Unclear Future for Marine Fuels

Written by Ryan McGuine //

The UN shipping regulator, the International Maritime Organization (IMO), recently adopted two major air pollution regulations to reduce the negative environmental effects of shipping. International trade is crucial to the functioning of the global economy, and has played a major role in the gains in well-being observed over the last two centuries. Today most of that trade is done using container ships, but the fuel most commonly used in the shipping industry — basically what is left at the end of the crude oil refining process after everything else has been removed — produces more air pollution per unit energy than most other fuels. A single container vessel emits sulfur oxides equivalent to 46m diesel-burning passenger vehicles, and the shipping industry emits roughly the same amount of carbon dioxide as Germany each year.

The first regulation, IMO 2020, was adopted in October 2016 and addresses sulfur oxides (SOx). IMO 2020 cuts the allowable SOx in shipping fuels from 3.5% to 0.5%. This is in line with a long string of similar mandates, beginning in 1997 when the maximum allowable sulfur content of fuel was set at 4.5%, and then reduced to 3.5% in 2008. Since SOx is a local ambient air pollutant, its effects are especially prominent near where it is emitted. For this reason, the IMO designates a number of regions Emissions Control Areas, where controls on emissions are more strongly enforced than on the open seas.

The second regulation, an initial strategy adopted in April 2018, resolves to bring the shipping industry into accord with the Paris Agreement by reducing its greenhouse gas emissions by at least 50% by 2050. To do this, the IMO pursues a regulatory framework, paired with initiatives to build capacity. The regulatory aspect includes an increase in strengthening the current energy efficiency framework, establishing a programme to monitor and improve the energy efficiency of existing ships, and requiring that newly-built ships to meet energy efficiency standards. The capacity-building measures include provisions to assist in the development of public-private partnerships, and to facilitate technical cooperation between countries.

Technological innovation is often touted as a key to decarbonization and reductions in ambient air pollution in general. Indeed, the development of new technologies have driven massive cost reductions in renewable energy to date, and will certainly play a role going forward. However, there are very few alternatives to liquid petroleum fuels for sea and aviation transport for the near future. Further, even if good alternatives did exist, there is an important distinction between the adoption time of a technology, and how widely it is used. While innovation can spur the development of new technologies, emissions will only be meaningfully reduced if said technologies are widely deployed. It is the role of environmental policy to facilitate that deployment.

Both of the IMO regulations discussed here mandate an emissions limit, and allow actors the freedom to select how best to meet the requirement. To comply with IMO 2020, most shippers will probably switch fuels to a 0.5% sulfur fuel. While this is the most straightforward option for shippers, it comes with challenges related to the availability and price of these fuels. For example, refineries are finely tuned to receive certain types of feedstocks, and to produce certain types of distillates and residuals. New requirements may change the location of the cheapest fuels, requiring shippers to alter long-established routes. Additionally, there is currently no standard refining process for 0.5% sulfur fuel and some engines may not be able to efficiently burn all new blends. Finally, 0.5% sulfur fuels are more demanded by other uses than the residual oil they use now, threatening to subject shipping companies to greater fuel price volatility.

Another option shippers have to comply with IMO 2020 is to install scrubbers that reduce SOx in the fuel exhaust stream. The principal benefit of taking this route is that it would allow ships to continue burning their current residual oil, eliminating some uncertainty around whether engines will be compatible with new 0.5% sulfur fuel oils. However, installing a scrubber requires a hefty up-front cost. Using cheaper fuel will likely recoup the installation cost over time, but the time that will take is determined by the unknowable differential between the residual oil they burn currently and 0.5% sulfur fuels. Due to this payoff time, scrubbers are probably not an option for older ships.

Finally, shippers can switch to liquefied natural gas (LNG). The relatively low-pollutant concentration of natural gas combustion products means that this option would protect shippers against any future environmental regulations beyond IMO 2020. However, retrofitting an existing vessel to burn LNG is prohibitively expensive, so a company needs to be considering the purchase of a brand new vessel. Additionally, LNG requires a larger volume of storage than fuel oil, reducing the amount of cargo a ship can carry. Finally, LNG comes with safety concerns that are not present with bunker, so crew training needs to be more intensive.

While the measures to curb local and global ambient air pollutants are sometimes conflated, the two categories require different strategies to mitigate. Global ambient pollutants can only be reduced by burning less fuel, or by burning fuel with a lower carbon content. Toward the former, ships can significantly improve fuel efficiency through measures as simple as travel speed reduction, regular propeller and hull cleaning, and waste heat recovery. Toward the later, switching from their current residual oil to LNG or biofuels could also the amount of carbon emitted by ships. LNG has the challenges mentioned above, and biofuels come with uncertainties about engine compatibility.

There are many uncertainties surrounding the coming IMO regulations and how shippers will respond due to the sheer number of decisions shippers need to make. What is clear, though, is that prices for getting goods from one place to another will increase. Companies have the option of eating the costs themselves, although shareholders are unlikely to be keen on this. The alternative is to pass costs on to customers. The possibility for shipping companies to do so is highly dependent on the type of contracts they have with customers. Achieving compliance with coming IMO regulations will no doubt be a challenge for shipping companies, but one well worth taking on.

 

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