Climate regulations are poised to disrupt the shipping industry

Global supply chains have been heavily burdened in recent years. From the Covid-19 pandemic to Russia’s recent invasion of Ukraine, More Than Shipping has covered the disruptions at length. But now a challenge is looming.

New guidelines

New environmental regulations will change the way shipping companies operate a significant number of transoceanic routes. The International Maritime Organization (IMO), the United Nations agency responsible for regulating global shipping, has issued new rules that “will have a significant impact on how container lines organize their services and will have consequences for the choice of production locations, underpinning global supply chains,” according to the Harvard Business Review. In addition, European Union regulations, which are increasingly likely to be passed before the end of the year, aim to add extra costs and complications to shippers by charging liners additional emission fees for entering and leaving EU ports.

From January 2023, the new IMO rules will require individual ships to measure and report a CO2 intensity index, which essentially boils down to an equation involving weight moved, distance traveled and amount of fuel burned. This report must be submitted annually for each vessel in each fleet.

These reports are then graded on a scale between A and E, with D and E grades having a short time to comply with IMO standards before their ships have to be withdrawn from the ship rotation. Grading criteria are reportedly getting stricter each year and boats must report a 2% improvement annually to remain in their labeled class.

The way forward

As discussed in detail on More Than Shipping, these rules will be implemented to achieve the goal of a carbon neutral future for the industry. With the target date of 2050, IMO has given shippers an incentive to make changes sooner rather than later on a record quarter by record quarter basis.

Switching fuel sources will be a way for liners to comply with IMO regulations. For example, Maersk, the second largest container line, focuses on bioethanol fuel. The Dutch shipping giant has already ordered 12 ships powered by methanol and signed contracts with several methanol producers. The renewable fuel source approach is also being explored by others who have looked to hydrogen-based fuels as an answer.

Technological advancements such as retrofitting existing vessels to burn renewable fuels will be another option for many liners. However, these changes will be expensive. Jeremy Nixon, CEO of shipping company Ocean Network Express, estimates that the industry will need to spend about $1.5 trillion over the next 20 to 30 years to meet IMO standards for emissions.

Conclusion

For the supply chain, these changes and the high fees that come with them could easily transform the way goods are sourced. The cost of decarbonization will change the calculus by declining rates, and we may never see pre-pandemic prices again, especially for goods coming in and out of Europe.

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