Shipping is a dirty business. Overwhelmingly reliant on petroleum-based fuels, it was responsible for about 2% of all energy-related greenhouse gas emissions in 2022, according to the International Energy Agency. That year, the sector’s total carbon footprint increased by 5%.
But the industry watchdog’s desire to clean up shipping is strong. At a meeting of the International Maritime Organization (IMO) in July, member states of the UN regulator agreed to cut total shipping emissions by 20%, compared with 2008 levels, by 2030. Their targeted reduction by 2040 is 70%, with a view to attaining net zero “by or around” 2050.
How to calculate shipping emissions
These targets are, by the IMO’s own admission, ambitious. Achieving them will clearly be tough, but the task should be aided by regulations aimed at decarbonising the sector that came into effect this year.
Since January, all vessels with a freight capacity of 400 gross tonnage and above have been required to calculate how they rate on the so-called attained energy-efficiency existing-ship index (EEXI). In essence, this measures how many grams of CO2 would be emitted by a ship if it were to move one tonne of cargo one nautical mile.
Alongside this, they must work out their annual operational carbon-intensity indicator (CII) score. This is a yearly average linking a vessel’s emissions to the amount of work it actually gets through over that period. Based on its score, a ship’s carbon intensity will be rated from A (what the IMO calls “a major superior performance level”) all the way down to E (“inferior”).
Only if a ship reaches the required EEXI score at its first periodical survey will it be awarded an international energy-efficiency certificate. Vessels that don’t make at least a C grade for carbon intensity will require remedial action.
The aim of all these measures is to encourage shipping companies to adopt alternative power sources such as biofuel, electricity and hydrogen. But that’s easier said than done, mostly because it’s costly.
Many vessels are therefore expected to try other measures to comply with the new regime. This could have a significant effect on global supply chains.
Dr Willy Shih, professor of management practice at Harvard Business School, is an expert in supply chain management and logistics. He points out that “the easiest way to lower emissions, and hence improve a ship’s grade, is to slow steam. Reducing its speed by 10% or so will, within limits, typically reduce its emissions by 30%.”
How to balance sustainability against supply chain needs
But that solution would entail a significant compromise. Cutting speeds would mean allocating more ships to each rotation, thereby reducing productivity and capital efficiency.
“Ultimately, it’s a trade-off,” Shih says. “There are many older, smaller ships on regional routes that will be grade D or worse. The easiest thing to do is slow steam them. Otherwise, they’re heading to Pakistan and India for scrapping.”
Voyages will take longer as a result, according to Niels Rasmussen, chief shipping analyst at industry body the Baltic and International Maritime Council. “Compared with the 2022 average, we estimate that sailing speeds in the container shipping sector could be reduced by as much as 10% by 2024,” he says.
Increased regulation doesn’t have to negatively impact the consumer
Shih believes that this wouldn’t affect service levels unduly, suggesting that adding a few extra days to the “20 days from Singapore to Rotterdam is not that big a deal” to the average customer.
The new regime could also mean significant changes to where goods are sourced. From next year, container shipping becomes subject to EU carbon pricing, which will affect vessels that call on member states. This could give shipping companies a strong incentive to assign the newest and most efficient ships to routes connecting to Europe.
“That could also have perverse consequences on rotation strings touching the EU – for example, one from the Middle East that touches Algeciras in Spain,” Shih says.
He suggests that a shipping firm’s thought processes in that case might go along the following lines: “If I make that stop, both the inbound and the outbound legs will be subject to the carbon tax. If I don’t make that stop, I can avoid paying it. Hmm… it seems that I should cut out that stop.”
What’s the cost of shipping under the new emissions rules?
As a result, companies that export to the EU or have European suppliers could face higher costs.
Logistics experts also expect the higher-volume trade lanes, which justify the largest and most efficient ships, to become even busier. This could mean that smaller ports on less popular strings get neglected, along with the areas they serve.
“Additional regulations have the potential to force changes to the supply chain network at large,” says Douglas Kent, executive vice-president of corporate and strategic alliances at the Association for Supply Chain Management. “This undoubtedly includes where products are sourced, where manufacturing sites are located and where inventory is stored.”
How the logistics industry might hit its green targets
While it’s theoretically possible to cut shipping’s CO2 emissions from their 2008 levels by as much as 47% by 2030, according to research by Dutch consultancy CE Delft, about half of this reduction would result from lowering speeds and other operational efforts, while the other half would come from adopting wind-assisted propulsion and switching to more eco-friendly fuels.
That said, ships tend to have a lifespan of only 20 to 35 years and new vessels capable of using alternative fuels are already appearing. It should become easier for shipping companies to achieve the necessary EEXI and CII ratings in the medium term without having to use slow steaming or make significant route adjustments.
In the meantime, Kent says, they’ll need to make a concerted effort to minimise the effects of the new regime on prices and shipping times. “Increased regulation doesn’t have to negatively affect the consumer”, he says, “but this does call for investment and strategic focus.”
