Climate goals: wait for agreement or take responsibility?

Climate goals: wait for a stricter agreement or take responsibility?

Every time there is research done on CO2 pollution by a prominent university or leading independent organization, the conclusion is the same: the shipping industry is on its way to become the most polluting industry there is. Some scientists have projected that maritime shipping could account for 17% of total annual CO2 emissions by 2050. And yet, maritime shipping is one of the few sectors left out of the Paris Agreement (PA) on climate change which states that in 2030 greenhouse gas emissions should be reduced by at least 40% compared to 1990. Mainly because it is deemed too complex.

The European Union is in the process of including shipping in its emissions trading system, but for now it’s pretty much up to the industry itself to take action. And then there is the offshore component of the maritime industry, with their own challenges and goals.

Carbon emissions

Carbon Disclosure Project (CDP) is a nonprofit charity that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. They estimate that the oil and gas industry and its products account for 50% of global carbon emissions. At the same time, there’s a ‘green side’ to the offshore industry, i.e. the offshore wind and solar energy. The transition towards these renewables form a critical part of meeting the goals of the Paris Agreement, which aims to limit the rise of global average temperatures to well below two degrees Celsius. Decommissioning offshore installations - the safe removal of property and restoration of the environment – is another more or less green step in the right direction.

Although both the oil and gas industry and the wind and solar energy industry come together under the ‘umbrella’ offshore, they’re two very different worlds. And yet, they were brought together by the Paris agreement and the impact of COVID-19.

Offshore wind

With COVID-19 turning the world’s economy on its head and oil prices not as high as they used to and more volatile than ever, the oil and gas industry is accelerating its efforts to adapt and evolve. Many companies are exploring partnerships with the offshore wind sector, seeing an opportunity for both hydrocarbon extraction and turbine emplacement to coexist across a wide range of sites. Some of these oil and gas companies want to invest in this sector as a subsidiary to their main business as a way to use existing rig infrastructure for power generation. Others want to power the hydrocarbon extraction processes. And there is of course the need for oil and gas companies to build

'Every megawatt saved

is an increase in profit'

a portfolio that is resilient to both lower commodity prices and longer-term decline in demand. Whatever their incentive may be, offshore wind is becoming more and more attractive.

The future growth trajectory for offshore wind energy is very different to the oil and gas market. In terms of capital expenditure, offshore wind is rapidly growing, whereas in oil and gas it is decreasing. Although the returns are lower for now, growth in wind is more stable – an attractive prospect for fossil fuel giants beset with visions of their core business collapsing in the next couple of decades. Although there are still some improvements to be made regarding the storage of wind energy, there is zero uncertainty about this energy pipeline. Wind is always there. The number of projects in the field of renewable energy, tidal installations, offshore wind and solar energy is growing. Although this is still a small part of the total investment capital, companies are increasingly being forced to invest 'green' instead of 'black'. Whether it’s from a profit or climate point of view. Or both.

Innovation

Where before, offshore wind farms heavily depended on subsidies, this has gradually changed over the last years. It is now becoming a self-supporting mature industry and a continuous process of innovation is underway to increase capacity and efficiency. Of all the energy generated by windmills, a significant amount is lost during transport to land. A lot of research is therefore being done on how this energy loss can be limited. Every megawatt that can be saved in this way per year provides companies with enormous profits in the long run. This also means that the costs of building an offshore wind farm in fewer years can be recouped sooner, which makes these projects more interesting for investors. And because of this optimism, the scale of these projects is getting bigger and bigger, which makes it even cheaper.

An interesting development here, is that the volatile behavior of wind and the solar based energy generation is not an issue anymore. Larger storage capacity and smart grid connections are reducing the impact of non-wind or non-solar periods. In addition, the insurance industry also developed new products to compensate for longer non-wind and non-solar periods resulting into large income losses.

Shipping industry

Where the need for change is getting more and more urgent for the oil and gas industry, that isn’t really the case for the shipping industry. And without any big incentive imposed by the Paris Agreement, it is now mainly a question of ‘Do we take our responsibility and do what’s right, before ‘Paris or Glasgow’ tell us what we need to do’? When the International Maritime Organization (IMO) was founded, an organization consisting of stakeholders from the maritime sector, this should have been one of the questions. In practice, however, the carbon elephant was acknowledged for years, but ignored. This has significantly changed the past two years and at its June 2021 meeting the IMO agreed to lowering ships’ carbon-intensity by 2% a year from 2023 to 2026 and ban the use of heavy fuel oil in the Arctic starting in 2024. But because there is still a waiver-option, allowing some ships to continue using it there until 2029, the net effects are to be seen.

A trend going in the wrong direction

While there has been plenty of talk about the need for the aviation industry to reduce their carbon footprint, there has been less mainstream coverage of the shipping industry. It looks like ‘aviation’ has better PR, because the shipping industry actually made the biggest progress. But there’s plenty more progress to be made. The global shipping industry accounts for more than one billion tons of emissions each year - almost three per cent of the global total - a similar amount to aviation. And considering that ships transport more than 90 per cent of goods that are traded, and include everything from cargo ships and oil tankers to passenger ferries and fishing boats, it is not a huge surprise that the greenhouse gas emissions rose by nearly 10 per cent between 2012 and 2018. Even if this emission increase was corresponding to a similar increase in the volumes of shipping, it is a trend that is going in the wrong direction. If nothing is done, there is no way the emissions will be cut by 45 per cent by 2030, let alone achieve net zero emissions by 2050.

Sailing own course

The Netherlands didn’t wait for the IMO or stricter PA-rules. The government, port authorities, maritime sector, shipping and transport organizations, banks and research institutes joined forces to promote sustainability in the shipping sectors. In the Dutch Reflection on the Green Deal these parties have set down ambitious goals for the sea and inland shipping sectors. By 2030, CO2 emissions by the inland shipping sector must be reduced by a minimum of 40 per cent, whilst its operations must be virtually climate-neutral by 2050. The maritime transport sector raised the bar even higher and aims to reduce the sea shipping sector’s emissions by 70 per cent by 2050. By comparison: the global goal is 50 per cent.

There are other Dutch initiatives as well, like the construction of the hydrogen vessel - giving more impetus to improving the sustainability of inland shipping – and the collective efforts in the northern border region. There, the Netherlands and Germany (Hamburg region) are fully committed to explore alternative fuels and innovations with 5G, drones and connected and automated mobility. The region has

everything to become Europe’s testing ground for innovations in the field of green and smart mobility. Cross-border rail links with Germany contribute to regional employment and activity.

At the same time, there is already a significant untapped potential to reduce shipping emissions cost-effectively. Many technical and operational measures, such as slow steaming, weather routing, contra-rotating propellers and propulsion efficiency devices, can deliver more fuel savings than the investment required. There is also a lot of experimenting done with electrification; zero- or low-carbon fuels such as hydrogen, natural gas, ammonia and biofuels, and power sources such as fuel cells and solar, wind and wave power. Electrifying a ship means replacing its traditional mechanical systems with electrical ones. Some fleets have already electrified propulsion and cargo handling.

Hybrid power systems, on the other hand, integrate different power-generation mechanisms, such as engines and batteries, to leverage their complementary characteristics. Both are key to cleaning up the industry’s emissions. It allows engines operating on fossil fuels to be either replaced by alternative power generation technologies, or downsized and modified for low-emissions operation. It also allows ships to connect to electric power while in port, reducing their emissions from idling. The main challenge lies with the electricity grid and infrastructure. Power and boosting stations are not always available.

Broaden the perspective

But no matter where you are in the maritime spectrum, a major stumbling block for the energy transition is financing. Especially after the COVID-19 crisis, there is little to no money available, especially for smaller companies, to make the necessary investments. All working capital is used to keep the business running. It is therefore a challenge for many companies and sectors to think creatively and work together to be able to participate in the energy transition. In order to achieve the climate goals in a cost-effective and efficient way, we must look at what is possible. A first step is to enter into discussions with various parties, such as large cargo owners, investors, risk consultants, entrepreneurs, municipalities and financiers, about the wishes and possibilities for the future. Together you have a better overview of where profit can be made in the entire chain. This broader perspective provides more room for finding creative solutions.

‘Cross-sector co-creation’ companies

Innovation combined with this ‘new’ perspective can accelerate the reduction of carbon emissions for both shipping and offshore companies. We see that there is more and more collaboration across sectors on new initiatives. Through this ‘cross-sector co-creation’ companies can learn a lot from each other about how to deal with the energy transition. For example, in the realization of offshore wind farms, which is a relatively expensive affair. To make these investments profitable, offshore solar farms are increasingly included in the concept of a wind farm. This means that solar panels will be placed in the spaces between the wind turbines. That way, the available space is used much better, because no ships pass between the windmills anyway. In addition, it is more efficient, because the expensive export cable can now also be used for the generated solar energy to bring the energy ashore. You can already see that these export cables are linked to the transport cables for gas or hydrogen. Everything to increase efficiency and reduce costs. But because there are new risks associated with this process, the risk management component should always be taking into consideration.

There is no doubt that the need for ‘greenification’, and more specifically, the Paris Agreement is the main driver for all the innovations and the new paths that big oil and shipping companies have taken. But it’s still business and a major, global one. When there is no fair level playing field, like when China or Russia are ignoring the climate rules for profit, the transition will fail. In addition, it is important to note that there are more drivers than regulation, law and treaties. The consumer is more and more often asking for sustainable and ethically responsible products. And when major companies are greening their supply chains, shipping companies have to follow.

In short, every link in this giant maritime supply chain plays it’s part. Like they say in sports: a team is only as strong as its weakest link. The same goes the maritime industry: the stronger each link, the sooner we will reach our CO2 goals.

For more infromation on maritime risk consultantcy:

Peter van der Brink

E peter.h.van.den.brink@aon.nl W www.aon.nl/marine

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