What Price to Clean up Shipping?

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Ed King suggests the shipping industry may be softening to the idea of a carbon tax $100 a tonne by 2027. $130 a tonne by 2030. That was the view of shipping magnate Andreas Sohmen-Pao at the London International Shipping Week conference on Thursday.

The chair of Singapore-headquartered BW Group – a shipping company valued at $592m with a fleet of more than 160 oil and gas tankers – is not your average green champion.

But he’s frustrated at the lack of progress to clean up a sector that is currently responsible for three per cent of global greenhouse gas emissions, a figure the UN says could rise fast in the coming decade.

“If you said in 10 years we’d have a price of $100 a tonne and it would rise $10 up every year I can work with that,” Sohmen-Pao told an audience of business leaders.

“It’s good for the world and it’s not alien to the world… you have a tax on petrol in the UK. Why are we not imposing more of a tax on fuel as means of helping the environment?”

Talks on delivering a UN climate deal for shipping are ongoing, with initial proposals due from the London-based International Maritime Organisation (IMO) due in April 2018.

But progress has been slow, with strong resistance from many in the industry against tougher measures – be that market-based mechanisms, new efficiency standards or a global CO2 target.

With shipowners and shippers still suffering a hangover from the financial crisis, and a surge in new ships driving down cargo rates, finance for new more efficient ships is scarce.

Lack of finance is often used as an argument from industry against further measures, but Sohmen-Pao sees incoming climate rules as a way of skimming off the oldest and dirtiest ships in the fleet.

“It will help with perceptions (of shipping) and clears out old inefficient tonnage… It’s more realistic than asking shipyards not to produce more ships,” he said.

Without a carbon tax – which was proposed by the IMF in 2016 but received lukewarm support – the sector will “end up going in circles, nobody funds the new technologies,” said Sohmen-Pao.

“The irony is we are looking at our navel in the short term… no regulations because of cost but not seeing the benefit of industry from improving and raising the bar,” he added.

With the efficiency of marine diesel engines no better than the the 1970s – a point made by Martin Stopford, head of Clarkson Research – investment is clearly required.

New research from CE Delft suggests efficiency in new ships has stalled, an ominous development given rising levels of trade.

Who stumps up the cash for better ships is less clear. Speaking on the sidelines of the conference, James Mitchell, finance lead at Carbon War Room, argued a carbon price could help that.

“A $100 tonne carbon price would serve two key purposes for the industry,” he said. “First, it could be revenue neutral. It could raise funds to develop, prove, and scale low-carbon technologies and fuels,” he said.

“Second, it would help correct the huge market failure in shipping. Vessel efficiency is not priced effectively by markets, and owners should be seeing better premiums for efficient vessels. A carbon price will begin to correct this.” 

It would be a big deal and it’s unclear what support a market-based mechanism has at the IMO, where most global maritime decisions are brokered.

42 countries already have carbon prices, but most are light years away from $100 a tonne of CO2. The EU’s carbon market is hovering around the €6 mark.

A World Bank-backed project to develop a plan for pricing CO2 in shipping launched in June, with a specific remit to explore how pricing CO2 would impact countries in remote areas.

It’s a concern for countries at the end of supply chains like Brazil, who fear higher rates could make the iron ore they ship to China or soya to the US uncompetitive.

But it’s a sign of the times that an executive as influential as Sohmen-Pao feels able to float this in the public domain, an indication that business leaders are growing tired of IMO inaction.

As if that’s not enough for the sector to chew on, physical risks from extreme weather are also a concern for insurers, Lloyd’s of London CEO Inga Beale warned the conference.

Three of Lloyd’s top five insurance payouts for lost cargo have occurred since 2005: Hurricanes Katrina, Ike and Sandy. The costs of closed ports and damaged cargoes from Harvey and Irma are as yet unknown.

“It is going to have an impact on all of us. The world is changing and we have to be very, very aware,” Beale said.

When insurers and oil barons start to bang the drum, perhaps it’s time to listen.

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Source: Business Green