Climate Policies for the Shipping Industry: What They Mean for Global Supply Chains
Just as businesses throughout the world grapple with the effects of the coronavirus pandemic and the Ukraine crisis on global supply chains, another issue looms: new emissions standards that promise to affect how shippers run numerous transoceanic and regional channels.
Decarbonization is a costly endeavour, but the European Union (EU) seems willing to make the sacrifice. The European Commission offered a variety of options in July 2021 to help the EU accomplish its objective of decreasing greenhouse gas (GHG) emissions by 55% by 2030 compared to 1990 levels.
One such policy would eliminate free allowances for cement, iron, steel, fertiliser, and aluminum producers and instead assess import duties on these items based on their carbon footprint. This so-called carbon border adjustment mechanism (CBAM) attempts to even out the playing field by requiring other nations around the world exporting to the EU to account for the carbon they generate whilst exporting steel. CBAM is typically imposed and regulated by the recipient country, which imposes a carbon tax on some imported commodities at a rate equivalent to that of comparable local products.
To add to the difficulties, the EU intends to include ships in its Emissions Trading System (ETS) in 2023. For journeys between EU and non-EU ports, shipping corporations will be required to purchase licenses for 50% of emissions. Danish shipping giant Maersk has already declared tariffs for its trade lanes from Asia to North Europe and North Europe to the United States, and others will be required to jump on board. While an impending economic downturn is already bringing down shipping rates, they are unlikely to revert to pre-pandemic values in the long run because the additional expenditures must be paid for.
For managers planning their supply chains, there are several important things to pay attention to:
The costs of carbon reduction in maritime transport will alter the economics of where commodities are sourced. Although spot market rates have lately decreased, it is certainly impossible to expect cost to return to pre-pandemic levels. While carriers want to add significant new capacities in the coming years, forecasting shipping prices is difficult since the retirement of ageing capacity that will have difficulty following the ETS standards would likely balance out the increases. Much will depend on whether import demand in the United States falls and carriers choose to idle ships. Other industries, such as bulk carriers and vessels for transporting motor vehicles, may face substantial hurdles due to a lack of a robust order book for newer, more efficient vessels to supplant older ones that must be retired. High-volume trade corridors where container lines could employ newer, larger, and more efficient infrastructure will perform better, but overall, even if manufacturing costs are lower, it could make less sense to produce hundreds of products far away from where they will be consumed.
Lower-volume trade corridors will probably see fewer and more expensive services. This was anticipated in 2021, at the peak of the supply chain crises, when Japan lost certain direct eastbound connections to North America as container lines attempted to juggle capacity constraints and delays by eliminating port visits from their scheduled rotations (a more efficient technique of running the ships). The ETS rules will favour efficiency by allowing for larger ships, fewer port visits, and less frequent service while maximising capacity utilisation per ship.
Companies that export to Europe or have European suppliers should budget for the greater expenses that CBAM, ETS, and other countries' initiatives will impose. Managers must expect other nations outside the EU to adopt similar steps. Managers in the United States, for example, must pay heed to Canada, which has mandated a significant increase in carbon pricing for 2030. Comparable border adjustment methods may come under pressure in heavy-GHG-emitting industries like the steel industry.
As explained above, carbon transition policies and laws are expected to have a significant impact on the structure of supply chains. Cost increases and the practicalities of shipping logistics are both on the rise. Therefore, now is the time to start planning for this new age.
Image credit: Eric Kilby via Flickr