Sustainable operations are required for continued profitability in the shipping industry. How to get poised for future growth?
More than 80 percent of world cargo is currently carried by sea, and the global shipping industry accounts for about 2-3 percent of global greenhouse gas emissions. Although the shipping industry succeeded in reducing its emissions over the period from 2008 to 2012, global shipping industry emissions increased by about 10 percent between 2012 and 2018.
- This was primarily because ever-increasing cargo volumes are carried by sea, which is generally more carbon-efficient than land and air transport, says Thommessen associate Ingrid Skjelmo.
Other types of environmental pollution, such as for example emissions of SOx, NOx and other air pollutants, as well as environmentally harmful discharges into the sea, can also be attributed to the shipping industry.
- Although we have fortunately witnessed a reduction in major casualties involving large-scale oil spills from vessels, global shipping activities always entail a risk of such spills, notes Ingrid.
The International Maritime Organization (IMO) published its fourth shipping industry greenhouse gas emissions study in August 2020. This estimates that shipping industry greenhouse gas emissions may increase by between 90 and 130 percent by 2050, compared to the 2008 level, unless further steps are taken to cut emissions.
SUSTAINABILITY: Ingrid Skjelmo is part of Thommessen’s Ocean and Industries team, and is also a member of the firm’s interdisciplinary Sustainability Group.
Green developments: Stricter regulations and industry initiatives
There is no doubt that the shipping industry has made great strides towards a green future in recent years. The industry is making rapid progress on the adoption of smarter and more sustainable operating models.
- Shipping companies are now taking real action to improve their climate credentials, and the Norwegian Shipowners’ Association reports that Norwegian shipping companies are optimistic about tackling the climate challenges. In the Shipowners’ Association’s Maritime Outlook Report 2021, close to 90 percent of Norwegian shipping companies are reported to consider the achievement of a climate-neutral fleet by 2050 a realistic ambition, in conformity with the Shipowners’ Association’s climate strategy, explains Thommessen partner Henrik Hagberg.
An increased climate focus in the maritime industry is reflected in both stricter regulations and a number of private initiatives from the industry itself.
- The IMO, which is the key promoter of new international shipping regulations, has in the last few years announced very ambitious targets for cutting greenhouse gas emissions from the maritime industry, without such targets being supported by specific measures or accompanying regulations for reaching such targets. The EU is also committed to reducing shipping emissions, and has set equally ambitious greenhouse gas emission reduction targets. The industry is nonetheless still lacking global international greenhouse gas emission regulations, says Ingrid.
However, the industry will be facing ever stricter regulations in the years to come. It is for example expected that the EU Taxonomy Regulation will also affect the shipping industry. The proposal currently circulated for consultation includes several shipping segments.
- The extensive reporting requirements to be applied to banks and other financial institutions, etc., will have a knock-on-effect on a number of companies that do not fall within the direct scope of the Taxonomy Regulation - for example through lender reporting requirements, says Henrik.
He adds that it remains to be seen whether EU will eventually expand the Taxonomy Regulation from reporting requirements to more hard-hitting measures.
- In addition, the European Parliament has proposed that shipping, which accounts for approximately 13 percent of EU greenhouse gas emissions, should be included in the EU emissions trading system (EU ETS). Such inclusion is expected to come into effect already from 2023, says Henrik.
Extensive research is also being conducted into new, more efficient and environmentally friendly fuels, such as for example hydrogen and ammonia. Other technological advances are also being made – including in the development of new and more environmentally friendly vessel design.
GREEN DEVELOPMENT: - Shipping companies are now taking real action to improve their climate credentials, says partner Henrik Hagberg.
How to get poised for sustainable and profitable future growth?
Maritime sector players need to adopt a long-term perspective, while at the same time being able to nimbly adapt operations to new requirements and expectations, advise Henrik and Ingrid.
- A vessel typically has a lifespan of 25-30 years, so both regulations and prevailing industry expectations will change between the investment decision date and the vessel launch date, as well as over the lifespan of the vessel, observes Ingrid.
It may therefore be prudent to pay heed to initiatives that have yet to result in any mandatory provisions.
- Private initiatives and collaborations are becoming increasingly prominent, and gaining support from a broad range of stakeholders. This is both about demonstrating a real commitment to addressing climate and environmental challenges, as well as acknowledging that sustainable operations are required for continued profitability and capital access for the industry, says Henrik, before adding the following:
- There is considerable variation in the practical implications of signing up to private initiatives, but private requirements will in some cases have a direct impact on operational profitability. Some loans are for example linking the loan interest rate to predefined greenhouse gas emission reduction targets on the part of the borrower. Cutting emissions will thereby become both financially profitable for shipping companies, as well as beneficial for the climate.
Would you like to know what rules and initiatives are of relevance to your business?
Our Sustainability Database provides you with a helpful overview of what is relevant to the maritime sector, with Thommessen lawyers also explaining how this can affect your business. This service is available to our clients, potential clients and other collaboration partners. You are welcome to read more and register free of charge here.