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IMO agrees strategy to halve shipping emissions by 2050
The UN’s International Maritime Organization (IMO) has adopted, for the first time, a plan to lower greenhouse gas emissions from the world’s ships, agreeing to peak emissions as soon as possible and to reduce them by at least 50% on 2008 levels by 2050. This ‘initial strategy’ also says that countries should pursue efforts to phase out shipping emissions entirely by the end of the century.
The strategy, agreed in mid-April, says that the shipping industry should ultimately follow a pathway of carbon dioxide (CO2) emissions reduction that is consistent with the Paris Agreement temperature goals. Until now the shipping industry has not been included in any international agreements on climate change.
The IMO’s Secretary-General, Kitack Lim, said that the strategy was ‘designed as a platform for future actions’. A separate roadmap on shipping emissions reduction published by the IMO in 2016 says that any agreement will be revisited and revised in 2023 – offering a means of ratcheting up ambition, similar to the Paris Agreement.
The IMO says that future reviews of the strategy should take into account updated emission estimates, new emissions reduction options for international shipping, and the latest science from the Intergovernmental Panel on Climate Change (IPCC).
As well as the agreement to peak and decline emissions in line with the Paris Agreement, the strategy also says that the carbon intensity of shipping should further decline via the IMO’s Energy Efficiency Design Index – to reduce carbon emissions per tonne of goods shipped by 40% by 2030, and 70% by 2050, on 2008 levels.
The IMO’s working group on emissions reduction is due to meet later in the year to develop a programme of follow-up actions to the strategy and to progress the issue of reduction of shipping greenhouse gas emissions.
Following the agreement, environmental groups were happy that an absolute target had been set – rather than one based around emissions intensity. Brazil, the US and Saudi Arabia were opposed to setting such an absolute target, while Pacific island states were pushing for a stronger deal. Either way, the strategy leaves open the option of strengthening ambition in line with the latest in climate change science.
Following the agreement, the EU’s Commissioner for Transport, Violeta Bulc, and Commissioner for Energy and Climate Action, Miguel Arias Cañete, said in a statement: ‘For this initial strategy to succeed, it is now crucial that effective reduction measures are swiftly adopted and put in place before 2023. Preparations on longer term actions should also begin.’
The International Chamber of Shipping Secretary General, Peter Hinchliffe, said: ‘This is a ground-breaking agreement – a Paris Agreement for shipping – that sets a very high level of ambition for the future reduction of CO2 emissions. We are confident this will give the shipping industry the clear signal it needs to get on with the job of developing zero carbon fuels, so that the entire sector will be in a position to decarbonise completely, consistent with the 1.5°C climate change goal.’
What will it cost?
Meanwhile, market analyst Wood Mackenzie suggests that global bunker fuel costs could rise by up to $60bn annually from 2020, in a full compliance scenario, when the IMO’s 0.5 wt% sulphur cap for bunker fuels kicks in.
Fuel oil, which is high in sulphur content, has traditionally been used by the shipping industry as bunker fuel. In 2017, global demand for high-sulphur fuel oil stood at over 70% of overall bunker fuels. With the implementation of the IMO regulation in 2020, shippers will have to consider a switch to alternative fuels, such as ultra-low sulphur fuel oil (ULSFO) or marine gas oil (MGO), or install scrubbers, a system that removes sulphur from exhaust gas emitted by bunkers.
Iain Mowat, Senior Research Analyst, EMEARC refining and oil product markets, at Wood Mackenzie, said: ‘Installing scrubbers may be an economically attractive option. Although there is an initial investment, shippers can expect a rate of return of between 20% and 50% depending on investment cost, MGO-fuel oil spread and ships' fuel consumption. However, the penetration rate for scrubbers could be limited by a number of factors, including access to finance, scrubber manufacturing capacity and dry-dock space. Switching to MGO is a more costly solution, and in full compliance, would probably see freight rates increase, perhaps by around $1/b.’
Demand from the bunker fuels market will total about 5.3mn b/d in 2020, according to Wood Mackenzie forecasts.
Based on pure ULSFO refinery streams, available ULSFO volumes in 2020 will total about 1.2mn b/d. This could be boosted by further blending ULSFO with vacuum gas oil (VGO) streams, but VGO is a valuable feedstock for the production of other lighter refinery products, and may not be readily available.
Mowat said: ‘It is likely that MGO will help meet additional demand from the shipping sector. Wood Mackenzie estimates that this will see MGO demand rise by over 1mn b/d in 2020 in our base case outlook. Meeting this demand will require higher crude runs with residue upgrading units, particularly in the US and China, supporting an uplift in refining margins.’
‘While there is a risk that this fuel specification change could be disruptive, the anticipated market reaction could benefit refiners with deep conversion/distillate oriented configurations. It also provides refiners, particularly in the US and China, the opportunity to capture the value of their ULSFO component streams and increase their share of the global bunker market.’
He added: ‘Some refiners should see better profit margins as incremental demand for MGO rises, pushing up its price. Higher refining runs, required to meet additional MGO demand, could potentially push global gasoline market into surplus weakening gasoline prices. This could mean that the gasoline pain for some refiners could be more acute than the impact of weaker HSFO prices. Overall, we expect a material impact on refining economics post IMO and refiners must ensure they have a robust IMO strategy in place.’
‘We also expect a shift in bunkering locations based on compliant fuels availability. Singapore, for example, could potentially lose some of its market share for bunker fuels to China as shippers look for alternative locations with a surplus of compliant fuels. China, with ample MGO supply, is well positioned to attract shippers.’