1. www.pwc.com
A game changer for the
shipping industry
industry?
An analysis of the future impact of carbon
regulations on environment and industry
An analysis prepared for
the ongoing discussions
in IMO and other
international fora
regarding future global
regulations of carbon
emissions
June 2011

2. This material was prepared by PricewaterhouseCoopers AS (PwC) for the specific use of the Norwegian
Shipowners Association and is not to be used, distributed or relied upon by any third party without PwC’s
prior written consent.
This publication has been prepared for general guidance on matters of interest only, and does not constitute
professional advice. You should not act upon the information contained in this publication without obtaining
specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or
completeness of the information contained in this publication, and, to the extent permitted by law, PwC, its
partners, employees and agents do not accept or assume any liability, responsibility or duty of care for any
consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in
this publication or for any decision based on it.
© 2011 PricewaterhouseCoopers AS (N0rway) All rights reserved. “PricewaterhouseCoopers” refers to the
(N0rway).
network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and
independent legal entity.
Contact: Team lead Ivar Strand: ivar.strand@no.pwc.com
PwC 2

3. Emerging policies are targeting CO2 emissions from shipping. The International Maritime
Organization (IMO) have produced policy proposals, backed by research, on an international regulatory
regime to manage CO2 emissions from shipping. Deliberations of the options are ongoing in IMO and in
other international fora. The EU has also announced that it is examining the shipping industry’s role in
.
mitigating climate change, potential through inclusion in the existing EU Emissions Trading Scheme
(ETS).
In total, ten proposals have been submitted to the IMO for consideration as possible
Scope and market-based measures. Six of these proposal can be generalized to two basic market-based schemes
based
– a levy and an emissions trading scheme. The proposals differ in detail and in principle.
objective The objective of this study is to clarify the policy options and their impacts on
environment and industry. The details and variations in the existing proposals complicates
comparison and could be masking the underlying objectives of the schemes. The ongoing dialogue
between policymakers and industry actors could benefit from a consolidation of facts and analysis as the
basis for deciding upon further action.
The policy process has produced an impressive body of robust scientific and economic work undertaken
under the auspices of the International Maritime Organization (IMO), the European Union (EU) and
others. One area which has also not examined in detail is the impact on the shipping industry.
The study aims to inform the ongoing process with analysis based on the core principles of the market
market-
based mechanisms. This includes crystallizing the impacts of key policy options and highlighting the
trade-offs between policies.
offs
The scope of this study is to analyze the environmental and economic impact of market market-
based instruments aimed at reducing global GHG emissions from international shipping. The focus
is on the impact on GHG mitigation and the costs to the industry. This independent analysis has
leveraged and built upon previous research. Other issues, for example administrative arrangements, are
beyond scope of this study, but may also have significant implications on the policy decisions.
The work has been conducted during the spring of 2011 by an international PwC team. The work is
commissioned by the Norwegian Shipowners Association. We have been working fully independently
and the analysis is the responsibility of the team
PwC 3

4. Summary of
PwC
Key findings 4

5. Summary of key findings
Context
Massive efficiency gains
Considerable fuel cost increase Fuel cost increase would drive Dramatic reduction of fuel use
required to reduce emissions to
as fleet shifts to low-sulfur fuels efficiency gains and emissions since 2008
target levels
Target and growth of emissions Fuel price 1990-2030 Fuel efficiency 1990-2030 Global fuel reduction 2008-2011
Metric tons CO 2 (million) USD per metric ton fuel ($2010) gram fuel/ton mile Fuel consumption Index
2000 1320 (International fleet)
1,0
3,3%
11
-30-40%
p.a 1500 80% -1,25% 0,9
57% p.a.
1000 700 9
0,8
500 0,7
Emissions Distillate 7
Target Bunker
0 0 0,6
1990 2010 2030 1990 2010 2030 1990 2010 2030 2008 2009 2010 2011
A proposed 10% reduction of emissions Forthcoming low sulfur regulations are Fuel cost is estimated to drive 26 Speed reductions have reduced fuel
below 2007 would require a reduction expected to drive fuel costs above percent efficiency gain, equivalent to consumption (and emissions) by 30
of 57 percent below business-as-usual US$1,300 per metric tonne by 2030 1.25 percent improved efficiency each percent globally since 2008. However,
by 2030. from about US$600 today. The year and a break with historical trends. any emission reductions from speed
increase in fuel costs under the sulfur The IMO proposals on market based reduction observed over the last three
regulations is expected to raise fuel measures are aimed at reducing years are unlikely to be sustainable. As
price to the point where currently emissions further to meet the target. freight rates rebound as a result of the
known opportunities to improve fuel economic recovery, it is likely that
efficiency would have been exhausted. speed may increase again.
More measures may become available
in the future with technological
improvements – but significant
uncertainties remain on this.
PwC 5

6. Summary of key findings
Options
Measures to put a price on carbon to Emissions Trading Scheme (ETS) proposals The Levy proposal is a centralized scheme,
incentivize fuel efficiency and reduction of involve auction of certificates, submission at putting direct charges on fuel, and links to
emissions ports, and trading in carbon markets carbon markets through a central entity
Carbon emission from shipping fuel Conceptual model for shipping ETS Conceptual model for shipping Levy
One tonne of fuel three tonnes of CO2* Central authority Central
to allocate authority sets
certificates(freely or and collects
auction), and levy
collect from ships
Certificate Central
owners authority
A cost of carbon is expected to be added to the price of engages in
(shipoperators/
fuel through a future market-based measure. owners) can market to
Currently, for every tonne of fuel consumed, trade certificates purchase
approximately three tonnes of CO2 are emitted. in market offsets
The policy options and various design features for a
Ships to acquire
market-based measure for the shipping sector, and submit
including how it is linked to these existing carbon certificates at port Ships to pay
markets, will impact the price of carbon, the industry based upon levy on fuel
and the environment. emissions from
each voyage
The two main market-based measures being
considered are a levy and an emissions trading scheme An Emissions Trading Scheme (ETS) entails A levy can be imposed on fuel during sales based on
(ETS), based on the principle that the shipping setting a cap for the aggregate emissions allowed to be the carbon content of fuel, or at a port based upon
industry will respond to a price signal to encourage emitted in the system. Typically one unit of allowance emissions of a completed voyage. The levy increases
emission reductions. permit its holder to emit a tonne of CO2. Ships are the cost to a ship voyage. If it is cheaper to reduce
required to surrender an allowance unit for every emissions than to pay the levy, the ship-owner or
In total, ten proposals have been submitted to the tonne of CO2 emitted during the voyage. Allowances charterer will prefer to do so. The proposal
IMO for consideration as possible market-based can be issued for free, which can be based on past recommends that the proceeds are collected by an
measures. Six of these proposal can be generalized to emissions, and/or through auctioning. Shipping international body and used to purchase carbon
two basic market-based schemes – a levy and an companies can then trade these allowances in the credits to achieve an emissions reductions target. The
emissions trading scheme. The remaining proposals carbon markets. If it is cheaper to reduce emissions levy would need to be set at a level sufficient to fund
address a rebate mechanism applicable to any MBM than to buy an allowance, a company will do so and the purchase of sufficient carbon credits to meet the
and technical measures such as efficiency index or sell any excess allowances; conversely, if it is cheaper target (and to include other contributions or costs of
design standards. for a company to buy allowances than to reduce its administration). If the funds are mobilized for other
*Actual relationship is between 3.09-3.17 varying with fuel emissions, then it will purchase an allowance for purposes than to purchase carbon credits the
quality. We have assumed 3.13 throughout this study compliance. environmental outcome cannot be determined with
6 certainty.
PwC

7. Summary of key findings
Impacts on the shipping industry
A levy, or an ETS without any auction, would
A levy and the ETS could achieve identical A higher levy, or auction under the ETS, would
achieve the environmental outcome at the
environmental outcomes mobilize more funds for a global climate fund
lowest cost to the industry
Carbon abatement options from Shipping Impacts of low-cost levy and ETS zero
cost zero-auction Impact of high-cost levy and ETS 100% auction
Metric tons C02 (million)
2000
Levy minimum +
ETS with 100%
large global fund
auction =
contributions =
1600 $152
Abated through $152
per metric ton fuel
26% efficiency gains per metric ton fuel
Levy minimum
ETS with 0%
required to offsets
auction =
1200 =
Abated through $66 41 billion to 41 billion to
$66
32% market-based per metric ton fuel global fund global fund
per metric ton fuel
measures
800
2,6 billion to 2,6 billion to
global fund global fund
400 43% Remaining emissions
0
2010 2020 2030
With appropriate target setting and policy design, a A levy based on the purchase of CDM carbon credits A levy, or an ETS without auction wouldmobilize
levy and the ETS can achieve identical outcomes. This would incur a cost of about $66 per metric tonne of US$3 billion annually by 2030. However, if a prime
is achieved with the size of the levy set as a function of fuel to the industry by 2030. An ETS proposal with objective of a scheme is to raise revenues, the levy can
a pre-determined abatement target on emissions and free allocation (i.e. 0% auction) would achieve the be increased beyond what is required to purchase
the proceeds of the levy used to purchase the required same impact. The cost of purchasing carbon credits offsets.
number of credits to meet the targets. through the proceeds of a levy scheme will be identical
to the total costs for firms to purchase allowances to After accounting for the purchase of carbon credits,
comply under an ETS. the auction proceeds and contribution to global
climate fund are additional revenues raised.
Under the ETS, allowances can be allocated freely or
through auction. With auctioning, the industry incurs The ETS with 100 percent auction of allowances would
additional cost as it has to purchase the allowances mobilize about US$41 billion annually by 2030.
being auctioned. The greater the proportion of
auctioning, the greater the cost to the industry.
PwC 7

8. Summary of key findings
Impacts on the shipping industry
Impact on cost base varies much Profit would be lost as a large
The impact of carbon polices is Seaborne trade volumes would
between vessels and could reach 9 share of the cost increase would
dwarfed by trends in the fuel cost decline
percent for a 3500 TEU container be absorbed by the industry
Impact on fuel cost 2030 ($2010) Components of cost base per shiptype 2010-2030 Absorption of cost increase at 25 percent initial Impact of high-cost levy and ETS 100% auction
with ETS 100% auction (daily costs) margin
1469 Capex Opex Fuel Carbon
152
618 Container Main Liner 8% 5% 78 % 9,0 %
71 % Loss of volume:
Capesize Bulker 15 % 12 % 65 % 7,5 %
47 % • Short-sea to road and
699
VLCC 18 % 12 % 63 % 7,3 %
rail
45 %
• Deep-sea to local
Handysize Product Tanker 16 % 19 % 58 % 6,7 % 38 % products which dont
Handysize Bulker 17 % 20 % 57 % 6,6 % -74 %
require ocean transport
Carbon
Bunker Sulfur New
high
base regs fuel
case
impact price
impact
Compared to the forthcoming The amount of carbon emissions for a The increases in voyage costs resulting As freight rates increase, especially in
regulations which mandates lower ship is strongly linked to fuel from carbon pricing will lead to higher the short-term, the level of shipping
sulfur content of fuel, carbon pricing is consumption, which as a proportion of rates. Freight rates and a ship’s profit activities may fall. Modal shift is a
estimated to have a relatively small the cost base, differs substantially margin are determined by a multitude particularly relevant scenario for the
impact on the cost to the industry. 80 across the ship segments. A container of factors, including the competitive short-sea freight segment where road
percent of the expected increase in main liner has the largest share of fuel conditions, operational and transport is an option, for example in
voyage costs for vessels will stem from cost, and therefore by extension carbon management efficiency of the ship and densely populated regions such as Asia,
the sulfur regulations. costs. Smaller ships (handysize bulkers market conditions. A levy would lead Europe and North-America. Studies
and tankers), with a proportionally to an increase of freight rates of from Europe indicate a severe impact
A levy would result in an average larger capex and opex cost base, finds between 1-5 percent across common with fuel costs above $1000 per metric
increase of voyage costs of about 5 carbon cost a smaller proportion of vessel types and goods. An ETS with tonne.
percent. On the other extreme, an ETS their cost base. full auctioning would increase freight
with full auctioning will result in an 11 rates between 7-9 percent. As freight rates increase, locally
percent increase in voyage costs. A levy would result in an increase in the produced goods would become more
total cost base between 3-4 percent Profits of the industry would fall. All competitive. The demand for
across common vessel segments. An ship types will be able to pass-through international transport would decline
ETS with auctioning would result in an some of their costs to their customers. as a consequence. However, these
increase between 6-9 percent. The extent depends upon the goods impacts are likely to be a result of the
being transported and the capacity in low-sulfur regulations rather than
PwC the market. carbon costs.

9. Bottom line
PwC 9

10. Three key issues will be addressed
1 Context
What is the problem and why should it be
addressed? How does this fit in with
wider developments in the industry?
What are the options? What models are
2 Options
being proposed? What are the key
parameters which policymakers need to
decide?
How much will it cost? How will different
3 Impact policy options impact costs? How will
shipping profits be impacted? How will
patterns of global trade change?
PwC

11. Section 1
PwC
Context 11

12. Context
Emissions from 100,000 ships equivalent to three percent of global CO2 emissions
About 3,3 percent of the global CO2 emissions stem from the global shipping There are about 100,000 ships weighing above 100 Gt, of which about half are
sector. This is a larger share than aviation and rail sectors, but much less than cargo ships which constitutes the largest share of emissions. The container
emissions from the road transport sector which is more than 6 times higher. fleet, which is the fastest moving and therefore more carbon-intensive segment
of the industry, releases as much carbon as the city of Tokyo in a year.
About 1050 million tonnes of carbon are emitted from the global shipping fleet
every year. Most of this is international shipping, i.e. transport between This study is focused on “international shipping” which is the scope of the IMO
countries and across oceans, which accounts for 870 million tonnes of carbon proposal.
emissions.
Emissions from global shipping less than road transport
Most emissions are from cargo transport
and more than aviation
Figure 1.1: Global emissions of CO2 by sector Figure 1.2: Emissions and vessels by major fleet segments (contribution to total)
50% 80%
Container 22 %
Bulk 17 %
Road Crude oil tanker 10 %
transport; General cargo 9%
21 % Global Ferry 8%
shipping; Miscellaneous 7%
3,3 % Service 5%
Chemical tanker 5%
Products tanker 4%
Aviation; Vehicle 3%
1,9 % LNG tanker 2%
Other dry 2%
All other; 73 % Rail; 0,5 % Of fshore 2%
Cruise 2%
Roro 2%
LPG tanker 1%
Yacht 0%
Other tanker 0%
Source: IMO 2009 Source: IMO 2009 Buhaug et al. ,Notes: Estimates are from 2007 and based upon detailed
assessments of vessel types, fuel consumption and size conducted by IMO in 2009. There is
stated a 20 percent margin of error in the estimates.
PwC 12

13. Context
Shipping is the most carbon efficient mode of transport
Despite emissions levels, ships are overall the most carbon efficient mode of Vessel types also affect fuel efficiency. Smaller ships, which are often used in
transport. coastal short-sea freight routes, are more carbon intensive than larger vessels.
This, however, varies by type of goods. Heavy bulk cargos such as iron ore, coal However, compared to their direct competition of road and rail, they still
and crude are more efficiently transported on ships. Shipping of lighter goods compare favorably on carbon emissions per tonne km travelled.
and cargos, on the other hand, competes with rail and road. Airfreight is also
used for high value-to-weight goods, especially if they are perishable or of a
critical nature.
Shipping is the most carbon efficient mode of transport Larger vessels are more carbon efficient
Figure 1.3: Intermodal carbon efficiency compared Figure 1.4: Carbon efficiency of different vessels (examples)
Large Average load
Very large Ore
Average Max load
Shipping VLCC
Range Suezmax Tanker
Container 8000 TEU+
Rail
Medium
Bulk Handymax
Panamax tanker
Road Handymax product
Container 5000-7999 TEU
Air* Smaller
Bulk Handy
Coastal product
0 100 200 300 400 500 Container 1000-1999 TEU
Vehicle carrier 0-3999ceu
Grams C02/tonkm
-30 -15 0 15 30 45 60
Grams C02/tonkm
Source: IMO 2009: * 747-F
PwC 13

14. Massive efficiency gains required to reduce emissions
Figure 1.5: Target and growth of emissions
As the demand for maritime transport services derives from global economic Metric tons CO2 (million)
growth and the need to carry international trade, trends in the shipping
sector are closely interlinked with the movement of trade. 2000
Economic growth and globalization will continue to drive the levels of
seaborne trade, however future scenarios by the IMO suggest that some trade
might shift away from sea to land – for example onto the Trans-Siberian 100% more
railway. emissions if
3,3% unconstrained growth
As such, we expect a growth of seaborne trade of about 3,3 percent 1500
alongside growth in
consistent with the IMO 2009 scenario. Fuel consumption, and thereby seaborne trade
emissions, will also follow this growth scenario if nothing else changes. This 1053
also constitutes the reference case for our further calculations. mt
The carbon intensity of the industry, however, may improve over time 57%
through efficiency improvements in the sector. The degree of efficiency
improvements will depend on a variety of factors, which include ongoing 1000
technological improvements, reacting to the cost of fuel, and potentially
future regulations in the shipping industry.
We will discuss these impacts in the following sections.
Target for reductions at
783 million tonnes
500
Emissions growth
Target reduction
0
1990 2000 2010 2020 2030
Sources: PwC GHG Shipping model. IMF, UNCTAD, IMO 2009 (Buhaug), Future growth rates are derived from: GDP: The Intergovernmental Panel on Climate Change high growth scenario (A1B), and
),
a scenario analysis by IMO in 2009. (Buhaug et.al). Our growth rates are in this study aligned with those scenarios developed in the IMO study.
PwC 14

15. Context
Potential to reduce emissions is substantial through existing proposals
The IMO has identified three wedges to reduce emissions.
Figure 1.6: Abatement potential
Volatility and increases in fuel costs (particularly from EU regulations on low-sulfur
sulfur Metric tons C02 (million) The impact Abatement measures
1 fuels)are a strong driver for the shipping industry to improve its fuel efficiency. in 2030
Thus even in the absence of any intervention or regulation, the industry expects an 2000
improvement in the carbon intensity of the sector as a result of business-as-
usual efficiency gains. An extensive scenario exercise by IMO in 2009 identified
.
these to be amount to a 14% reduction by 2030, which is higher than the fuel- Abated through business
efficiency gains for the global fleet over the last decades. The IMO emissions 14% 248 as usual efficiency
scenario for 2030 of about 1550 million tonnes of carbon takes account of these 1600 improvements
improvements.
Abated through mandated
A current proposal within the IMO to introduce the energy efficiency design 12% 213 energy efficiency design
2 index (EEDI) to encourage design improvements for new ships is also expected to index (EEDI)
result in carbon efficiency improvements for the sector beyond the business-as-
-
usual efficiency improvements. 1200
The use of market-based measures is a further set of proposals within the IMO 32% 592
Abated through market-
3 community to reduce the contribution of the shipping sector to carbon emissions
based measures
and is the focus of this study. The current proposals can potentially reduce
emissions through two routes: a) by reducing emissions within the sector through
responding to a price signal; and/or b) by making shipping companies pay for 800
emissions reduction in another sector.
The scope for emissions reduction of market-based measures depends on the target
based
set. Analyses conducted for the IMO suggests that the range of targets being
considered of up to 20% below 2007 emission levels.
400 43% 783
Political economy influences heavily on the actual level of target to be agreed. For Remaining emissions
the purpose of our analysis we assume the target set by IMO expert group review of
proposals of 10% below 2007 levels. For international shipping this translates into
783 million tonnes. We also assume that the process will only be implemented
.
from 2015.
0
The remaining emissions will depend on the compounded impact of the 2010 2015 2020 2025 2030
4 emissions reduction measures above.
Sources: IMO 2009, 2010; PwC GHG Shipping model
PwC 15

16. Context
Speed reductions have reduced fuel consumption by 30 percent globally since 2008
Speed reduction is an important fuel efficiency measure, highly influenced Despite the significant speed reduction observed, due to data unavailability it
by a number of market factors. Ship operators respond to low rates, is difficult to conclude the impact on emissions since 2007, when the IMO
overcapacity and higher fuel costs by reducing speeds. estimated emissions to be 870 million tonnes.
A measurable decrease in total fuel consumption has been observed since Moreover, any emission reductions from speed reduction observed over the
2008, reflecting changes in operational patterns as a result of the increase in last three years are unlikely to be sustainable. The economic and trade boom
fuel costs in recent years. leading up to 2008 followed by the deepest recession in decades is likely to
impact the industry far greater than a ‘typical’ economic cycle. As freight rates
The speed reductions are in the range of 14-16 percent over the three years rebound as a result of the economic recovery, it is likely that speed may
across tankers, bulkers and containers; with the exception of iron ore increase again.
bulkers which are less sensitive to fuel cost increases; and with the
exception of ferries which operate scheduled services often subject to license
requirements.
Figure 1.7 Global fuel reduction estimate 2008-2011
More vessels in the market,
Speed reductions across the Fuel consumption reduced
but fewer are actually at
fleet 2008-2011 by 30-40 percent
40
sea
Vessels at sea Index Speed International fleet Index Fuel consumption Index
1,0 (Global fleet)
1,1 1,0
-6% -15% -30-40% 30-40 percent Not sustainable
0,9 reduction in Will increase again
1,0
0,9 0,8 carbon emissions if demand for
0,9 transport increases
0,7 since early 2008
0,8 0,8 0,6
2008 2009 2010 2011 2008 2009 2010 2011 2008 2009 2010 2011
Sources: PwC Shipping fuel model. Baseline fuel data from IMO 2009 (Buhaug); AISlive satelite datastreams Bloomberg. Coverage of about 25.000 vessels constituting about 65 percent of global fuel
datastreams.
consumption. Segmented by 24 vessel categories. The relationship between fuel consumption and speed has been assumed as a thi power relationship. Total for all vessels tonne kilometers expressed as square
third
relationship and is shown as upper line. Not accounted for fuel consumption at anchor or in ports. The figures incorporates t number of vessels on the market and those that are actually moving at sea at a given
the
date. Weekly data.
PwC 16

17. Context
But speed reductions are very market sensitive and cannot be counted as reliable
abatement measures
Figure 1.8: Containership speed response to rate collapse, overcapacity, and higher costs 2008
2008-2011
There has been much volatility over the last few years in
many of the factors that would induce response in speed.
Demand for transport More ships entered the
Rates dropped
• The market for seaborne transport collapsed at the end of collapsed market
2008 upon reaching historical heights. Demand has since
come back and increased since 2009. Singapore throughput Million Container fleet Vessels Container freight rates Index
(Containers TEU) (index)
3 5000 12
• Many more ships were ordered at the end of the high cycle +12% 10
and these have been entering the market since. There was -25%
25% 4600 -75% 8
oversupply and rates dropped across most segments. 2,4 6
4200 4
2
• Fewer of the ships are utilized, meaning that they are at
1,8 3800 0
anchor and not at sea at a given day.
2008 2009 2010 2011 2008 2009 2010 2011 2008 2009 2010 2011
• Fuel costs have increased and are expected to increase
further in the future due to both the: (i) market
expectations; and (ii) The shift in fuel mix towards low-
sulfur fuels.
Fewer ships are utilized Fuel cost are higher Speed is lower
Speed reduction will be most cost effective if there is
overcapacity in the market (as for the last three years). If not,
Utilization fleet Percent Bunker fuel USD/Ton Container speed Knots
there will capital investments required to build new vessels (Container) (Rotterdam) (Average)
to compensate for the drop in transport capacity. The 100 % 800 14
-9%
9% +200%
dynamics are very volatile and hard to forecast. 600 -14% 13
90 %
400 12
Examples from the container fleet are shown on the right. 80 %
200 11
The container fleet has reduced speed by about 14 percent
since early 2008. This is consistent across most other types 70 % 0 10
of vessels and the typical range of speed reductions over the 2008 2009 2010 2011 2008 2009 2010 2011 2008 2009 2010 2011
three years is about 14-16 percent.
Sources: Singapore Port Authority, Lloyds, Hamburg Shipbrokers Association , Bloomberg AISlive datastreams
PwC 17

18. Context
Low-sulfur fuel regulations will be a game changer
sulfur
This report is focused on carbon regulations, but other international Complying with these fuel sulfur reduction requirements will require change,
environmental legislation are also likely to drive changes in the industry. In through the use of distillate or alternative fuel oils, LNG or gas-cleaning
particular the IMO’s amendments to Annex VI of the MARPOL Convention technologies (scrubbers). LNG can only be used for newly built ships. This will
in relation to SOx (sulfur oxides) reductions are expected to drive a have a strong upward pressure on fuel prices as distillates are historically 80-90%
significant rise in average fuel costs over the coming years. These include: more expensive than traditional bunker fuel. There is also limited capacity at the
refineries to produce distillate fuel and this is expected to create further price
• The global limit for sulfur content in fuel will be reduced from 4.5% to pressure on the fuel.
3.5% effective from 1 January 2012; then gradually to 0.5% by 2020
(subject to a feasibility review). The price increase from the shift of fuel mix will create incentives for considerable
fuel efficiency in the fleet. This will result in a much more significant impact to the
• The limits applicable in Sulfur Emission Control Areas (SECAs) will be industry than the current proposals on carbon regulation.
reduced from 1.5% to 1%, beginning on 1 July 2010; then further to 0.1 %,
effective from 1 January 2015. The price levels corresponds to an underlying cost of crude oil of about US$115
per barrel ($2010).
Increased use of low
low-sulfur, more
Fuel costs may remain high Much higher average fuel cost
expensive fuel
Figure 1.9: Fuel prices 1990-2030 Figure 1.10: Change in fuel mix of fleet Figure 1.11: Average fuel unit cost for fleet when
USD per metric ton fuel using bunker and distillate
($2010) Share of f uel type used USD per metric ton f uel
(2010$)
Distillate 20 %
1200 1200
Bunker f uel
80%
900 900
80 %
96 % 150%
600 80 % 600
300 300
20 %
4% 0
0
2010 2020 2030 2010 2020 2030
1990 2000 2010 2020 2030
Sources: IMO 2010, Bloomberg, Bunker fuel projections from Annual Energy Outlook 2011 (Department of Energy US), Purvin Getz 2009. EMTS 2010. Assumes distillate at 60% higher than bunker+demand
increase top-off at 20% from 2020. Similar to IMO 2010 expert group assumptions. Bunker costs historical shown at Singapore rate The production process from residual to distillate fuels also requires
off rates.
energy. About 350 kg of carbon may be released per tonne of fuel in the production process, which compares to about 10 percent of the carbon emitted during combustion at the ships. T distillate fuel burns
The
more efficiently at the ships, but not enough to offset the energy required in the refining process.
PwC 18

19. Context
Higher fuel costs unlikely to result in sufficient efficiency improvements
The extent to which fuel saving technologies are economically viable depends on All of these technologies (except solar on the Suezmax) are found to be profitable
the capital and recurrent costs of implementation and the fuel savings potential at fuel prices of $900 a tonne. If all these measures can be implemented at the
for each measure. same vessel – the resulting emissions reductions are estimated to exceed 50
percent.
The figures below shows examples of two vessels where the efficiency options
are exhausted below $900 per tonne a fuel. The vertical axis shows the cost In practice, there are many uncertainties and implementation constraints which
below which the investment will be profitable. The horizontal axis shows the are not included in these estimates. Other measures, or stronger price incentives
impact on the annual fuel consumption of the ship. may help to overcome these barriers, which is beyond the scope of this study.
There are many ways to reduce fuel consumption of a typical Similar savings can be made by a Panamax bulker; and all these
Suezmax tanker and increase profits options are profitable with $900 per tonne fuel
Figure 1.12 Marginal cost of efficiency improvements at $900 fuel price in Figure 1.13 Marginal cost of efficiency improvements at $900 fuel price in
2030. Midrange estimates. W.o speed reduction. Suezmax tanker 2030. Midrange estimates. W.o speed reduction. Panamax bulker
Marginal efficiency cost Savings as share of annual fuel Marginal efficiency cost Savings as share of annual fuel
$/tonne fuel consumption for ship $/tonne fuel consumption
10% 20% 30% 40% 50%
400
60 0
Propellerrudderupgrade
40
Propellerrudderupgrade
-20
20
Solar
Towingkite
10% 20% 30% 40% 50%
0
-40
Propellerupgrade
-20
WHR
Speedcontrolpumps
Towingkite
Wind Engine
Airlubrication
METuning
Propellerbushing reg
Propellerbushing reg
METuning -60 Common Rail
-40
Wind Engine
Propellerbushing req
Bosscapfin
Airlubrication
Coating
Weatherrouting
Lighting
Weatherrouting
Hullbushing
Speedcontrolpumps
Bosscapfin
-60
Hullbushing
Common Rail
Autopilot
Coating
-80
Autopilot
-80
-100 -100
Sources: Project cost and abatement potential data in examples from IMO 2010 INF 61:18 ; Imarest (2010). We
have converted this to fuel equivalents.
PwC 19

20. Context
Success in the future fuel economy will require innovation and strategic shifts
The fuel economy is an increasingly important component of the competitive The industry will respond strategically.
dynamics in the of future shipping. We may see strategic shifts in the industry.
Impacts may differ across main segments: Larger vessel types might be deployed, such as ultra large container vessels
which have greater fuel efficiency per tonne mile than the smaller vessels.
Short-sea shipping in densely populated regions face the most immediate threat More attention will be paid to address port infrastructure, which currently
of modal shifts towards land-based transport. Studies indicate that a threshold has limitations on vessel sizes.
level at about $1000 dollars/ton fuel will lead to significant modal shift and market
volumes will be lost to land. The risk for environmental regulators is that this may Downward management of other cost components and further integration
lead to higher total emissions as road and rail transport is less carbon efficient. of supply chains will rise in focus.
Deep-sea shipping will face different dynamics, in particular the threat of Consolidation in the sector may also follow to exploit greater economies of
increased competition from each other as fuel efficiency becomes a competitive scale.
lever. Locally produced goods will also become more competitive as the freight
costs of the distantly produced goods increases, leading to falls in seaborne trade
volumes.
Fuel efficiency forecast improve by 1,25% annually Efficiency gains will be outrun by increased fuel cost
Figure 1.14: Fuel efficiency improvement 1990-2030 Figure 1.15: Fuel costs per tonne mile of transport 1990-2030
gram f uel/ton mile $ cents/ton mile
1
11 3,4% Fuel costs will increase
0,75 faster and outrun the
Efficiency gains gains in efficiency
-1,25% represents a break with
9 +95% 0,5
recent history
0,25
7
0
1990 2010 2030 1990 2000 2010 2020 2030
Sources: IMO 2009, 2010; AEO 2010, Fernley, UNCTAD 1990-2010 reports, EMTS 2010. Consistent with the BAU+EEDI scenarios presente on page 15
2010 presented
PwC GHG Shipping models.
PwC 20

21. Section 2
PwC
Options 21

22. Two main groups of market-based measures are being considered by the IMO
based
The two main market-based measures being considered are a levy and an emissions trading scheme (ETS), based on the principle tha the shipping industry will
based that
respond to a price signal to encourage emission reductions. In total, ten proposals have been submitted to the IMO for consi
consideration as possible market-based
measures. Six of these proposal can be generalized to two basic market-based schemes – a levy and an emissions trading scheme. The remaining proposals address a
based
rebate mechanism applicable to any MBM and technical measures such as efficiency index or design standards.
The table below outlines the key features of each proposal. We will review the key features and policy options on the next pa
pages.
Proposal Scope and responsibility Expected source of Mechanism Revenue generation and allocation
emissions reductions design features
(Levy) GHG • All party ships engaged in international • Out-of-sector • Purchasing of • Fund used to offset GHG emissions from international
Fund: MEPC trade and emissions from all marine fuels. project based shipping which exceed global reduction targets. Could also
60/4/8 • GHG contributions due when taking credits (CERs) be used to finance adaptation in developing countries, R&D,
Denmark et bunkers are made to the Fund by bunker technical cooperation & administrative expenses of GHG
al. fuel suppliers or shipowners. Fund.
(Levy) LIS: • Direct payment to International GHG • In-sector • Revenue generated available for mitigation and adaption
MEPC Fund through electronic accounts for • Out-of-sector (from activities.
60/4/37 individual ships. remaining proceeds) • Part refund to industry.
Japan • Small ships may be excluded.
(Levy) PSL: • Uniform emissions charge on all vessels • In-sector • No discussion regarding the use of funds generated.
MEPC calling at all ports. • Out-of-sector (from
60/4/40 • Process enforced by Port State remaining proceeds)
Jamaica authorities.
Global ETS : • Applies to all CO2 emissions from the use • Primarily out-of-sect0r • Partial or full • A Fund would be established by the auctioning of allowances
MEPC of fossil fuels by ships engaged in auctioning to be used for climate change mitigation and adaptation and
60/4/22 international shipping above a certain • Links to other R&D for shipping.
Norway size threshold. ETS schemes
Global ETS: • Ship operators would be responsible for • Primarily out-of-sector • Partial or full • Allowances could be allocated to national governments for
MEPC complying with the system. Individual auctioning auctioning and therefore revenue generated would remain
60/4/26 UK ships would be the point of obligation. • Links to other with the governments to be used for a variety of
ETS schemes (unspecified) purposes.
Global ETS : • Applies to all ships above a threshold, • Primarily out-of-sector • Partial or full • The revenues could follow the principles laid out in the
MEPC regardless of their flags. auctioning Danish proposal, with the final allocation of the revenues to
60/4/41 • Links to other be decided by the Parties taking into account the principle of
France ETS schemes common but differentiated responsibilities and respective
capabilities.
PwC 22

23. Both ETS and Levy models involve carbon markets and trading
The levy proposal is a more centralized scheme which also
ETS proposals resemble existing emissions trading schemes
links to existing carbon market
Figure 2.1 Conceptual models for shipping carbon market engagement Conceptual
Central authority
to allocate Central authority
allowances (freely sets and collects
or auction), and levy
collect from ships
Certificate
Central
owners
authority
(shipoperators/
engages in
owners) can
market to
trade allowances
purchase offsets
in market
Ships to acquire
and submit
emissions Ships to pay levy
certificates based on fuel
upon each
voyage
PwC 23

24. ETS involves known implementation mechanisms but at a larger scale
Figure 2.2 Key issues for implementation of shipping ETS Simplified
Mechanism Key risks and mitigation
Risk of misallocation of free allowances due to:
Central authority to allocate allowances (i) Much volatility in emissions due to speed and market fluctuations; and
(freely or auction) to shipowners/operators. (ii) Lack of standardized information required to benchmark performance.
Large number of owners, but less than number Large number of different vessel and engine configurations.
of ships. About 100.000 ships may be covered The use of auction can mitigate misallocation. Better testing, piloting
compared to about 12.000 sites under EU ETS. and/or technology to assess actual emissions can also improve information
base.
Portside collection of emissions certificates
Risk of:
for voyage. Each ship to submit certificates.
(i) Excessive costs for monitoring, reporting, verification. This can be
Certificates may be ultimately owned by
mitigated by intelligent administrative systems or technology; and
shipowner, operators or charterers.
(ii) Fraud and corruption risks, e.g. bunker notes can be falsified,
(iii) Avoidance of scheme through e.g. sea-to-sea transfers.
Monitoring and verification checks. Technology
or paper based. May require verification
These can be mitigated by appropriate controls and/or technology.
personnel.
Owners of certificates can trade certificates in Risk of:
carbon markets to optimize the economics of (i) Excessive price volatility. This can be mitigated by allowing for banking
ships or fleet. and borrowing of certificates across phases;
(ii) Risks of supply constraints of CDM credits. This can be mitigated by
Certificates can also be acquired in the also allowing linkages to other markets; and
marketplace if additional certificates are needed. (iii) Transaction and trading costs. This can be mitigated by developing
efficient technology based marketplaces.
Various trading strategies possible within design
constraints of the ETS mechanisms.
Source: MEPC 60 various proposals.
PwC 24

25. Levy involves simpler mechanisms but also has risks
Figure 2.3 Key issues for implementation of shipping Levy Simplified
Mechanism Key risks and mitigation
Risk of setting wrong levels: setting a levy that is too low will lead to
Central authority to set levy for 1+ years ahead insufficient funds to acquire required offsets; while setting a levy that is too
based upon estimates of emissions and carbon high will tax the industry unduly.
price in the future. This can be mitigated by having shorter levy phase (e.g. where the levy is
updated every 1-2 years) coupled with an adjustment mechanism to reflect
actual carbon prices. This needs to be balanced against the desire to provide
longer term price stability.
Collection at point of fuel sales. Levy to be
Risk of:
paid alongside fuelcharge.
(i) Fraud and corruption risks. This can be mitigated by appropriate
controls and/or technology; and
About 400 bunkersales points. About 20% of
(ii) Risk of leakage to fuel outside of scheme boundaries. This can be
total sales at three ports: Singapore, Rotterdam
mitigated by ensuring compliance at major centers, setting entry
and Fujairah.
requirements to major ports, or impose charge based upon emissions
during voyage to be paid at port rather than fuel sales.**
Monitoring and verification checks could be
required.
Central authority will engage in carbon
markets to acquire CDM or similar credits to
ensure offsets of emissions. Risk of:
(i) The central authority, as a very large actor in the CDM market, may
May engage in market from time-to-time to substantially affect prices in the CDM market or cause undue volatility.
adjust portfolio or employ hedging strategies. This can be mitigated by spreading purchases over time and using
intermediaries;
(ii) Risks of supply constraints of CDM credits (similar to ETS).
Source: MEPC 60 various proposals; EPA 2008.
**Levy based upon emissions would require much the same monitoring and verification requirements as an ETS. Such a design wou also resemble the Norwegian NOx fund currently in operation.
would
PwC 25