15. April 2021 - Report
EPH Focus Sustainability – Agenda for Shipping & Ports
Sustainability – Agenda for Shipping & Ports
Climate change is the biggest challenge of this generation and probably the next two generations as well. The decisions we make in this decade will have a profound impact on the very existence of mankind. While the fuzz around actions needed is clearing slowly, what is clear is the need for concerted effort on a global scale. The shipping & ports industry with its global footprint and as a key enabler of trade has its job cut out for the next few decades.
Relevance of the Shipping & Ports Industry
Over the past 6 decades, we have built a world that relies on global trade of goods that defines and impacts every minute of our day. The screen on which you are reading this piece right now or the omnipresent banana on your kitchen counter is a testament to each of us being reliant as well as a silent participant in the larger scheme of things.
Close to 60,000 ocean-going ships of varying sizes and types brave the elements every day to keep the wheels of global trade moving, 11 billion tons of it (2019) that constitutes 83% of all traded volumes. All of these life-enabling goods make their way to our homes and manufacturing hubs through the 1000-odd ports around the world, nodes in the fabric of global trade. Every small bit that goes into making the multitude of processes and operations efficient in this web of logistics drives efficiency in the economy and makes markets more accessible to a larger demography.
Operational Efficiency and Sustainability – Hand in Glove
Operational efficiency drives profits is a known fact and the ports & shipping sectors are not strangers to this. A case in point is the steadily declining costs of shipping a container across the globe over the last 6 decades. The discussion has always been about doing more with less and boosting productivity. But the discussion now has taken gargantuan proportions because of the added dimension of environmental sustainability and the impact the industry has on our planet.
Shipping generates a mammoth 1.1 billion tons of greenhouse gas emissions annually (2018) accounting for close to 3% of global anthropogenic emissions and one of the single largest contributing industry. Every other industry is on a trajectory to reduce their reliance on fossil fuels. The sheer volume of renewable energy installations, over the last decade, in meeting the power demand of land-based industries is impressive and the growth is exponential. The ports & shipping sector is sticking out like a sore thumb and a slew of proposed new regulatory reforms viz. a carbon tax, inclusion of shipping in EU’s emissions trading scheme, carbon credits are all part of bringing the industry under the ambit of global GHG reduction ambition.
To add to the gravity of the problem, the shipping industry has not yet found its silver bullet as there are currently no alternative fuels available at a scale that can drive the zero-carbon ambition. Let’s not forget the scale of the problem here – we are looking to propel a mass of steel (up to 450,000 tons at times!) through the punishing oceans without a chance to recharge or replenish at will until the ship has reached her destination weeks away without delaying the schedule that was planned well in advance. This is a technical, engineering and economic challenge that the industry faces without a clear answer. The last time the industry made such a leap from steam engines (fired by coal) to internal combustion engines (fueled by diesel and residual fuel oil) was in the early decades of the 20th century and that transition took 3 decades. The leading consideration then was efficiency and productivity which will be high on the agenda this time around as well. This time the considerations will also include environmental impact and the all-important cost factor. The environmental impact of the industry is so large and looming that every small improvement in operational efficiency will also drive the path to environmental sustainability.
What is the industry doing about this conundrum?
While the industry is attempting at making the transition to the elusive zero-carbon fuel over the next couple of decades (at least) by testing various alternatives in small-scale pilots, what it has already been doing well are the continuous improvements to operational processes. These efficiency improvements have been focused on the operation and maintenance of ships leveraging the latest developments in technology.
The larger impact, though, comes from efficiency improvements in the ship-shore interface which is also the frontier handling the flows of goods in and out of the captive hinterland. The bottlenecks here are not just operational but also purely procedural in nature, equitable to non-tariff barriers in trade economics parlance. Every minute saved in cargo handling and port operations is a minute added to cargo-carrying capacity of the existing fleet boosting its productivity and reducing total emissions. The quantum of impact is made ever profound by the sheer number of these interactions, 4.3 million port arrivals in 2019!
Trends shaping the actions of the industry
The key trends driving the industry’s growth and environmental sustainability ambitions can be broadly categorized across 5 workstreams:
Port policy - Shipping and ports are a derived demand. They will follow trade which is driven by economics which in turn follows demographics. That explains a large part of the tremendous growth in the ports sector of Asian and African economies over the last decade. A nation’s socio-economic structure largely determines how the ports sector is administered and how synchronized it is with the region’s growth agenda. As a key enabler in facilitating trade, the ports sector sets the direction in fostering the growth of a low-carbon industrial cluster. In fact, in almost all port development projects of the last few years, the environmental impact of the immediate economic cluster around the port has been a key factor. While most ports in developing economies have traditionally been operated by the public sector, there is a clear trend in moving towards the landlord model where privatization and public-private partnerships (PPP’s) are proving successful in every aspect.
Energy Mix – As discussed earlier, zeroing in on the sustainable fuel of the future for the shipping industry and economies at large will take its own course but it's important to note that the process is underway. Meanwhile, less carbon-intense fuels take center stage. The phenomenal growth in the demand for liquefied natural gas (LNG) shipping over the last 5 years (15% y-o-y) has spurred a great deal of port development activities and a spike in LNG ships to facilitate handling and transport of LNG. LNG bunkering is another interesting case in point. There has been a steep rise in the number of ships that use LNG as fuel and that number continues to grow. Developing infrastructure to facilitate LNG bunkering is a bandwagon that some major port operators don’t want to miss.
Containerization and container handling – Increasingly larger quantities of commodities tend to be moved in containers due to the low costs involved, the flexibility of having it delivered at your doorstep, and the high level of schedule reliability of the carriers. Consolidation in the market and increased vertical integration across the broad spectrum of container handling have accelerated over the last 5-10 years. A case in point is the whopping 54% market share covered by the top-5 container handling terminal companies in the world.
Data flows & Monitoring – We live in a connected world. However, the shipping & ports sector has been a laggard here in the uptake of digital technology which has a lot to do with the fragmentation of the activities involved within the industry that brings up the case of competing and conflicting interests in data transparency. That, however, is changing and the industry is looking towards digitalization as a means for more optimized data flows. Digitalization of these processes brings in added efficiencies in productivity, fuel consumption, and emissions management. As in every other industry, managing the change towards greater uptake of digital infrastructure is difficult but the industry is committed to making that change.
Regulatory changes – The global nature of this industry makes it uniquely placed to fall under the ambit of regulatory requirements across the globe, but also, at times, slip within the cracks. This is what has happened until now when the shipping sector was not included in any of the major international climate change agreements (The Paris agreement or the larger context of UNFCCC). That is set to change soon with regional authorities making proposals to include shipping within national legislation with regards to emissions reduction. The European Commission’s move to include shipping into the wider EU emissions trading system (EU-ETS) is a prime example of how regulatory changes could distort the shipping markets. The International Maritime Organization (IMO), shipping’s primary regulatory framework setting body, has also stepped up its game in laying the groundwork of a GHG reduction strategy (until 2050) and is currently framing measures to accelerate wider adoption of operational measures that can be implemented quickly at low cost to the industry. The regulatory landscape around emissions reduction is changing quite rapidly and the shipping & ports industry will need to keep step with it.
In essence, it is clear that sustainability and the environmental impact of the shipping & ports industry will define all developments in the industry for the foreseeable future. The industry is so intertwined and integral to global trade that it no longer operates in a vacuum. The key will be to identify bottlenecks in development activities quickly and resolving them to ensure efficient measures are made available to the market at large. While it is important to replicate successful pilots at scale, it is even more vital to customize these measures to best fit every user, geographic location, and specific needs of that particular business stream. And to achieve this, knowledge sharing and building a coalition of the willing will be the first step of the ladder.
Written by Abhishek Nair, Expert Consultant on Shipping and Port Operations.