With the world becoming more reliant on maritime transport to send and receive the materials that are crucial to companies’ operations, global CO2 emissions from the shipping industry are projected to rise from the current 2-3 per cent of the global total to up to 17 per cent in 20501 if the increase goes unchecked.
Switching from fossil fuels to cleaner alternatives is easier said than done for long-haul, ocean-going vessels. Although one of the world’s biggest shipping companies has announced plans to launch “carbon-neutral vessels”,2 sustainable fuels for maritime transport are currently either unavailable at scale or not commercially viable for industry-wide adoption.
“While 1,800 organisations have made public sustainability commitments, the technology is unfortunately just not there for some industries like steel manufacturing and shipping,” said John Chen, Head of Commodity Sales for ASEAN and Head of Corporate Sales for Singapore at Standard Chartered, speaking at an industry event.
Even though decarbonisation in the near-term remains a distant goal for most shipping firms, taking a watch-and-wait approach is not the answer to the climate crisis. Instead, encouraging widespread participation in the carbon market is the best alternative, according to panellists at the event.
Putting a price on carbon to plug the gap
Broadly, two main types of carbon markets exist today: mandatory, also known as compliance, and voluntary.
In the compliance market, carbon emission allowances are governed by a regulatory framework. Examples include the EU Emissions Trading System3 (ETS)– the world’s largest and most liquid mandatory scheme – and the California Cap-and-Trade Program, which ranks as the fourth largest.4 Voluntary markets, which are primarily based in Asia, entail the use of carbon credits generated from projects that reduce, avoid or remove carbon dioxide to retire or offset emissions generated by polluting sources.
Together, by putting a reasonable yet meaningful price on carbon, these two schemes work to incentivise companies to compensate and increasingly neutralise emissions as they try to meet their net zero targets.
However, experts at the session acknowledged that a lot more work needs to be done to bring shipping on board. For one, the wild disparity in voluntary carbon credits today – prices can range from US$2 to US$90 per tonne – needs to be addressed to level the playing field for all parties in the shipping industry. While high carbon prices in the compliance market are a deliberate decision, the huge price differential in the voluntary market is driven by demand dynamics and the quality of carbon credits.
Secondly, given the global and fragmented nature of the shipping industry, trying to put in place a uniform emissions trading scheme could prove complex. Currently there is a lack of consensus on how to address the industry’s carbon emissions problem, especially when for most companies shipping is considered a cost centre, and cost reductions have often taken priority over sustainability.
Solutions debated at the panel session include implementing a hybrid carbon offset-and-tax approach to overcome the lack of an industry-wide, global system. Also discussed was the setting up of a global exchange to enable the trading of high-quality voluntary carbon credits– such as Climate Impact X (CIX), a public-private entity based in Singapore5 that aims to address the issues of price discovery and the quality of voluntary carbon credits.
Implications for the maritime industry
While carbon trading has yet to be widely adopted in the shipping industry, panellists agreed that for it to switch from emissions-intensive fuel to cleaner energy, fuel costs must increase, either relative to other fuels or just in themselves.
Discussions at the session suggest that among the various approaches to pricing carbon, market-based mechanisms, such as CIX, are far more efficient for the shipping trade than simply adding to firms’ fuel costs. If the goal is to increase fleet efficiency or fuel savings with technology, the best approach is to incentivise corporations through financing. And companies that are unable or unwilling to retrofit their fleet can do their part by compensating those that proactively adopt more sustainable options.
Setting the right price for carbon credits is key. Priced too low, it can incentivise the wrong behaviour, such as shipping firms opting to purchase carbon credits to pay their way through the problem, rather than thinking about long-term mitigation measures.
Despite critics’ concerns that carbon credit schemes inhibit innovation and extend the runway to net zero, they have already demonstrated their effectiveness in some industries, such as real estate, oil and gas, and aviation.
“There's a place for carbon credits, it just needs to be priced correctly and the quality needs to be assured,” said Chen. “And that means using technology for monitoring and ensuring transparency in the process.”
With quality carbon credits, shipping companies will be able to accelerate the industry’s decarbonisation journey.