Carbon futures: What’s in store for shipping?

As we approach yet another round of international climate negotiations, this time in Paris in December, it is time to recap on the status quo for shipping regarding carbon dioxide (CO2) emissions. Although the ballast water issue and tightened ECA requirements may have been the key focus areas for ship owners lately, regulators are also moving on CO2 emissions.

The CO2 issue is a complex one due to its multiplicity of stakeholders and its political rather than technical nature. While maritime regulations are traditionally moved forward by IMO, CO2 is part of a complex tapestry of international, regional and domestic politics and negotiations. The crux of the matter is that political processes in which maritime interests have a negligible say may be instrumental in determining the direction of maritime CO2 regulations.

International regulation by IMO

It is worth recollecting that a few years back there was a strong drive to develop a carbon pricing or trading mechanism for shipping. Heated discussions at IMO highlighted the split between developing and developed nations; the same split has so far proven to be an almost insurmountable barrier to a comprehensive international climate deal. Unable to reach consensus, IMO put market mechanisms for CO2 regulation on hold and instead focused on energy efficiency. This resulted in broad agreement on the Energy Efficiency Design Index (EEDI) and Ship Energy Efficiency Management Plan (SEEMP). In practical terms, this is the first-ever international agreement on CO2 emissions in any sector; quite an achievement for IMO.

Nevertheless, a number of countries hold the view that this achievement is not nearly sufficient if shipping is going to be able to contribute to actual reductions in CO2 emissions and the well-known 2°C goal of the international climate negotiations. Several mechanisms to enhance ships’ operational efficiency have therefore been proposed. Generally, these follow a three-stage approach; data collection, the development and testing of an efficiency calculation methodology, and the eventual roll-out of the mechanism as a mandatory performance standard. Timelines have not been stipulated, only that each stage will take a number of years.

The proposals are strongly opposed by a number of parties who believe that developing operational efficiency regulations for ships is neither feasible nor appropriate. Presently, IMO is therefore limited to developing a framework for monitoring and reporting ship fuel consumption data only. As agreement on making even this limited scope mandatory appears to be out of reach, the development of mandatory regulations is expected to remain slow. In DNV GL’s view, the earliest possible entry into force of mandatory international reporting requirements will be towards the end of this decade. Voluntary fuel consumption reporting may happen earlier, but IMO-agreed mandatory operational efficiency standards remain a distant prospect.

Regional regulations in the EU

The EU is presently in the lead on CO2-emission-related regulations for shipping. After rolling back its proposal to include ships in the EU carbon trading system, Brussels decided to focus on developing a mechanism for a CO2 Monitoring, Reporting and Verification (MRV) scheme for shipping. Political agreements have now been reached between various EU institutions and the MRV Regulation will become part of EU law on 1 July this year. Ship owners will have to prepare annual reports on a per-ship basis for all vessels above 5,000gt calling at a European port; the report must include information such as the annual data on the CO2 emitted, distance sailed and cargo carried. The emission reports are to be verified by accredited verifiers, e.g. Class societies subject to accreditation in 2017. The technical details of the regulation are to be finalized by the end of 2016, ship owners must submit their monitoring plans by 1 September 2017 and monitoring starts on 1 January 2018.

This regulation will have a direct impact on ship owners in the form of mandatory data collection and reporting, but there is no CO2 cost as such associated with it. Furthermore the regulation may have an indirect effect on the charter market and second-hand values of ships, as Brussels will make the collected data publicly available, including per-ship operational efficiency figures. The EU has stated its intention to leverage the MRV mechanism into a CO2 pricing/trading mechanism at some point in the future, either in the EU or preferably at IMO. Finally, Brussels has also expressed its willingness to retire the EU MRV Regulation as soon as IMO develops a comparable international mechanism. DNV GL does not foresee EU CO2 pricing happening this decade, but we do expect to see developments on this when moving into the 2020s.

Political negotiations at the UNFCCC The international climate negotiations at COP21 in Paris in December this year have as a stated goal to reach a comprehensive international agreement that is to become effective in 2020. There is an outside possibility that shipping and aviation will be designated to DNV GL provide funding, potentially as much as USD 100 billion annually, to the Green Climate Fund intended to facilitate climate change adaptation and mitigation in developing countries. Language proposing this has been kept alive and still exists in the present negotiating text. DNV GL considers it highly unlikely that there will be any agreement on this, indeed the outcome of COP21 itself remains in doubt given the present status of the negotiating text and associated political positions. However, if there is a surprise decision at COP21, the expectation is that IMO and the International Civil Aviation Organization (ICAO) would be tasked with the development of appropriate mechanisms. In such case, we do not anticipate that any such mechanism will enter into force before 2020 at the earliest.

In essence, we expect COP21 to have only a negligible impact on the shipping industry and even in the case of a surprise decision we foresee no tangible effects on the industry before the beginning of the next decade.

Where now?

Concern about CO2 emissions from shipping will not disappear from the policymakers’ agenda. However, we expect the EU MRV mechanism to be the key tangible regulation this decade. There is a reasonable possibility that IMO will develop a monitoring and reporting mechanism for fuel consumption, but we predict that this will initially be voluntary, with possible mandatory application following some time later. If IMO moves quicker than anticipated and agrees on mandatory fuel-consumption reporting, this is nevertheless presumed to have a limited impact on the industry. IMO-mandated energy-efficiency reporting with associated minimum requirements is not expected this decade. International climate negotiations are predicted to have a very limited direct impact on shipping, but if an agreement also covering shipping is reached at COP21, its impact is not foreseen to be significant before 2020. It is important to realize that while the development of international regulations takes time, it is rarely given up. At DNV GL, we will therefore continue our efforts to shape regulations so that they are lag neutral, technically sound and preferably developed by IMO.
Source: DNV GL, Tanker Update No1 2015