Shipping’s New ESG Rules Could Starve Millions

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By Paul Homewood

A shipping expert gives his views on the latest climate regulations for international shipping:

A new report found that more than 75% of ships will not meet the International Maritime Organization’s (IMO) new Environmental social and corporate governance (ESG) index aimed at decarbonizing the industry. This means that many ship owners will be forced to slow ships down to reduce emissions but doing so could deepen the global food and energy crisis by reducing available ship capacity.

“IMO decarbonization targets will cause ships to slow down delaying food shipments and people will starve,” a global security analyst told gCaptain. “How many people will die as a result of the IMO’s ESG efforts is unknown at this time. I don’t think most shipowners even understand the severity of the EEXI threat, but it could be millions of lives.”

IMO EEXI ESG INDEX

“Prior to any efficiency modifications, more than 75% of the fleet — including bulkers, tankers, and containerships — will not be compliant with the Energy Efficiency Existing Index (EEXI) that will enter into force next year,” said cargo analyst Joey Daly, in the new VesselsValue report.

The challenge of decarbonization will extend to all areas of shipping, and EEXI alone will present a myriad of challenges to owners, operators and financiers. Simon Hodgkinson, who heads loss prevention at West P&I, has suggested that the new rule could be one of the most significant new shipping regulations in years. He believes it has the potential to shift the entire industry.

The International Maritime Organization’s Energy Efficiency Existing Index is a voluntary, incentive-based system that encourages ships to improve their energy efficiency. The Index uses a vessel’s speed, cargo-carrying capacity, and other factors to calculate a numerical score. The higher the score, the more energy efficient the vessel. More specifically EEXI (Energy Efficiency Existing Ships Index) is a measure of a ship’s CO2 emissions per transport work. It is similar to the Energy Efficiency Design Index (EEDI), which has been in force since 2013, but applies to existing ships rather than new ones.

The Index is designed to motivate shipowners and operators to invest in energy efficiency measures that will reduce fuel consumption and greenhouse gas emissions.

Ships have to attain EEXI approval once in a lifetime, by the first periodical survey in 2023 at the latest.

Slow Steaming

Ship owners can meet the target by building new eco-friendly ships, investing in new decarbonization technology, and upgrading existing ships to burn cleaner fuels like LNG, or by slow steaming.

Slow steaming is a technique used by shippers to reduce fuel consumption and emissions by slowing down vessels. The process involves sailing at a slower speed, typically around 50% of the vessel’s maximum speed. This can be done by reducing the revolutions per minute (RPM) of the propellers.

While older ships can be retrofitted with devices to lower emissions and meet EEXI requirements, analysts say the fix most ship owners will take is just to go slower, with a 10% drop in cruising speeds slashing fuel usage by almost 30%, according to marine sector lender Danish Ship Finance.

“They’re basically being told to either improve the ship or slow down,” said Jan Dieleman, president of Cargill Ocean Transportation, the freight division of commodities trading house Cargill, which leases more than 600 vessels to ferry mainly food and energy products around the world.

This strategy also reduces the amount of wear and tear on the vessel, which can help extend the life of the ship. But there is one ancillary effect: a potentially massive reduction in fleet capacity.

Full story here.

As I understand it, the new regulations are voluntary, so will likely be ignored by many countries. However, shipping lines ignoring the diktat may find themselves punished by banks and insurers, operating to strict ESG rules:

“As the IMO prepares to rate the energy efficiency of ships on a EEXI scale of A to E, shipping companies will come under increasing pressure to meet these targets not just from regulators but also from banks.

In 2019, a group of banks committed to efforts to cut carbon emissions when lending to shipping companies. This group of banks established the Poseidon Principles, a global framework that is consistent with IMO policies on environmental grounds. As of today, 28 banks have signed on to the Poseidon Principles.

The Poseidon Principles are fairly new but are already having a ripple effect on finance and insurance, as banks and other lenders begin to factor in a company’s carbon emissions when making lending decisions.

What this means for shipowners is that even if they find a way around the IMO’s ESG regulations, steaming at normal speeds could increase their carbon scores and have a negative effect on financing options and stock prices”

This demented obsession with decarbonisation brings a painful dilemma:

Slow steaming means in effect less global shipping capacity, leading to a potential bottleneck on supplies. As the article explains:

“Is a reduction of capacity really a troubling problem? Yes.

Nobody is calculating the price of a good ESG score in terms of human lives,” said one global security analyst who wished to stay anonymous. “The question is no longer if people will starve to death because of IMO decarbonization targets. The question is how many?”

The most troubling fact from our conversations with global security analysts was that millions could die before famine even sets in. “

And longer shipping times mean higher journey costs, despite the savings on fuel, adding to the cost of everything we import.

The alternative, of course, is to simply build more ships to bring shipping capacity back into equilibrium. The building of these ships will, of course, carry an enormous carbon footprint of its own, eliminating any potential savings from fuel efficiency for many years to come.

And China?

Any discussion about international shipping must take into account the role of China, who are believed to control the world’s second-largest shipping fleet by gross tons and constructed over a third of the world’s vessels in 2019.

Will they follow these rules?

One of the reasons for their global dominance of shipping lies in a complicated and opaque system of formal and informal state support that is unrivalled in size and scope, and which includes subsidised finance from state banks, who are unlikely to be concerned with ESG.

While China may pay lip service to these new regulations, given their total disregard for ESG in other industries, I would strongly suspect that they will just carry on building up their shipping industry, taking advantage of the West’s weakness.

And the West’s economic dependence on China will grow ever more dangerous.

via NOT A LOT OF PEOPLE KNOW THAT

AUGUST 4, 2022

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