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How Will More Environmental Regulations Affect The Shipping Industry?

Public concern about global warming and the air we breathe means shippers will potentially find themselves operating under increasingly tight rules and thinner margins in the coming years. Like most industries that depend heavily on fossil fuels, shipping is likely to find itself in a complicated position between competing requirements.
Consider the implications of the requirement of the International Maritime Organization (“IMO”), the United Nations’ shipping regulatory agency, that by 2020, shippers reduce their sulfur oxide (SOX). This can be done by:

  • Purifying a dirty fuel. Typically, shipping bunker fuel is a leftover (heavy) fuel from the processing of other transportation fuels like kerosene, diesel, and aviation fuel. In order to comply with IMO guidelines, shippers can purchase fuel with reduced sulfur content (0.5% sulfur compared to 3.5% on a mass basis). Lower sulfur fuels require additional processing by refineries, which will prevent shipping companies from purchasing the residual from other refinery processes, and raise costs substantially. Maersk’s Q1 2019 investor report projects the spread between high sulfur fuel and 0.5% compliant fuel to be approximately $200 USD per metric ton (a 60%+ increase)[1].
  • Installing a scrubber. Scrubbers have a high upfront cost and require the disposal of a waste stream. Typically, scrubbers take ocean water, remove the SOX with a solvent, and then discharge the residue back into the ocean, killing marine life and releasing a potential carcinogen into the environment[2].
  • Substituting an ultra-clean fuel such as gasoil or liquefied natural gas (LNG). Maersk projects gasoil to be almost $100 USD per metric ton more expensive than 0.5%-compliant fuel. LNG is cheaper than gasoil or 0.5%-compliant fuel, but potentially requires additional capital expenditures to convert the engine/generator.

To an extent, some of these fuel cost increases can be countered on a per-unit of weight basis by using larger vessels (Figures 1.3). However, limiting sulfur emissions hinders a different problem: ironically, reducing SOXemissions will increase global warming. SOX is a principal element of acid rain, but SOX also cools the atmosphere. Scientists estimate that global shipping reduced the impact of global warming by 7% in 2000, and success meeting their 2020 SOX reduction targets will mean the planet loses four-fifths of that benefit.
The shipping industry produced about 1 billion tons of the world’s 40 billion tons of carbon dioxide (“CO2”) in 2014, roughly 2.5%. By cutting SOX emissions (which reduced global warming), shipping would potentially need to cut even more GHG emissions than most other industries in order to comply with the Paris Climate Accord.

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