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Climate Regulations Are About to Disrupt the Shipping Industry

There’s been a lot of strain on global supply chains in recent years. From the Covid-19 pandemic to Russia’s recent invasion of Ukraine, More Than Shipping has covered the disruptions in depth. But now a challenge is on the horizon.

New Policy

New environmental regulations are going to change the way shipping companies operate a significant number of transoceanic routes. The International Maritime Organization (IMO), the United Nations agency responsible for the regulation of global shipping, has issued new rules that “will have significant implications for how container lines design their services and will have consequences for production location choices that underpin global supply chains,” according to the Harvard Business Review. Additionally, European Union regulations that look increasingly likely to be passed before the end of the year aim to add additional costs and complications to freight forwarders by charging liners additional emissions fees for entering and exiting EU ports.

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

These reports are then scored on a scale between A and E, wherein D and E grades will have a short time to become compliant with IMO standards before their ships must be taken out of shipping rotation. Reportedly, the grading criteria will become harder each year, and boats must report a 2% improvement annually to remain in their lettered class.

The Path Forwards

As discussed in depth on More Than Shipping, these rules are being implemented to reach the target of a carbon neutral future for the industry. With the target date of 2050, the IMO has incentivized shippers to make changes sooner rather than later on the back of record quarter after record quarter.

Changing fuel sources will be one way liners look to comply with IMO regulations. Maersk, the second largest container line for example, is focusing their efforts on bioethanol fuel. The Dutch shipping giant has already ordered 12 methanol-powered ships and signed agreements 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.

Making technical refinements such as retrofitting ships currently in use with the ability to burn renewable fuels will be another option for many liners. These changes will be expensive, however. Jeremy Nixon, the CEO of shipping company Ocean Network Express, estimates the industry will need to spend roughly $1.5 trillion over the next 20-30 years in order to reach IMO standards for emissions.

Conclusion

For the supply chain, these changes and hefty fees that accompany them could easily change the way goods are sourced. The cost of decarbonization will change the calculus around declining rates, and we may never see pre-pandemic prices realized again, particularly for goods coming into and out of Europe.

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