An ETS for ships will be based on a form of EEOI to measure a ships performance
Pigs Can’t Fly is a well-known children’s book. Each time the main character in the book, Little Pig, sees a different animal that he wants to imitate in order to have fun, he concocts a catastrophe. The frustrated attempts of Little Pig resemble, in away, the EuropeanUnion’s attempt to get the Emissions Trading System implemented in global shipping, as it did in the airline industry. However, and I paraphrase Ben Cort’s book, Ships Can’t Fly, there are too many differences between shipping and airlines to make it happen without a tremendous amount of exemptions, administrative costs, political controversies and outright evasion and fraud. Big words that need
clarification.
Planes fly mostly on fixed schedules and routes, at fixed speeds, with on
average a high load factor (no ballast legs), fuelling at airportswhere administrative and reporting procedures are in place and respected. Emissions can thus be calculated relatively simply and accurately, contrary
to ships that more often than not trade to different ports during the year, at different speeds, in different weather conditions (storms, currents, ice), often in ballast, for different owners, operators and charterers under different contracts (voyage, spot, bareboat) with different types of fuel, sometimes bunkering in exotic places where regulations are not always followed to the letter, to put it mildly.
An ETS for ships will necessarily be based on a form of Energy Efficiency Operational Index to measure a ship’s performance in terms of cargo actually carried, multiplied by kilometres travelled in a year. But that measure depends 80%-90% on themarket situation and weather. A long ballast leg to get a well paying cargo, or no other cargo available nearby, will result in a bad EEOI. The owner can improve a ship’s efficiency by cleaning the hull regularlyand instalingmagical energy saving devices, but there are limits to that of 10%-20%maximum. So nomatter how good the owner, he cannot control his EEOI performance,which determines whether at the end of the year hewill need to purchase credits or have surplus credits: totally unfair, and you can imagine the creative accounting during audits.
The ensuing market distortions, such as “don’t take a cargo involving ballast”, will be potentially huge. Not tomention that to judge if your EEOI is good or bad, baselines must be developed for each ship type and size. This cannot be done since there is no data to start from. For EEDI, the LRFP database was used, containing a huge amount of data, but still the baselines thus established are theoretical and inmost cases unrelated to any statistical correlationwith real ships. As already mentioned, ships do not trade at predetermined speeds. Those who pay for the fuel, that is the shipowner, if the ship is in the spotmarket on voyage charter, or the charterer, if the ship is on time or bareboat charter,will choose an optimal speed as a function of the bunker price, and the state of themarket, specifically the spot rate.
The practice of slow steaming that has a direct and critical impact on CO2
emissions is an operator’s automatic response to both those variables. It is not a measure that can be imposed effectively by regulators. There are a number of significant issues to resolve for a global ETS, sanctioned via the International Maritime Organization, to become a viable reality. In
particular, decisionswould be needed on such issues as proper allocation criteria, thresholds, setting the global cap for each size and type of ship, addressing evasion possibilities via transhipment and geographical scope.
Reaching agreement internationally on such criteria would be complicated and would have to be in linewith other relevant international agreements. It is clear that an environmentally effective, cost-effective and fair global ETS for shipping is highly unlikely. Maybe the onlyway to keep the administrative burden fromskyrocketingto an arbitrarily high levelwould be to place limits on coverage, for example, limit the scheme to ships above a certain size.
In fact, this is precisely the reason these limits are suggested in the ETS
proposal. If all ships are included, the scheme would be unmanageable. There is no indication what the size limitwould be. According to the Second IMO GHG Study 2009, if the limit were to be set at 10,000 gt, it would amount to 16,000 ships covering 67%of total CO2 emissions. Thus, side effects of any limit would be that a percentage of the fleetwould be exempt and hence producing CO2 without regulation.
One may see additional side effects, such as many ships of 9,900 gt being built if the limit is 10,000 gt. But even then, even if 16,000 ships were to be included instead of 60,000 (the number of ships if the limit is set at 400 gt), it would still be a very heavy burden. Avoidance of carbon leakage is likely to
be problematic in ETS.One reason is the high number of exemptions built into the scheme. Already mentioned is the problem associated with the ship size cut-off. Another exemption would be that of cargoes associated with small island developing states. This could result in traffic being diverted to these countries, which could develop into mega transhipment hubs, just for the purpose of emissions exemptions. Based on all available research and the
lacklustre performance record of existing ETS schemes, onemay conclude that an effective ETS scheme for international shipping is unattainable.
An obvious and effective way to achieve the objectives of emission reduction for the entire world fleet would be to simply increase the bunker price with a fixed levy. In the short run, this will induce shipping to operate at slower speeds. In the long run, it will induce owners to invest in ships that are technologically more fuel efficient. Besides, such a levy must be clearly identifiable and stable in order to affect shipping industry behaviour as awhole, as its capitalintensive nature requires ample lead times. Erratic and unpredictable price signals as witnessed from the existing EU ETS will not produce the desired effect. Therefore, in my opinion, the current proposal for ETS in global shipping might add a newchapter to the book Ships Can’t Fly, which will become nice bedtime reading for the dreamers among us.
Niko Wijnolst
Professor Emeritus in Shipping Innovation
This article initially published at Lloyd’s List, on 23 February 2011.For more information visit www.lloydslist.com