REDUCTION OF GHG EMISSIONS FROM SHIPS. Reducing global ship emissions using a speed-related GHG or compensation fund

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1 E MARINE ENVIRONMENT PROTECTION COMMITTEE 64th session Agenda item 5 MEPC 64/5/8 27 July 2012 Original: ENGLISH REDUCTION OF GHG EMISSIONS FROM SHIPS Reducing global ship emissions using a speed-related GHG or compensation fund Executive summary: Strategic direction: 7.3 High-level action: Planned output: Action to be taken: Paragraph 21 Submitted by Clean Shipping Coalition (CSC) SUMMARY Speed reduction can play a major role in reducing shipping's carbon footprint and could be a central element in any IMO approach to MBMs. A reduced speed approach would reflect industry's likely response to rising fuel prices would deliver impressive in-sector emissions cuts at a negative cost to industry and enable shipping to continue to grow sustainably. Significant revenues could be generated for climate finance and funding GHG abatement. Related documents: MEPC 59/INF.10; MEPC 61/5/10, MEPC 61/24; MEPC 62/5/1, MEPC 62/INF.7; MEPC 63/23 and MEPC 64/INF.14 Introduction Slow steaming today 1 The shipping industry has widely adopted slow steaming in response to lower demand and overcapacity, and as a means to reduce fuel consumption/operating costs. The link between a lower environmental footprint and reduced speed has also been well established. BIMCO is looking to redraw contracts to absolve ships' captains from having to sail at "utmost dispatch" to port without knowing how long they will have to wait to enter. OCIMF and Intertanko's "virtual arrival" creates arrival slots at ports enabling ships to slow steam and split the savings between the shipowner and charterer. "Virtual arrival is a sustainable and practical process aimed at improving efficiency within the transportation chain, while achieving real benefits with regards to safety, fuel saving and the reduction in vessel emissions" ( Container lines are ordering ships with lower design speeds, operating their fleet at substantially lower average speeds, seeing schedule reliability improve significantly, and proclaiming that slow steaming is "here to stay". IMarEST (MEPC 62/INF.7) describes slow steaming as "technically mature".

2 Page 2 Slow steaming and emissions reductions 2 Recently available data suggests that since the onset of the economic crisis in 2008, slow steaming has been responsible for a very substantial drop in ship emissions. According to (S-)AIS data some principal ship types containers, tankers, bulkers have reduced their average speeds by per cent. Cariou (World Maritime University and Euromed, 2010) found that liner emissions dropped 17.3 per cent from due to slow steaming. The European Environment Agency's (EEA's) latest statistics 1 show that EU ship CO 2 emissions are 15 per cent below their 2007 peak despite EU sea freight being back at pre-crisis levels. Slow steaming is the only realistic explanation. 3 When the economy recovers, shipping emissions will likely continue to grow at 3-5 per cent per annum as the world fleet expands. Even if all the measures cited in the marginal abatement cost curve (MACC) published by IMarEST (MEPC 62/INF.7) are implemented globally (and hence if the marginal incentive is over USD100 per tonne of CO 2 ), emissions could be back at their 2005 levels by 2020, but it is unlikely that they will be below the 2005 levels (UNEP, Bridging the Gap, 2011). The only substantial additional measure to improve ship efficiency is a speed reduction beyond the 10 to 20 per cent below the 2007 levels that IMarEST already assumed in the above scenario. Implementing operational and technical abatement measures is essential, but they can only slow the growth in emissions. Progressive reductions in average ship speeds will be needed to ensure emissions fall as the shipping industry grows. This is the premise of the European Commision (EC) funded Ulysses ultra-slow-steaming project (Maddox, 2012), which asserts that speed reduction has more potential to reduce ship emissions than all other abatement options put together. On the other hand, left unabated, the Second IMO Greenhouse Gas Study 2009 (MEPC 59/INF.10) estimates that shipping emissions will constitute 12 to 18 per cent of the global carbon budget in 2050 consistent with keeping global warming below 2 degrees. UNEP (Bridging the Gap, 2011) puts this 2050 figure for shipping and aviation combined at per cent. Ship speed and fuel prices 4 There are several possible explanations for ships having slowed down apart from the slump in demand and overcapacity. One reason is higher fuel prices which may now be reaching a point where reducing speed is widely adopted. The SECA requirement in 2015 will add further to fuel cost due to the expected switch to distillates. The Second IMO Greehouse Gas Study 2009 observes that "in the long-term perspective, if fuel costs are expected to increase relative to other costs, the fleet may be expected to adapt by expanding in size and reducing the operational speed of each vessel". Corbett and Wang (Transportation Research, 2009) found that "as fuel price becomes higher, economic incentives to maximize profit trigger reduced ship speed to avoid fuel consumption". Lindstaad (Energy Policy, 2011) found that, if fuel prices increase, the profitable (19%) and free-of-charge (28%) abatement cost options from reduced ship speed will also increase. IMarEST (2010) estimates speed reduction to be a significant abatement element for both existing and new (EEDI-compliant) ships under its rising fuel price scenarios. Maddox (2012) say the rising fuel price since 2007 has increased the incentive to reduce speed and project in their "likely" scenario assessing achievable emissions reductions in 2020 and 2030 that 60 per cent will come from speed reduction due to rising fuel prices. In their "high" scenario which assumes regulatory measures, speed reduction accounts for 71 per cent in 2020 and 75 per cent in 2030 of all CO 2 reductions. 1

3 Page 3 5 If higher fuel prices invariably triggered lower speeds, market intervention might not be required. However, IMarEST (MEPC 62/INF.7) notes that ships typically speed up in the boom and slow down in the bust. Moreover, the usual industry response to adopting efficiency measures such as hull cleaning may not be to bank the consequent fuel savings but to speed up. In effect, fuel efficiency gains are converted into increased transport capacity per vessel rather than reduced costs and emissions. Economic analysis supports this conclusion. This practice, not widely acknowledged by industry, challenges fundamental assumptions about the impact of carbon pricing and MBMs and about the efficacy of abatement approaches based solely on improving the energy efficiency of an individual ship. In a recent survey conducted by CE Delft (MEPC 64/INF.14), industry was unanimous that once the market recovers from the current economic crisis, ships will return to their previous speeds. So will they slow down or will they speed up? If they speed up, then the IMO will face a large spike possibly per cent in ship emissions just at the time it is deciding on a measure to reduce them. If ships maintain slow steaming, then a regulated speed regime could codify this process and create a level playing field. 6 At MEPC 61, members of the CSC proposed (MEPC 61/5/10) that speed reduction should be pursued as a regulatory option in its own right and not only as a possible consequence of market-based instruments or as an element of the EEDI. The debate recognised that speed reduction was the most immediate single factor to increase energy efficiency and reduce emissions, that there may be some technical challenges in reducing the operational speed of existing vessels, such as less complete combustion and increased engine deposits; and that if specific speed restrictions were imposed, different speeds would be needed for different ship types and segments. The legal and enforcement aspects, as well as the practicalities of the measure needed to be investigated. Study into regulated slow steaming 7 CSC members Transport and Environment (T&E) and Seas at Risk (SAR) subsequently commissioned CE Delft to investigate the questions raised by the Committee (MEPC 61/24) i.e. the legal, enforcement and practical aspects of regulating ship speed and additionally to carry out a cost benefit analysis. The results (MEPC 64/INF.14 or or show that regulated slow steaming has significant economic and multiple environmental benefits, very few, if any, technical obstacles, is legally and practicably feasible to implement, can deliver very significant in-sector emissions reductions and, implemented correctly, is cost free to the shipping industry as a whole and entails marginal incremental logistic and supply chain costs to consumers. 8 Reducing ship speeds in 2015 to 75 per cent of 2007 levels, generates in 2050 net present value (NPV) benefits for the industry of some USD883 billion, reduces world fleet relative fuel use by 17 per cent, and cuts emissions by 17 per cent. Note that this is likely to be an underestimate; the baseline used in the study assumed containerships had already slowed down to an average 18 knots cutting CO 2 by 225Mt in These calculations include the costs and CO 2 burden of building and operating new ships to replace capacity, as well as the additional inventory and logistics costs. The balance of costs and benefits depends to a large extent on fuel price projections and the prices of new ships, as these determine the main benefit and cost items. Speed-based GHG fund or compensation fund 9 The IMO is considering proposals for a GHG fund MBM or an ETS (MEPC 62/5/1). Industry has suggested in the context of an EU measure the setting up of a compensation fund either managed by industry or by governments. Contributions to the fund would be

4 Page 4 based on actual emissions. Industry at all levels is concerned about the potential costs and impacts of any climate measure. Under the IMO GHG fund proposal, revenues generated would be used to purchase offsets. Various European stakeholders questioned whether a levy on emissions or emissions trading would be a sufficiently effective price signal to promote change in the sector; whether it might just become another cost to pass on, or whether market barriers would continue to block abatement action. The end result might not reduce ship emissions; rather would emissions be reduced in other sectors through offsets or credits. A compensation fund could channel revenues back to industry to ensure some degree of abatement action at the ship level or port energy efficiency improvements or could purchase offsets or contribute to climate change finance. But the interest in recycling revenues supports doubts that owners would alone invest in abatement as an MBM response. 10 This proposal combines the ideas of global ship speed reduction with a global GHG or compensation fund MBM. The basic policy concept is to set average target speeds for different types and sizes of ships in order to meet the agreed emissions reduction target set by the IMO for an MBM. Average speed overground would be measured between set waypoints using (S-)AIS. As a first step the IMO is already over 10 years into the process the target base speeds could be set to reflect the lower average speeds that we see in today's market due to the current economic crisis. By entrenching these lower speeds at no cost to industry the IMO would guard against the large (15%+) rapid increases in emissions that would result should ships speed up once the recession is over. Over time, the target base average ship speeds could be progressively lowered according to further more stringent emission reduction targets that IMO might agree. 11 For ships where significant speed reduction may not be feasible, an alternative approach could be considered, e.g. a levy on these emissions with the proceeds used to purchase offsets. The target (base) speed corresponding to the speed restriction needed to deliver the required reductions in emissions could attract a low or a nominal charge to cover scheme costs. 12 In order to address industry concerns that restricted speeds take away flexibility, certain ship types, e.g. those carrying very high value and/or time-sensitive goods, could be assigned the flexibility to operate at higher average speeds (e.g. percentages) above their assigned target speed. An additional speed levy or speed compensation fund contribution would be payable according to the emissions generated at these higher average speeds. These speed levies would rise exponentially as with emissions and could be set even higher at the top end to discourage excessive speed. The remainder of the fleet would operate at its respective assigned target speeds and enjoy lower operating costs more than sufficient to fund any MBM contribution. If too many ships speed up and the overall reduction target looks like it might be missed, a number of options exist: base target speeds could be lowered across the board or according to the offending ship types; the levy for speeding up could be increased; or the number of ship categories allowed to speed up and/or the higher permitted speed levels could be adjusted. 13 Revenues from fast-sailing ships could also be directed towards purchasing offsets rather than being recycled to industry. In general, though the revenues obtained from the speed levy could be allocated to a number of possible uses including the Green Climate Fund, support to industry for the adoption of abatement measures or for green port infrastructure, or to fund offsets equal to the increased emissions. 14 One possible drawback is whether the proposal provides a sufficient incentive for technological innovation. This could be addressed by adding an extra incentive beyond the emissions-related speed levy. For example, ships with a better EEDI or otherwise lower

5 Page 5 emissions might pay a lower speed levy. Other policy variants are possible. The onus would be on the ship to demonstrate its improved performance and secure recognition thereof. 15 CSC accepts that restricting or lowering ship speed remains controversial. The ability to maintain a flexible ship speed was valued highly in the industry survey conducted by CE Delft. The main concerns seem to be that regulated slow steaming would interfere with the safe passage of the ship and the master's authority, would deprive the operator of the flexibility needed to meet changing deadlines or compensate for weather or other delays. The flexibility in the proposal's provisions meet these concerns. There is also a concern that industry would be deprived of a key competitive element, namely the ability for a ship to deliver goods more quickly than its competitor. Since the mid-1990s, and following EU Directive 92/6, all heavy trucks in Europe have had 89km/h speed limiters installed without any detrimental impact on business. Impact assessments that were conducted effectively suggested a positive economic impact. Some have raised ship safety issues related to operating at too low speeds but there are now proposals submitted to MEPC relating to minimum ship propulsion power. As to potentially higher logistics and inventory and shipper's costs, these issues do not appear to have proved insurmountable as the market has progressively adopted voluntary slow steaming. Inventory costs were included in the CE Delft calculation of net benefits. Summary of benefits 16 CSC believes that the benefits of using reduced ship speed as a way to deliver a GHG emission reduction target and as the means to set the GHG fund (levy) or compensation fund are many and significant, as follows:.1 somewhat counter-intuitively, the policy proposed would recast MBMs as having potentially negative costs to industry, since the savings from lower fuel costs are so significant that additional capital, labour, inventory and levy costs can be paid for;.2 flexibility is built into compliance. Owners, masters and charterers will all be aware of the ship's target and actual speed aiding compliance and enforcement;.3 speed regulation enables industry to slow down in a coordinated way which competition over speed currently prevents;.4 an industry-wide voluntary commitment to slow down or not to speed up once the economy recovers is a nice idea but would be illegal. Anti-trust issues prevent any coordinated voluntary program of speed reduction initiated by shipping companies as regulators would view this as collusion to reduce capacity, i.e. to increase prices;.5 long-term slow steaming requires shipping companies to purchase additional ships to maintain capacity. Regulated slow steaming would provide the market predictability and business certainty to justify these purchases that short term measures do not;.6 industry delivers very significant emissions reductions in sector and delivers them immediately. Industry can continue to grow at progressively lower speeds. The net carbon cost of building and operating the required additional ships is negative;

6 Page 6.7 the overhang in ship supply is more quickly absorbed than would otherwise be the case;.8 instead of costing industry money, a speed-linked MBM would lower operating costs and free cash to invest in further efficiency measures as fuel costs rise;.9 new (EEDI compliant) ships would be needed around 2020 providing investment and employment opportunities in the ship-building sector;.10 additional employment opportunities would also arise for the additional crew needed to operate and maintain the additional ships;.11 there are possibilities to supplement the policy with incentives for low-carbon technologies and fuel-efficient ships;.12 average freight rates would hardly be affected or be even lower than before, addressing concerns of developing countries in particular; and.13 the requirement for ships to pay to speed up in addition to the cost of the extra fuel would lead to cargo differentiation, particularly in the container market. Creation of dedicated express services would remove an additional barrier to slow steaming; mixing time sensitive with ordinary cargo today often means ships sail at the speed needed to deliver the time sensitive goods which comprise only a small fraction of the total load. 17 During the debate on ship speed at MEPC 61, the Committee agreed that speed considerations would be addressed indirectly through the EEDI, the SEEMP and by a possible MBM and, therefore, decided that no further investigation of speed reductions as a separate regulatory path was needed. The submitter does not rule out a separate regulatory path on speed it is legally feasible and cost and environmentally effective but suggest that, in the first instance, speed reduction be considered for explicit inclusion in existing MBM proposals as we have described. 18 MEPC 63 (MEPC 63/23) calls for those MBM proposals subject to the impact assessment (MEPC 62/5/1, annex 3) to be further developed and finalised in time for MEPC 64. Ship speed and speed reductions applied in the manner described here should be incorporated in the impact assessment as a further development of the GHG Fund. Speed reduction can in fact be included as a co-measure in any MBM which would justify a wider study into incorporating speed reduction in the MBM proposals. Regulated slow steaming and setting the levy or fund contribution according to speed as a proxy for emissions should therefore be analysed against the impact assessment criteria as reduced speed of the fleet will lead to lower operating costs which will be reflected in lower freight rates. 19 MEPC 63 also invited submissions on climate finance and possible uses of MBM revenues. Speed restrictions and levies for speeding up are innovative ways to recast MBMs without putting a financial burden on the industry. CSC is not aware of any other proposal submitted to the IMO that achieves large, guaranteed and immediate emissions reductions in-sector at no cost to industry. There is obvious potential here as regards sources of climate finance which CSC recommends should be examined further.

7 Page 7 20 MEPC 63 also invited further submissions to MEPC 64 on the question of setting a reduction target (MEPC 63/23, paragraph 5.42). In the first instance CSC proposes that IMO consider a cap on emissions based on average (S-)AIS-determined ship speeds say This is a straightforward proposal that can be quickly implemented without interfering with the market and would lock in the considerable emission reductions due to slow steaming today. Together with a speed-related MBM, a large emissions spike when the economy recovers would be averted. The cap could be subsequently tightened. The CE Delft speed reduction scenarios set out feasible emission reduction levels to 2050 based on varying levels of speed reduction, taking into account both projected fleet growth, already foreseen improvements in fleet fuel efficiency and projected fuel price increases. Action requested of the Committee 21 The Committee is invited to consider the proposal and specifically recommendations in paragraphs 18, 19 and 20 to include regulated slow steaming in the design and impact assessment of MBMs under consideration and take action, as appropriate.