Shipping companies must take a harder look at emissions

Pic: Ship Smoke and Pic & Cap: Engebret Dahm, CEO of Klaveness Combination Carriers ASA

In September 2022, legislators passed Australia’s first climate law in more than a decade and toughened targets to make the country net zero by 2050, with an aim to reduce emissions by 43% by 2030. For the Australian Petroleum Industry, this means companies will have to take a harder look at emissions and in particular their scope 3 emissions, which currently account for almost 75% of the total. Within that figure, shipping makes up a crucial portion and represents an opportunity for carbon cuts that should not be missed.

Globally, the shipping industry has already started its decarbonization journey, with the International Maritime Organization (IMO) implementing in January 2023 stricter requirements on energy and operational efficiency of the world’s fleet. Furthermore, the EU is expected to implement shipping into its Emission Trading System (ETS) from January 2024, effectively charging a carbon tax on the shipping industry. The IMO has also advanced discussions for introduction of a global carbon tax for shipping, likely to be implemented later this decade.

To reach anywhere close to the 2030 targets for its scope 3 emissions, the Australian Petroleum Industry cannot wait for IMO to take charge when it comes to the decarbonization of shipping. The industry should begin preparations and take active steps to cut emissions from ocean freight. With a potential carbon tax looming, companies should start making the necessary changes – and sooner rather than later.

Carbon tax exposure — putting it into perspective

If you are one of the leading Australian importers of clean petroleum products importing some 2.5 million mt per year primarily from the Far East and South East Asia aboard a mix of vessel types, your exposure with the average EU’s ETS pricing to date in 2022 (US$86/mt CO2) could amount to around USD 9.5 million per year.

What actions can you take starting today?

1. Measure and report ocean freight emissions

The starting point for taking action is to first understand where you stand today– simply put, if you can’t measure it, you can’t manage it.

Those leading by example illustrated this in May 2022 when three oil majors, Total, Shell and Chevron together with leading oil traders Trafigura and Gunvor, reported, for the first time, the climate alignment of their shipping activities through the Sea Cargo Charter (SCC). This global framework for responsible ship chartering includes standards for climate reporting in shipping with 34 of the world’s largest energy, agriculture, mining, and commodity trading companies as signatories.

By improving the collection and analysis of data, inefficiencies can be identified, and better choices can be made when deploying vessels.

2. Scrutinize any possibility to improve supply chain efficiency and dare to challenge existing solutions

A lot can be done by improving the efficiency of ocean freight. The shipping industry is inherently inefficient with waste in all parts of the shipping supply chain and holds a great deal of potential for improvement. For example, tankers transporting oil products into Australia sail empty over long distances both before arriving at load ports overseas and after departing at discharge ports. There is excess waiting time and the transportation capacity of performing vessels is not always fully utilized. The energy efficiency of a large part of the tanker fleet serving Australia is well below its potential and the standard of the most modern part of the fleet.

Engebret Dahm, CEO of Klaveness Combination Carriers (KCC) says: By improving efficiency, the Australian petroleum industry can, with little to no extra costs, cut the carbon footprint from its ocean freight by up to 50% over the coming years. He adds that to tap into this efficiency potential, the industry needs to challenge existing solutions, its ways of operating and be willing to consider unfamiliar but proven solutions.

KCC currently serves the Australian petroleum industry with its fleet of 2019-2021 built combination carriers, being among the most energy efficient tankers of their size. KCC’s vessels effectively combine inbound shipments of petroleum products with outbound shipments from Australia of dry bulk commodities such as alumina, grains, salt, and iron ore. Through superior trading efficiency and minimizing time with no cargo onboard, KCC’s vessels cut carbon emissions per ton transported by 30-40% when compared to standard tankers of their size. Dahm explains that KCC is, in addition, implementing an energy efficiency program with a target to deliver a further 20% in carbon emission cuts from the ‘CLEANBU’ part of the fleet over the next 3-4 years.

3. Develop a new co-operative relationship with shipping partners

To succeed with its decarbonization efforts, the Australian petroleum industry should develop new ways of collaborating with shipowner partners. Co-operation can include better and more precise reporting, joint experimentation on measures to improve efficiency, joint emission reduction target setting and developing a freight model that incentivizes shipowners to invest in energy efficiency measures and voyage optimization.

As an example, Dahm highlights that KCC is piloting a model with customers where the freight paid depends on the emissions performance relative to a baseline. If the shipowner performs better than the baseline, the freight increases but if the shipowner underperforms against the baseline, freight costs will decrease. With such methods, a price on carbon is effectively included into freight contracts and gives the right incentives to shipowners to optimize efficiency and make carbon cuts.

Update your climate strategy

For shipping emissions, change is right around the corner and front-runners have the opportunity to establish a competitive advantage over peers with respect to in-house competency and securing capacity with the best performing shipowners.

By considering measures such as those outlines, the Australian petroleum industry already today possesses the potential to substantially reduce its exposure to future carbon taxes by improving the efficiency of ocean freight. This will make the future transition to new and more expensive fuel types much easier.

The landscape has changed. All industries will face tougher requirements and stricter regulations and companies must adapt their climate strategies and plans to meet this challenge.

Marex Media