Pollution: the race to clean up the shipping industry
Hamish Norton, a shipping executive at US-listed Star Bulk Carriers, is as prepared as he can be. Over the past year, his company has begun installing exhaust gas cleaning units on 100 vessels — almost all of its fleet — to meet new environmental rules that are set to change the industry.
“It’s certainly a pretty disruptive event,” says Mr Norton, adding it will cost the company $170m to fit so-called scrubbers on to its ships, which carry commodities such as bauxite and iron ore. “It’s a massive amount, particularly as profitability has not been great.”
Shipping is the lifeblood of the global economy and 90 per cent of trade is
seaborne. But it is also one of the world’s most polluting industries. More than 90,000 ships criss-crossed oceans last year, burning nearly 2bn barrels of the heaviest fuel oil made from the dirtiest dregs of a barrel of crude and carrying oil and gas, chemicals, metals and other goods.
Vessels belch out large quantities of pollutants into the air, principally in the form of sulphur dioxide, nitrogen oxides and particulate matter, which have been steadily rising and endangering human health especially along key shipping routes. They also create between 2 and 3 per cent of the world’s total greenhouse gas emissions such as carbon dioxide, contributing to global warming and extreme weather effects.
“The reason the health impact of these fuels is not a front-page scandal is simply that those impacted tend to be people living along developing country coastlines and ports in Asia, rather than people in western capitals,” says one shipping consultant.
From 2020, shipowners must clean up their act as part of sweeping plans designed to reduce the industry’s greenhouse gas emissions by at least 50 per cent by 2050 compared with 2008. In January a sulphur cap will be adopted and later carbon emissions will be tackled. While industries such as road transport, power and even aviation have made environmental progress, shipping is one of the last bastions of the old fossil-fuel world order.
Shipping fuel contains sulphur concentrations more than 3,500 times greater than the diesel that triggered the emissions testing scandal at carmaker Volkswagen. The International Maritime Organisation, a UN agency, has been working for 12 years to get an agreement on introducing measures to limit sulphur content in fuels from 3.5 to 0.5 per cent from 2020. While the Paris climate agreement set goals, the shipping agreement is the most significant binding worldwide environmental regulation mandated in decades.
S&P Global Platts analysts say the rule change could cost the global economy $1tn over five years. Environmentalists say the impact of shipping pollution on the world is far costlier.
After much foot-dragging, shipping companies, oil traders, refiners and energy players are priming themselves. Most shipowners will switch to lower-sulphur fuel oil while others, such as Mr Norton’s company, are installing exhaust scrubbers to strip out the sulphur from their vessels’ emissions. While some systems store the waste on board until it can be treated on land, others discharge it into the ocean.
One of Star Bulk’s biggest ships — the Star Leo — has recently had a scrubber installed. It does 90-day journeys from Brazil to China carrying iron ore, the raw material used to make steel. The bulk carrier goes around the Cape of Good Hope, then the Strait of Malacca to ports on the east coast of China — along the most polluted tanker superhighways in the world.
“Do you care more about the quality of your air or water? Do you want to breathe in scrubbed fumes or unscrubbed?,” asks Mr Norton, spelling out the dilemma, as he sees it, for shipowners who are still primarily thinking about costs and hedging themselves for swings in fuel prices.
With just over six months left before the sulphur cap takes effect, huge uncertainties remain. Are companies prepared for big shifts in fuel demand? Will governments enforce the rule and shipowners comply? And will it be enough to reduce air pollution as well as shipping’s contribution to global warming?
“After sulphur, regulators will go after carbon, that’s part of the plan. But there are very few ways to dramatically cut carbon emissions as of right now,” says Mr Norton. “No company is going to ask for stricter regulation.”
The maritime sector has functioned for decades as a vast waste disposal system for the oil industry. As refineries became more sophisticated, producing higher quality petrol for cars, for example, the worst bits of the barrel ended up in the engines of ships.
Exhaust gases transformed into toxic particles that pollute coastal regions. The pollutants drift inland beyond busy shipping routes, causing major respiratory illnesses and other health hazards as well as polluting lakes and streams and causing crop damage, especially in south-east Asia, say climate activists.
A 2018 study led by James Corbett found that ship pollution causes about 14m cases of childhood asthma and 400,000 premature deaths a year — from lung cancer to cardiovascular disease. That is more than 1,000 deaths a day, although other estimates are lower. The research found that the use of lower sulphur fuels could cut by more than a third the number of deaths attributed to shipping.
Mr Corbett has calculated that 200 of the largest ships produce as much sulphur as all the world’s cars. The International Council on Clean Transportation found that while road vehicles make up 64 per cent of transport-attributable pollution-related deaths, ships out at sea still account for 16 per cent.
Some health experts do not think the new rules go far enough: “With lower-sulphur fuel you could have a greater number of particles even if their mass is reduced,” says the University of Southampton’s Dr Matthew Loxham, who specialises in air pollution. Smaller particles remaining in the air, he says, “will [still] have health consequences”.
The debate over who is responsible for cleaning up the global shipping industry has been a long one and the ambiguity has been used by some to avoid accepting their role in causing the pollution. Is it the oil companies who produce the fuel, the shipowners who burn it in their vessels, the sellers of the products held on those ships or the buyers of the goods?
And then there is regional responsibility. Unlike environmental rules for other sectors that can be governed at a country level, the IMO must negotiate with 174 member nations. In a sign of its complexity, the sulphur ruling is only taking effect 12 years after an agreement on draft regulations was reached and decades after the worst effects of these emissions were realised.
“We can only go so far as our members want us to go,” says Edmund Hughes, head of air pollution at the IMO. While France, Germany, Sweden and the UK have been among countries pushing for reform, others, such as Saudi Arabia — which produces higher sulphur crude — have opposed it. “You need to have a political agreement,” says Mr Hughes. “This is not always understood by those that want us to go faster.”
Despite several years’ notice about the sulphur cap, there are fears that some companies are ill-prepared. Others expect to do well from the ruling. International energy companies such as BP and Royal Dutch Shell have improved their refineries to make the most of the legislative change and analysts say their refining earnings may double in 2020. Producers of lighter crudes such as the US and Nigeria will benefit too.
Shipping groups including AP Moller-Maersk, Mitsui OSK and Euronav are among those most exposed to higher fuel costs. Maersk, the world’s largest container shipping company, estimates that the IMO 2020 ruling will result in a $2bn rise in annual fuel costs as it makes the switch from high-sulphur fuel oil to marine gas-oil, which is almost 50 per cent more expensive. Although it was a scrubber sceptic, it has now also committed to retrofitting some ships, amid concerns there could be a shortage of higher specification marine fuels.
According to energy consultancy Wood Mackenzie, there are scrubbers for more than 2,000 ships on order. But this is modest compared with the tens of thousands of other vessels worldwide, meaning the majority are either choosing to or are forced into switching the type of fuel they use.
That could put pressure on supplies of lower-sulphur fuels and reduce the amount available for trucks and aeroplanes, sending prices surging. Concern about stoking prices during a re-election bid has even caused US president Donald Trump’s administration to seek to delay the implementation of the rules with little success, shipping executives say.
“For the first year, the situation will be tight,” the International Energy Agency said in a recent report, adding that benchmark diesel prices could jump by 20 per cent, dealing a blow to ordinary users at the pump, at least in the short term. Others are far more sanguine. The IMO says there are more than adequate supplies of low-sulphur products.
A bigger worry is compliance, which is dependent on governments’ abilities to monitor and enforce adoption. Goldman Sachs analysts estimate that compliance will be around 80 per cent next year but unlikely to reach 100 per cent even by 2024.
“It will be illegal for a vessel to have non-compliant fuel on board,” says Alan Gelder, at Wood Mackenzie. “But not all ports have the capability to test the quality of marine fuels and not all countries have ratified this IMO regulation into their national legislation.”
In the longer term, there is a concern that the hundreds of millions of dollars being spent on new fuels and retrofitting ships with scrubbers to comply with the sulphur cap will ultimately do little to reduce the sector’s contribution towards cutting carbon emissions.
There are also questions about the longevity of the investment in scrubbers. Although Mr Norton says scientists have yet to conclude that wash water from so-called “open-loop” scrubbers was harmful when discharged into the sea, he conceded more studies were necessary. Some ports such as in Singapore and the UAE have banned this variety of cleaning system. Most shippers expect these scrubbers will fall out of favour as regulators step up scrutiny.
Shipowners are exploring new ways to cut air pollution and emissions. A group of French and Greek companies want to impose a speed limit on ships. “Slow steaming” immediately reduces emissions because ships burn less fuel; it also has the beneficial side-effect of decreasing capacity in a market where a glut of ships has pushed down freight rates.
At a meeting of the IMO’s marine environment protection committee in London this month, it agreed to consider slow-steaming as a short-term measure and to accelerate energy efficiency requirements for new container and cruise ships. These could cut 750m tonnes — or 2 per cent — of CO2 emissions between 2022 and 2050, according to the ICCT.
Others are investigating fuel switching, which has had a mixed reception. “Even if every ship switched to gas, it’s just not enough,” says Hiroki Sato, vice-president at Japanese utility JERA, the world’s largest buyer of liquefied natural gas. He says such a move would cut sulphur dioxide and nitrogen oxide emissions but only help to reduce CO2 levels by up to 20 per cent. “The IMO needs to be careful” about aggressive regulation when alternatives are not yet present, he says.
Some are indeed going much further. As commercial vessels last for at least 25 to 30 years, clean shipping advocates say companies need to be building the next generation of ships to meet the IMO’s 2050 target. Electric battery-powered ferries have operated on a smaller scale, while wind-assisted propulsion — essentially sails — is making a comeback too. Hydrogen technologies are also being considered.
Maersk has invested $1bn and engaged more than 50 of its engineers each year for the past four in cleaner technology development. The company has even suggested an industry-wide fee for research and development.
Although some companies are thinking ahead to an era of more stringent regulation on carbon emissions, Mr Norton says most are not looking beyond the first five years of the new rules: “It’s not a shipowners’ problem yet.”
“There are no mandates from regulators,” Star Bulk’s president adds. “It’s quite frankly nobody’s problem yet.”