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container ship

Low-Carbon, Efficient Ships Save Millions. So Why Aren’t Owners Reaping the Rewards?

container shipThe shipping industry, like aviation, doesn’t have its own carbon reduction targets under last year’s Paris climate deal.

And while it is far more carbon-efficient than road or air transport — shipping makes up around 2.4 percent of global CO2 emissions compared to 16.8 percent from road transportation — the UN’s International Maritime Organization projects CO2 emissions from vessels will rise between 50 percent and 250 percent by 2050 in its “business as usual” case.

Also unlike its road and air counterparts, there isn’t much of a business benefit to ship owners to decarbonize. While road greenhouse gas and fuel efficiency standards are expected to save billions for corporate owners, efficiency and fuel costs play no part in the returns shipping asset owners see, according to research published today.

Researchers from UCL Energy Institute and global NGO Carbon War Room today confirmed that vessels with high design efficiency leave millions in the pockets of fuel payers. However, the market often fails to reward owners of efficient vessels by way of premiums or preferential hiring. This does not help the industry’s efforts to decarboize and could challenge regulations designed to reduce total industry emissions, the report says.

“These findings suggest that there is a market failure in shipping,” said Carbon War Room senior associate James Mitchell in an email exchange. “Fuel savings are not being shared and, on average, efficient vessels aren’t being utilized more. In the immediate-term, some owners are not being rewarded for efficiency, thus reducing the incentive for improving technical and operational efficiency through business-as-usual practices. In the long-term, this will greatly reduce the effectiveness of common policy tools such as bunker levies and carbon taxes because the market failure will diminish the advantages of vessel efficiency.”

UCL investigated the role of energy efficiency in vessel competitiveness by bringing together data on market dynamics and data on vessel operational patterns derived from the Automatic Identification System. The research showed that vessels with higher design efficiency, as measured by the GHG Emissions Rating, save more fuel on average than design alone would indicate.

Carbon War Room developed the GHG Emissions Rating with its partner RightShip and launched it as a free tool in 2010.

The study found, for example, that in 2012 the difference in fuel costs between a B-rated and an F-rated Capesize vessel was, on average, $5,500 per day, or nearly $1.5 million annually.

Despite this, efficient vessels do not appear to deliver significant rewards for anyone other than the fuel payer. In the time charter market, charterers appear to be reaping rewards when they choose vessels with high GHG Emissions Ratings, but owners of efficient ships do not share in the benefits.

On average, there should be a fuel saving for charterers choosing vessels with high GHG Emissions Ratings, according to the study. All else being equal, there is an incentive for charterers to hire highly rated ships. However, despite the consistency of these savings, the market does not also incentivize owners of efficient ships with premiums that reflect charterers’ fuel cost savings.

Owners in the time charter market that choose to improve their fleet’s efficiency by investing in efficiency technologies are not seeing a return from either price or preferential chartering. This means that in today’s markets there is little financial incentive for other owners to follow their example.

“This research presents a challenge to industry, to its business model, and to whether markets can be harnessed to help shipping meet the challenges of a low-carbon economy,” Mitchell said. “Shipowners are bearing the brunt of the failures of the market at present, but we see this as an opportunity. It is our view that robust and transparent market information offers a solution to start resolving this challenge.”

He says ship owners can use free data provided online by Carbon War Room’s Shipping Efficiency operation to bolster their negotiations. “Transparent data on operational efficiency would also help rebalance the power dynamic in negotiations, allowing all parties to profit from efficiency. The availability of transparent operational information would resolve the information asymmetry that exists in markets today and thus the power dynamic in such negotiations, better allowing the profits of efficiency to be shared.”

At least some owners are already taking steps to address shipping GHG emissions.

Mitchell says 39 charterers are now using Carbon War Room’s GHG Emissions Rating to shift away from the most inefficient ships, representing 20 percent of all commodities transported.

Just last week five global companies via the BICEPS Network launched a rating system to help shippers choose more sustainable ocean freight carriers.

The BICEPS Network — it stands for Boosting Initiatives for Collaborative Emission-reduction with the Power of Shippers — is a joint initiative of five global shippers, AB InBev, AkzoNobel, DSM, FrieslandCampina and Huntsman, which launched last year.

The five companies will use the new BICEPS Rating System in their global procurement processes of ocean freight container carriers. The Rating System will rank the carriers from A to F based on their scores from a questionnaire that covers performance in five areas including emission scores and targets.

Additionally, Heineken USA has reduced its carbon emissions associated with distribution by 3.7 percent since 2011 and is working with different industries to reduce emissions associated with marine container transport through BSR’s Clean Cargo Working Group. The group helps ocean freight carriers track and benchmark their performance.

“We’re also beginning to see the use of innovative business models to bring greater efficiency to the fleet by overcoming market barriers,” Mitchell said. “Carbon War Room’s Shipping Efficiency operation recently unlocked an innovative ‘shared savings retrofit clause’ by offering a grant to cover the cost of installation of continuous monitoring equipment in a shared savings bundle retrofit. Shipowner Hammonia Reederei worked with their charterer, Intermarine, to ensure the fuel savings were shared between the two parties, thus overcoming the split incentive where the owner invests in the technologies and the charterer gains the benefits. Carbon War Room is now working to unlock this model for industry.”

In another example of a new business model to benefit ship owner’s efficiency improvements, AkzoNobel’s first-of-its-kind carbon credits program for the shipping industry last year awarded two ship owners a combined total of nearly $500,000 for 17 vessels. This program rewards ship owners for converting from a biocidal antifouling system to a biocide-free advanced hull coating.

AkzoNobel says these coatings increase a vessel’s operating efficiency and reduce CO2 and associated emissions by an average of 9 percent. Carbon credits are awarded based on the reduction in emissions, which can then be sold on the carbon markets.

“There are also more innovative technologies that can be looks at such as wind-assisted propulsion or hull air-lubrication which suggest savings of over 10 percent to 20 percent with a single technology installation, these should be considered more widely by the industry,” Mitchell said.

Let’s hope, for the sake of the environment and for ship owners, that these new business models and technologies pick up steam.

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