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Is shipping’s decarbonisation revolution about to start slow steaming?

Shipping’s decarbonisation trajectory depends on regulation that will be decided over two crucial meetings. Yet there is already growing concern that governments could backslide on promises when the easy ambition statements give way to the difficult detail of climate finance

The shipping industry and governments are attempting to negotiate the most difficult and controversial details of a global greenhouse gas reduction strategy amid a backlash against pro-climate policies. Some are more invested in the outcome than others

“YOU can be loyal to American labour or you can be loyal to the environmental lunatics, but you can’t really be loyal to both,” explained Donald Trump in September last year as he tackled the subject of “job-killing electric vehicle mandates” in typically nuanced terms.

If the shipping industry had genuinely invested in a strategy that believed in a rapid decarbonisation of maritime trade, such statements would be worrying.

Yet the shipping industry is — with a few anomalous exceptions — not worried.

The prospect of a second Trump presidency in the US, and the anticipated reversal on climate policy and leadership, is worrying the very few senior leadership teams who have invested in strategies that foresee a rapid uptake of zero-emissions fuels and binding regulation that delivers a genuine trajectory of zero greenhouse gas emissions from shipping by 2050.

They are worried about the growing backlash against pro-climate policies inside governments previously committed to regulation aligned to the Paris Agreement 1.5-degree target.

They are worried about the prospect of a swing towards populist governments intent on pulling the handbrake on costly green commitments in a year where 49% of the people in the world are voting in elections and inflation is biting.

However, mostly they are worried that the International Maritime Organization is about to fudge the future of its climate strategy by falling short on a substantive regulatory commitment to delivering net-zero.

The majority of the industry, however, is not worried. Not really.

When Lloyd’s List polled its readers in December, 76% said they did not believe that the industry would meet the 2030 climate targets agreed by the IMO in July last year.

Looking further ahead, 56% said the 2040 targets were unachievable — and only 56% believed that the 2050 net zero target would be met.

The industry does not believe the targets will be met because, despite the rapid expansion of dual-fuel capable tonnage, the vast majority of shipping investment to date is a bet on “business as usual” scenarios prevailing.

A rapid uptake of zero-carbon fuels is, of course, theoretically feasible with the right pricing mechanism to close the price gap between zero-carbon and conventional fossil fuels.

Yet the ships being ordered today will prove economically viable, even if they sail through the next few decades on conventional fuels with incremental efficiency improvements.

Shipping has not invested in a zero-carbon future; it has hedged its bets on the speed of change.

The real step change in the industry’s decarbonisation revolution will only come at the point that binding regulation either mandates a change or offers a sufficiently enticing financial incentive. And herein lies the concern about what happens next.

Over the next two editions of the IMO’s Marine Environment Protection Committee, governments are scheduled to agree the mid-term measures, including an economic and technical measure.

The details of the various policy measures and combinations on the table at the IMO are about to become the subject of intense and forensic scrutiny.

Any one measure currently on the table — including the proposed global fuel standard and multiple variations on Greenhouse Gas Pricing — might achieve the IMO’s stated GHG-reduction targets, but this all depends on their scope, clarity and stringency.

The devil, as ever, will be in the detail.

To deliver on the objectives of stimulating early adoption of scalable zero-emission fuels, ramping-up use of such fuels towards 2040, and enabling a so-called just and equitable transition, requires a combination of a GHG pricing mechanism, a global fuel standard based on well-to-wake, and revenue disbursement mechanisms.

The prospect of that combination landing in a sufficiently ambitious format is increasingly being couched in caveats and warnings that the political landscape may not be conducive.

Senior industry and government voices are already talking down the expectations that a sufficiently robust market-based mechanism will be delivered and some are openly raising the possibility that, perhaps, a voluntary set of measures could be a more achievable scenario.

If the GHG price and any subsidy regime is not targeted at scalable zero-emissions fuel use, it could end up only stimulating transition technologies and driving an incremental energy transition.

For most shipping companies, the prospect of this next phase of regulatory certainty failing to achieve a rapid ramp-up in investments across the sector will come with some risk, but these will be largely manageable.

However, for those few companies that have passed the tipping point of investment and are now dependent on decarbonisation materialising to achieve their strategy, that uncertainty is a massive risk.

According to several senior European shipping executives regularly talking to regulators globally, the backlash against pro-climate policies is now a regular topic of conversation in closed-door meetings.

While expectations for this year’s MEPC81 are relatively muted, in that no final decisions are expected, there is a growing concern among some senior IMO delegates that if the basic building blocks are not at least broadly agreed this year, then the window of opportunity is already closing.

This month [March], an interim impact assessment report will be published by the IMO. This will be the point at which the full implications for Small Island Developing States (SIDS) and Least Developed Countries (LDCs) are made clear, and the point that states will start ramping-up the negotiations over climate financing in response.

There are two likely scenarios here. The first is that the report concludes that a market-based mechanism will not have a substantive impact on trade, in which case states opposed to the perceived negative impact on their economy — notably Latin American states — will cry foul and disagree with the report findings.

The second scenario is that it will impact maritime trade, import and export capabilities and some states are going to be hit more heavily than others. Those same states will then say: “We told you so,” and use the findings to push back on timelines.

The reality is that full decarbonisation of a global industry is going to be costly, but the inflationary impact is manageable, provided that the agreed mechanisms start at a suitably low price for carbon and the right incentives.

That is going to be a difficult negotiation to close in less than two years. Many of those who left MEPC80 in high spirits, buoyed by the IMO’s 2050 ambitions, are now preparing to enter MEP81 feeling much more negative about prospects of success this time around.

“I’m fighting this on three separate fronts now,” explained one senior shipping executive involved in high-level discussions.

“I feel like I’m having to fight off the negative countries that don’t want a market-based measure.

“I have to fight off some stakeholders that are now saying there’s never going to be enough fuels, so let's just focus on energy efficiency.

“And then I have to fight to secure the support of the ambitious countries because they are now worried about how this is all going to play out in an election year.”

Those assessing the submissions to MEPC81 understand that the detail of what emerges will bear little relation to the positions currently being taken.

However, there is a genuine concern among many of those preparing to enter the negotiations that this could all yet fall down on politics of climate financing that will never be resolved within the IMO.

If governments can agree this year the basic building blocks of a market-based measure that is global, well-to-wake and rewards the uptake of scalable zero-carbon fuels, then progress is possible and the timeline remains viable.

If not, there is a realistic possibility that either what gets agreed is so diluted that it fails to incentivise investment and fuel uptake; or negotiations collapse once again and the window of opportunity to secure a meaningful IMO agreement is pushed back by another decade, while climate financing negotiations play out in other forums.  

“That is a massive risk to be facing,” said the executive fighting on three fronts.

“To have regulation that one year says: ‘Let’s be super ambitious’ and the next year, all we’re hearing is: ‘Perhaps we went too far’. That’s a huge risk.

“Those of us who committed to this — we need regulation. It’s absolutely essential — we cannot let this push back.”

This article is part of Lloyd’s List’s latest special report on Decarbonisation, which can be viewed in full here

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