Approximately 2-3% of total anthropogenic greenhouse gas (GHG) emissions come from shipping. If the number of emissions was a country, it would be larger than Brazil and Germany’s emissions.
Unfortunately, by 2050, the emissions are expected to climb by 50% to 250% above current levels. Hence, there is a significant gap between the international community’s goal to contain the rise of GHG emissions below 2 degrees Celsius. Moreover, with the expected continuous growth in GHG emissions, the shipping sector has a long way ahead in achieving its global commitment.
On the 14th of July 2021, the EU proposed new and revised measures to combat their shipping emissions with their Fit-for-55 package. In the light of the recent developments, this article will deal with how the EU aims to counteract rising shipping emissions along with discussing, in general, the barriers and opportunities behind the shipping sector’s decarbonisation.
Barriers and Opportunities Behind Decarbonising the Shipping Industry
In general, there are three different types of measures to reduce GHG emissions from shipping:
1. Adopting operational measures (for instance, speed reduction and weather routing)
2. Technical measures (changing the design of ships)
3. Switching to alternative (renewable) forms of energy
A switch to alternative fuels is the most efficient way. This is because fuel cost is between 25% and 50% of shipping’s overall costs and is, therefore, the largest cost item of shipping companies. Hence, reducing emissions would be of benefit for ships as it reduces their costs and gives them financial incentives to switch to alternative sources. The most commonly used conventional fuel types for ships are Heavy Fuel Oil and Marine Diesel Oil (both fossil fuels). Alternative fuels for shipping are hydrogen and ammonia, natural liquefied gas, methanol, biodiesel and electricity. These fuels can be zero-emission but their carbon content is dependent on the production pathway, for instance, ammonia can be produced with crude oil but also with renewable sources.
However, there are several barriers to improving the energy efficiency of ships. Firstly, there is a lack of reliable information, as in some cases ship owners misrepresent the fuel efficiency of the ships to the charterers. Secondly, there is a lack of capital (as well as hidden costs) to invest in changing the design of a ship to run on more sustainable fuels and a lack of skilled personnel. Lastly, there is the so-called split incentive problem, which means that ship owners bear the costs of building more energy-efficient ships while cargo owners reap the benefits. Therefore, the ship owners do not perceive a reason to reduce emissions.
Other barriers are more institutional such as the power imbalances between actors in the global maritime shipping activities. For instance, in tanker shipping (ships designed to carry gases or liquids such as oil), oil majors have a major influence over the commercial choices of ship owners’ usage of fuel and these oil majors are not particularly concerned with reducing GHG emissions.
As we have explored the obstacles to decarbonisation, it is important to understand whether current regulations and the EU’s new proposals are effective to lower ships’ GHG emissions. Let us have a look at the present and proposed regulations.
The EU’s Current Regulations
Due to the slow progress of the International Maritime Organisation to develop an approach for a global fight against shipping emissions, the EU set out its 2013 strategy. It involved the implementation of the EU’s Monitoring, Reporting and Verification (MRV) regulation, setting of GHG emission targets and a discussion about implementing market-based measures. However, the only concrete measure that was implemented was the EU MRV regulation.
From January 2018 onwards, large ships with a 5000 gross tonnage are required to monitor and report their CO2 emissions under the mandatory EU MRV regulation. The regulation is not aimed at reducing emissions per se, but it is argued that gathering information is vital so that actors can use it to reduce their emissions. However, studies have shown that the environmental effectiveness of the EU’s MRV regulation is limited.
The EU’s Current Proposals
The European Green Deal, which was published in December 2019 by the European Commission, sets the objective of reducing GHG emissions in the EU by at least 55% by 2030 and to achieve climate neutrality by 2050.
On the 14th of July 2021, the European Commission published the ‘Fit for 55’ package that involves concrete measures to achieve the targets set in the Green Deal. The goal of the package is to cut GHG emissions from all transport modes by 90%. It also lays forth specific measures for the shipping industry with four noteworthy measures being: The inclusion of shipping in the European Trading System Directive (EU ETS), a new regulation called the FuelEU Maritime Regulation, revision of the Alternative Fuels Infrastructure Regulation and The Energy Taxation Directive.
1. Shipping and the EU ETS
The EU ETS is a carbon market and operates based on the ‘cap and trade’ principle. It means that a company is allowed to freely emit a certain total amount of GHG emissions. If the company emits more than the cap set, it must buy allowances to emit more. The EU ETS provides an economic incentive to reduce emissions. Up until now, aviation and shipping have not been included in the EU ETS. This is about to change with the proposal in the ‘Fit for 55’ package to include shipping.
Shipping would be included gradually from 2023 onwards. When ships pollute more than the emission cap limit, ship owners will be required by law to buy permits to comply with the EU ETS. Otherwise, they might be faced with bans from EU ports. The proposal will not only cover ships that sail within the EU but will also aim to cover 50% emissions from international travels.
The purpose behind including shipping in the EU ETS is to increase production and take-up of more sustainable shipping fuels along with employing more zero- and low-emission vessels. It further aims to restrict the most polluting ships from entering EU ports and to make it mandatory that docked ships use shore-side electricity.
2. The FuelEU Maritime Regulation
This legislation limits the carbon intensity of vessel energy usage beginning in 2025. Carbon intensity is a measure of a ships’ efficiency transporting goods or passengers and is expressed in grams of CO2 emissions per ton-nautical miles.
The regulation works in the way that it sets a limit on the amount of GHG emissions that ships can generate in European ports. More specifically, it lays down that carbon intensity must be decreased by 2% in 2025, 6% in 2030. In 2050, carbon intensity should be 75% lower than it was in 2020.
Ships that do not comply with the regulation will be banned from EU waters and will have to pay a fine. The goal of this regulation is to incentivise ships to use alternative fuels.
3. The Alternative Fuels Infrastructure Regulation
This legislation aims to increase the availability of alternative fuels in the EU. It has been in effect since 2014. This was designed to improve infrastructure for recharging and refuelling vessels to equip them with sustainable fuels and also to increase the availability of engines powered with alternative fuels. Currently, this is just a Directive, however, the EU proposed to make it a regulation which makes it binding for all EU Member States.
4. The Energy Taxation Directive
Shipping and aviation fuels still enjoy tax exemptions for using fossil fuels. The proposed revision of the Energy Taxation Directive states that Heavy Fuel Oil (HFO) is no longer tax exempted for journeys inside the EU and that a minimum tax on HFO usage is imposed. The aim of the revision is to move away from fossil fuels towards cleaner fuels.
The new proposed regulations seem to make the EU’s actions more ambitious in the fight against the climate crisis. However, the question arises whether these measures are enough to achieve the ambitious goal set in the EU’s Green New Deal? This will be discussed in the second part of this article.
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