Customer Logins
Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
Customer Logins
BLOG
Jan 17, 2023
Pass-through fees could disincentivize carriers from decarbonizing: shippers
Shippers are warning that their willingness to share the cost of decarbonizing maritime supply chains — estimated at more than $1 trillion — could disincentivize carriers from making the necessary changes to reduce carbon emissions.
Container lines have been clear that they will pass
decarbonization costs on to customers, and shippers generally
accept that they bear some responsibility for so-called Scope 3
emissions, but they harbor a deep mistrust of carriers when it
comes to calculating and recovering those costs.
"Given past behavior — think low-sulfur fuel — shippers are
fully expecting any increases in fuel costs to just be passed on as
the 'mother of all BAFs' (bunker adjustment factors)," James
Hookham, director of the Global Shippers Forum (GSF), told the
Journal of Commerce. "This will just neuter the financial incentive
on lines to change fuels, with the result that many shipping lines
will carry on burning highly taxed conventional fuels at their
customers' expense, just as we were expected to pay low-sulfur
surcharges for ships using marine oil with a scrubber
fitted."
Sea-Intelligence Maritime Analysis has estimated the cost of
container shipping's compliance with the International Maritime
Organization's 2020 low-sulfur fuel regulation was around $27
billion, proof of the industry's ability to absorb massive cost
increases.
According to the International Energy Agency, however, the
transition from fossil fuels to renewable energy sources will
require an investment of $4 trillion by 2030 to put the world on
track for net-zero emissions by 2050, three times what is being
invested today. Tufton Investment Management put the cost of decarbonizing the
shipping industry at more than $1 trillion, a price that will
require both public and private investment with a solid regulatory
framework.
Hookham said shippers will be keeping a close eye on pass-through
charges, particularly if carriers take the same approach to
recouping the cost of reducing emissions as they did with the IMO
2020 rules, applying charges via opaque BAFs, rather than assessing
a separate, more transparent fee.
"Shippers will expect to know what they are paying for, over what
time periods, and the paybacks they offer for their own carbon
accounting," he said. "But the route map to net zero for shipping
is still far from clear: which fuels, which propulsion
technologies, which trade lanes? None of these have yet been
answered."
Peter Sand, chief analyst at rate benchmarking platform Xeneta,
said shippers' approaches to sustainability range widely, from
wanting carriers to deliver a greener service with no added costs
or surcharges, to wanting to pay more for a green option, such as
buying sustainable fuel, a popular offering from forwarders and
carriers. He added that there may be limits to what shippers can
— or will — pay for decarbonization, particularly after
more than two years of pandemic-induced disruption and record-high
spot rates.
"But if you are willing to pay $6,000 or $18,000 per FEU during a
supply chain crisis, you may also be willing to pay something for
sustainability issues," he told the Journal of Commerce. "Whether
that willingness to pay a premium amounts to a few bucks or
hundreds of dollars on a global industry wide average is hard to
say."
A survey by Boston Consulting Group released in mid-December found
shippers were willing to pay an average premium of 3 percent for
zero-carbon shipping — compared with less than 2 percent in
2021 — that would generate $10 billion to $20 billion in extra
revenue for the shipping sector. This was far below the 10 to 15
percent premium needed to reach net-zero shipping targets by 2050,
but the survey found 65 percent of shipping customers were willing
to pay an even greater premium in the future.
Devil in the details
Tackling the decarbonization of maritime transport is as urgent as
it is complex. Shipping's annual greenhouse gas (GHG) emissions
increased by 9.6 percent in 2018 compared with 2012, and there are
no indications that maritime shipping's emissions have peaked.
According to the IMO, absent immediate action from the industry,
carbon dioxide (CO2) emissions from shipping could rise as much as
50 percent by 2050.
Carriers regard pricing instruments as the most effective way to
raise revenue to fund the industry decarbonization. The European
Union, for example, included shipping in its Emissions Trading
System (ETS) from Jan. 1, 2023. Sea-Intelligence believes the
annual cost of shipping's compliance with the EU ETS could exceed
$10 billion a year.
"The shipping industry seems utterly focussed on raising yet more
money from its customers to fund this up front through carbon
levies and other market-based measures," Hookham said, adding that
this would not play well with shippers after watching carriers
report record profits of almost half-a-trillion dollars over the
past three years.
According to a December report from the International Transport
Forum (ITF), an intergovernmental organization within the
Organization for Economic Co-operation and Development (OECD),
there were 68 carbon pricing schemes in operation worldwide in
2022, covering about 23 percent of global GHG emissions and split
between explicit carbon taxes and emissions-trading schemes. Last
year, those 68 schemes brought in revenues of about $84 billion,
according to the ITF report.
However, Olaf Merk, who leads ports and shipping research at the
ITF, cautioned that carbon pricing should not become simply another
surcharge to be passed on to customers without real change in the
behavior of shipping companies.
"That is why choosing the right design of the scheme is important,"
Merk told the Journal of Commerce in a recent interview. "We would
favor a 'feebate' system in which the price gap between
conventional fuels and zero-emission fuels is fully bridged to
stimulate the uptake of zero-emission fuels and energy
sources."
Under a "feebate" system, all ships emitting greenhouse gas
emissions pay a levy that is used to subsidise zero-emission fuels
and energy sources. Ships operating with zero emissions receive a
rebate that covers the price difference between conventional fuels
and zero-emission fuels or energy sources, with the rebate funded
by increased levies for vessels that still burn fossil fuels.
"In addition, we think it is important that competition authorities
build up their expertise on decarbonization of shipping, to make
sure that they have the tools to assess future decarbonization
surcharges," Merk added.
'Unspecified' solutions
Hookham said that although shippers are generally resigned to the
inevitability of decarbonization-driven increases in freight rates,
they want to see carriers step up their investment in low- and
zero-emissions vessels, fuel, and related infrastructure before
they start paying those higher prices.
"They will expect [carrier] shareholders to invest first and
recover their investment over the lifetime of the assets, rather
than get their customers to fund the green transition on a
pay-as-you-go-basis," he said.
The shipping industry uses more than 300 million metric tons of
fossil fuels every year, about 5 percent of global oil production,
and there is still no clear pathway toward replacing that volume
with renewable fuels. There is also no regulatory structure
underpinning the development and production of zero-carbon
fuels.
With no idea what fuels will be used by shipping, what the price
per TEU will be, and when adequate supplies of those fuels will be
available, Hookham said any surcharge would be based on vague and
ill-defined costs.
"The prospect is for a surcharge being imposed to fund a so far
unspecified solution, over an unspecified time period, with
unspecified outcomes," he said. "This needs to be tackled on a
route-by-route basis, and the green corridor approach seems to be
the way to go — immediate start, limited risk exposure, able to
attract supportive shippers to engage in real world trials, with
open book accounting and sharing of lessons learned, all with
government patronage at either end.
"We didn't electrify the railways overnight so expecting to
transform the shipping industry everywhere at once is unrealistic,"
Hookham said.
Subscribe now or sign up for a free trial to the Journal of
Commerce and gain access to breaking industry news, in-depth
analysis, and actionable data for container shipping and
international supply chain professionals.
Subscribe now or sign up for a
free trial to the Journal of Commerce and gain access to
breaking industry news, in-depth analysis, and actionable data for
container shipping and international supply chain
professionals.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
{"items" : [
{"name":"share","enabled":true,"desc":"<strong>Share</strong>","mobdesc":"Share","options":[ {"name":"facebook","url":"https://www.facebook.com/sharer.php?u=http%3a%2f%2fstage.www.spglobal.com%2fmarketintelligence%2fen%2fmi%2fresearch-analysis%2fpassthrough-fees-could-disincentivize-carriers-from-decarboniz.html","enabled":true},{"name":"twitter","url":"https://twitter.com/intent/tweet?url=http%3a%2f%2fstage.www.spglobal.com%2fmarketintelligence%2fen%2fmi%2fresearch-analysis%2fpassthrough-fees-could-disincentivize-carriers-from-decarboniz.html&text=Pass-through+fees+could+disincentivize+carriers+from+decarbonizing%3a+shippers+%7c+S%26P+Global+","enabled":true},{"name":"linkedin","url":"https://www.linkedin.com/sharing/share-offsite/?url=http%3a%2f%2fstage.www.spglobal.com%2fmarketintelligence%2fen%2fmi%2fresearch-analysis%2fpassthrough-fees-could-disincentivize-carriers-from-decarboniz.html","enabled":true},{"name":"email","url":"?subject=Pass-through fees could disincentivize carriers from decarbonizing: shippers | S&P Global &body=http%3a%2f%2fstage.www.spglobal.com%2fmarketintelligence%2fen%2fmi%2fresearch-analysis%2fpassthrough-fees-could-disincentivize-carriers-from-decarboniz.html","enabled":true},{"name":"whatsapp","url":"https://api.whatsapp.com/send?text=Pass-through+fees+could+disincentivize+carriers+from+decarbonizing%3a+shippers+%7c+S%26P+Global+ http%3a%2f%2fstage.www.spglobal.com%2fmarketintelligence%2fen%2fmi%2fresearch-analysis%2fpassthrough-fees-could-disincentivize-carriers-from-decarboniz.html","enabled":true}]}, {"name":"rtt","enabled":true,"mobdesc":"Top"}
]}