Commentary Trading Places

By Peter Tirschwell

Carriers ’ inability to pass along higher zero-carbon fuel costs would continue longstanding industry tradition .

Global maritime regulators are no closer to approving a carbon tax to incentivize the use of high-cost zero-carbon fuels , increasing the odds that the financial burden will fall on ocean carriers who possess little ability other than a strong market to pass those costs on to customers .

To the extent they can ’ t pass those costs along , the industry faces the prospect of higher costs for zero-carbon fuels and further consolidation and reduction in choice for shippers .

“ We firmly believe that leaving carriers ’ cost recoupment for decarbonization to unpredictable market conditions is a recipe for disaster , posing significant risks for shippers and carriers alike ,” said Ken O ’ Brien , CEO of Gemini Shippers Group and a board member of Greenabl .

Carriers ’ inability to pass along higher zerocarbon fuel costs would continue longstanding industry tradition . When the price of bunker fuel goes up , carriers ’ ability to recoup the increase hangs on the strength of the market ; a strong market enables those costs to be successfully passed along . When overcapacity leaves the market weak , carriers struggle to pass along fuel cost increases despite Bunker Adjustment Factor surcharges being written into virtually all customer contracts or incorporated into the base rate .

“ Shipping lines try to impose surcharges all the time , and they are more successful in tight markets than otherwise ,” said Parash Jain , the Hong Kong-based global head of transport and logistics research at HSBC . “ We believe that freight rates , including fuel surcharges , are more of a function of demand and supply and not much to do with changes in costs .”

The inability to pass along cost increases has long had a negative financial impact on the industry . Studies show carriers over a period of decades are much less profitable than other transport segments such as rail or logistics and , partly as a result , have steadily consolidated . Between 1996 and 2022 , the share of global capacity controlled by the top 20 carriers increased from 48 % to 91 %, according to UN Trade and Development ( UNCTAD ), thus limiting choice among cargo owners or beneficial cargo owners .

‘ Divergent views ’

Although container lines have been vocal about the need for fuel taxes or so-called “ market-based measures ” to facilitate the energy transition in shipping , one thing was clear from the results of the March meeting of the International Maritime Organization ’ s ( IMO ) Marine

Environment Protection Committee ( MEPC 81 ), the group tasked with decarbonization .

While the 176 member nations of the IMO were able to agree last year on the landmark goal of decarbonizing the maritime industry “ by or around ” 2050 , it was obvious after MEPC 81 that achieving consensus on a carbon tax as a way to achieve that lofty goal will be much harder . At MEPC 81 , “ there were divergent views on if and what type of economic elements should be implemented ,” Tore Longva , director of decarbonization for DNV Maritime , told the Journal of Commerce .

While European countries and several Pacific and Caribbean island states see a carbon levy as necessary , “ a number of developing countries see it as a totally unacceptable tax on trade ,” Longva said . “ Given the differing views , we think it is unlikely that the IMO will impose a high levy in the short term .”

That means the primary route to achieve decarbonization could be a fuel standard imposed on shipowners . “ In our opinion , the technical greenhouse gas [ GHG ] intensity standard seems the most likely measure to be implemented and to be the primary mechanism ,” Longva said , noting the GHG standard is a form of fuel standard . There is debate over how much of higher zero-carbon fuel costs will be shared along the supply chain versus disproportionately falling on carriers . Some believe because the costs will be so high , there will be no option but for the costs to be shared , thus it will eventually happen .

In response to a reporter positing that carriers could end up disproportionately paying for the energy transition in container shipping , Lynn Loo , CEO of the Singapore-based Global Center for Maritime Decarbonization , said this : “ I disagree with your thesis that ocean carriers will have to shoulder a disproportionate share of the cost . Just like during COVID and now [ with ] ships having to travel around [ southern Africa ], business will be more expensive , and the stakeholders along the supply chain will need to figure out how to absorb this cost .”

Others agreed , but noted the market will still play a key role .

“ We expect that any imposed GHG cost , such as [ the EU ’ s emissions trading scheme ] and in the future similar IMO schemes , will eventually be passed to the end-customer ,” Longva said . “ The cost will first be taken by shipping companies , and over time depending on market conditions , be passed on to cargo owners .”

email : peter . tirschwell @ spglobal . com

46 Journal of Commerce | June 17 , 2024 www . joc . com