note that ZEVs will be more expensive than current designs and only make economic sense if there is a saving on fuel costs. Carbon/emissions taxes are therefore a key policy tool.
  3. Different fuel options include:
  4. Ammonia emits no carbon dioxide when burned and can be made using renewable electricity. Both fuel cells and internal combustion engines (ICE) can use it. Unlike hydrogen, it doesn’t have to be stored in high-pressure or cryogenic tanks.
  5. Whilst there currently isn’t a vessel that operates on the fuel, there are a number of engine manufactures that are developing suitable engines.
  6. Leading shipowners including Hoegh Autoliners, Euronav and Avin have ordered ‘ammonia ready’ vessels.
  7. Hydrogen is recognised for its potential to generate electricity through fuel cells and combustion technologies and become a zero emission fuel. Hydrogen has the highest energy content per mass of all chemical fuels however, it needs to be transported at -253oC in a liquefied state which significantly increases vessel construction costs. The first hydrogen fuelled vessels has been launched – the MF Hydra – and is a small ferry (80 car capacity) and will operate in Norway.
  8. Hydrogen is more expensive and technically complex than ammonia. It is unlikely to be widespread in shipping until the late 2030s and may be considered inferior to ammonia.
  9. Methanol is a readily available fuel. Because it produces no sulphur emissions and very low levels of nitrogen oxides emissions, it is compliant with emission control areas (ECAs). The German re-pax ferry Stena Germanica, was the first and currently only vessel to be retro-fitted to enable the usage of methanol as a fuel. Methanex Corporation ordered eight methanol dual-fuel vessels during December 2020. The vessels will be delivered by 2023. Maersk ordered a methanol feeder container vessel during July 2021. Also, recently (24 Aug 21) Maersk ordered eight 16,000 teu containerships. These are scheduled from first quarter 2024.

 

  1. A number of existing and developmental technologies exist to reduce emissions from shipping. Technologies which are already widely available and in use are not discussed below but include mewis ducts, ocean/weather routing.
  2. Available technologies with low uptake include:
  3. Wind assistance: A number of different wind assistance solutions are currently available, although the current uptake is low. Wind assistance started to emerge in 2008 due to high fuel costs but failed to achieve any meaningful market penetration. However, interest in wind assistance has emerged as means of lowering total emissions.
  4. Wind assistance could have a role to play in shipping’s decarbonisation drive, however the extent will vary depending on the trade route, voyage schedule and vessel design (and type). Some vessels may be more suited than others. Container vessels will lack the space on deck for sails, whilst some ports may struggle to load/unload vessels with sails. Thus, wind assistance is expected to have a limited role in shipping decarbonisation.
  5. Battery storage: A battery storage system can either be retro-fitted to a vessel or installed as part of a newly constructed vessel. The first vessel to incorporate a battery storage system was the Viking Queen (a platform supply vessel) which was retrofitted with a 1600Kw custom-designed system. The system enabled an 18% reduction in fuel consumption and a corresponding reduction in GHG emissions by approximately 25%. Due to the size and weight penalties of the battery requirements. However, it is perceived that batteries are not feasible for the majority of the deep-sea shipping on larger tonnage due to battery capacity limitations.
  6. Air lubrication: this is a method to reduce the resistance between the ship’s hull and seawater using air bubbles. The reduced resistance can achieve between a 10-15% reductions in CO2 emissions, along with significant savings in fuel consumption.
  7. Shore to shore power (cold ironing): This is when a vessel turns off its engines and generators in port, with the port supplying power to the vessel. This can lead to a significant reduction in ‘in port’ emission when vessels are on the berth. However, the actual reduction in emission depends on how the power provided by the report is generated (e.g. from renewables).
  8. Government policy to support cold ironing in the UK could have a meaningful impact of emissions at UK ports, subject to how the shore power is generated.
  9. Technologies under development include:
  10. Carbon Capture & Storage (CCS): CCS for shipping is still in the early development stage, with no definitive timeline on when viable solutions for the industry might be available. Generally, the industry has overlook CCS as a solution to address emissions from shipping.
  11. Flettner rotor sails: These are tall cylinders fixed on the deck of a vessels. They rotated via the wind and due to fluid dynamics they propel the ship forward. They have been installed on several vessels. On the Viking Grace the rotors have reduced carbon emissions by around 900 tonnes annually and via cutting LNG consumption by 300 tones per year.  The project has been supported by Horizon 2020 program of the European Commission. The rotor sail was removed after the trial period ended during 2021.
  12. Fuel cells: still a very new technology within the shipping world. There have been a couple of vessels that have experimented with fuel cells (both utilising hydrogen as the fuel) – see hydrogen.
  13. Solar cells: - the first vessel that was equipped with solar-energy power generation system was the Nihioh Maru car carrier in 2021. The solar power units generate power to light the ship’s LED-based lighting system. This is estimated to reduce CO2 emissions by 4,000 tonnes annually. Car carriers are particularly suitable for fitting largescale solar panels due to the large flat surfaces of the vessel.
  1. Infrastructure: Support for infrastructure development is key. Switching to low carbon fuels (LCFs) will require production, storage and distribution infrastructure, including bunkering (ship refuelling) capabilities. All of these facilities will need to be planned, financed and constructed in order to support the development of ZCF for shipping.
  2. Note: The World Bank has advised against state support for LNG bunkering infrastructure due to climate issues.
  3. Fuel Supply: The reluctance to invest in ZCFs is partly driven by uncertainty over readily available fuel supply at acceptable prices.
  4. Taxes and Subsidies: Low/zero carbon fuels will be more expensive than traditional oil-based fuels. Taxes and subsidies will be needed to bridge the cost gap.
  5. Other ports around the world offer discounted port fees for vessels utilising LCFs. These include ports such as Rotterdam, Gothenburg, Singapore, Dahej and Dhamra which all offer discounted port charges for vessels burning LNG as a fuel when at the port.
  6. Regulatory framework: New fuels such as ammonia and hydrogen may require a supportive regulatory framework.
  7. Support development of green ammonia/hydrogen plant in the UK – to enable a fully environmentally sound source of renewable ammonia/hydrogen.
  8. Support R&D into hydrogen – The UK could become a world leader in hydrogen with the government backing.
  9. Zero carbon fuels are unlikely to be available in large quantities until the 2030’s. The first zero emission cargo vessels (aside from test projects) are not expected to enter service until the late 2020’s/early 2030s. The most critical factor will be fuel supply and costs. Zero emission fuels (ZEFs) for shipping can only be sustainable if financial parity can be achieved relative to dirtier fuels.
  10. Therefore, incentives or penalties should be introduced to make ZEFs commercially viable. Several ports around the world have introduced reduced port fees for ZEFs/LEFs
  11. A combination of policies is needed. A carbon/GHG tax on shipping within UK waters; incentives for vessels calling at UK ports to burn ZEFs or LCFs; support for infrastructure development for ZEFs/LCFs including production and bunkering facilities.

 

  1. Despite shipping’s obvious climate impact, it remains a comparatively energy efficient way of transporting goods compared to the alternatives of long-haul trucking, rail and aviation. If the reliance on shipping was reduced, it would likely lead to an increase in demand for other transportation modes which would likely increase overall emissions.
  2. Policy mechanisms to reduce the UKs reliance on shipping would need to support domestic production of commodities, raw materials, and manufactured goods, which in many cases is unlikely to be feasible or economically viable.

 

  1. For shipping to make meaningful emissions reductions, the IMO must implement a global price on GHG emissions (not just CO2). The UK Government should continue to press the IMO to implement such a policy.
  2. Such a policy will:
  3. Disadvantage the highest polluting ships and speed up their scrapping.
  4. Move zero/low emissions fuels closer to price parity with traditional fuels.
  5. Incentivise the uptake of new technologies on new ships.
  6. Encourage existing ships to reduce their emissions through retrofitting energy saving devices.
  7. Create a global level playing field for shipping and prevent emissions leakage outside regions where a emissions tax exists (e.g. the EU).
  8. The IMO’s currently short- and medium-term measures are thought to be too ‘soft’ with many polluting states blocking stricter measures. The UK should take the lead in pushing for stricter measures to be implemented at the next review.
  9. Another major shortcoming is the IMO’s failure to address lifecycle GHG emissions. By targeting carbon intensity, fuel such as LNG which are responsible for methane emissions may look greener than they actually are.
  10. The UK Government should encourage the IMO to:

-          Introduce a methodology for assessing lifecycle GHG emissions from all different fuel types, which accounts for upstream and downstream emissions.

-          Ensure the IMO does not simply target CO2 and ensure that methane emissions are targeted, including those from the extraction and liquefaction process.

 

  1. The EU ETS is a good start, but its limited global scope will limit the benefit.

Positives:

-          Introduces and incentive for low emissions vessels to trade within, to or from Europe.

-          Helps to level the playing field between low and high emission vessels.

-          Will go some way towards bridging the gap between high and low emission fuels but may not be expensive enough (depending on the price).

Negatives:

-          Will see higher polluting ships move to trade outside the European Union, but will not phase them out as it is not global in its scope.

-          Because the ETS only applies to vessels over 5000GT, many small, short sea vessels will not be impacted, despite having high emissions.

-          Some older vessels are often debt free, so despite having to pay a higher carbon price, may still continue to trade.

-          Countries like the UK or Morocco could benefit from sitting just outside the EU ETS and act as a transhipment hub, whereby cargoes are imported from other countries (e.g. China) and shipped into Europe on low/zero emission vessels. This may serve as a way to significantly reduce paying carbon taxes on imports into the EU. Economically this would benefit countries like the UK and Morocco, but would have a negative climate impact.

 

  1. All emissions incurred due to the import or export of goods from the UK should be counted to some extent. The EU has adopted a 50% policy for exports and imports, and a 100% policy for intra EU trade. The UK should adopt a similar approach
  2. Consideration should also be given as to the origin of the cargo. Some cargoes, like containers may pass through several ports before reaching the UK so it is important to ensure the emissions on a container imported from China are counted as from China, not from the previous port which would likely be in Europe.
  3. Counting emissions for just the leg of the voyage that falls within the UK EEZ would do little to encourage deep sea shipping to lower its emissions.
  4. It is also important to define who would pay for any emissions tax. Would it be the owner of the vessel, the operator of the vessel, the charterer of the vessel or the importer/exporter of the cargo, or the buyer of the cargo? There are a number of options:
  5. Shipowner:

Pros

-          Incentivises shipowners to invest in low/zero carbon vessels.

-          Shipowners who are more efficient will be paid a higher freight rate (financial incentive)

Cons

-          May push those who do not want to invest in new technologies away from the UK, but does not prevent emissions (carbon leakage).

-          Shipowners of high carbon vessels may simply charge lower freight rates and still win business. Old vessels which are debt free may still be able to compete.

  1. Charterer:

Pros

-          Incentivises charterers to choose lower carbon vessels

Cons

-          Charterers may choose cheap vessels which pollute and opt to pay the tax (if the tax is not high enough)

 

  1. Cargo receiver:

Pros

-          The receiver is closest to the consumer and will probably have the costs passed to them regardless.

Cons

-          The receiver may have little control over what vessel is used.

-          There may not be sufficient zero carbon vessels, prices may be too high.

Unintended consequences

  1. Taxing emissions from shipping could shift trade flows. To avoid a European/UK carbon tax, ports just outside the EU could be used as ‘transhipment ports’ where cargoes are imported from long haul destinations and transferred onto different, smaller ships. Thus, the emissions would only be counted for a short distance. Unless the original origin of the cargo is considered.
  2. There could be the shifting of freight from sea to road, which may lead to an increase in CO2 emissions.
  3. Encouraging a shift from oil-based fuels to LNG could lead to an increase in GHG emissions.
  4. Increased use of biofuels needs to consider the impact on the food industry and also ensure it does not lead to deforestation.

September 2021