The uncounted cost of shipping's environmental impact
Single industries easily can seem negligible when examined within the global scale of the Paris Agreement. This is particularly the case for international shipping because it is very much an industry that’s out of sight, a phenomenon known as "sea blindness."
Despite emissions exceeding those of Germany, the industry remains outside any international agreement to limit its emissions. While policy is ultimately necessary, key actions should be taken by banks to begin steering the industry towards even preparing for decarbonization.
Take a look at the iPhone sitting in front of you. It arrived as a finished product to you on a container ship, but each element of its manufacture was also shipped in turn — from crude oil deliveries to a refinery, to silicon for glassmakers and electronic components, and from ores to be processed into metals, to the wholesale transportation of wires, chips and plastics. The phone also needs to be charged: oil products or biomass are transported daily to power stations, generating the electricity through wires that run into your home — themselves made of concrete, sand, wood, metal and ceramics. In fact, 90 percent of almost everything is transported by ship at some point. It is the backbone of the globalized, connected society we live in. Ships are effectively floating power stations, some with the ability to burn 300 tonnes of fuel a day.
It should be no surprise, then, that the industry is as financially significant as it is environmentally. A group of leading commercial banks holds $355.25 billion of collective exposure to shipping. This is one of the key groups with the influence to begin steering shipping towards decarbonization. It’s worth mentioning — particularly to their shareholders — that they also have a profit incentive to do so as well.
Both the U.N.’s International Maritime Organization and the European Union are working towards greenhouse policies for international shipping, at least one of which will be implemented by 2023.
Market-based policies will, by design, advantage those vessels that are more energy-efficient, and disadvantage those that are more carbon-intensive. In practice, this will benefit those vessels able to install efficiency technologies and eventually switch to the use of low-carbon fuels. Despite this being only a few years away, only two banks of the more than 40 active in shipping consider the efficiency of ships they finance.
Additionally, over the next few decades we can expect a global decline in demand for coal and oil products as the world shifts to renewables under Paris. We can expect significant impacts on trade patterns, which ships are able to find work, and how much they can charge for that work based on shifting demand. Of course, this type of thinking has yet to penetrate the operations of shipping desks, although it will become key to future profitability and supporting the aims of the Paris Agreement.
The shipping industry prides itself on providing its service at an unbelievably low cost and thus playing an important role in enabling global trade. To ensure that this remains the case and that shipping can enable a vibrant, low-carbon economy, the pledges of financial institutions must lead to actions at the sector level.
A decarbonized shipping sector that supports a vibrant low-carbon economy is vital. With an uncertain policy environment and markets that largely reward short-term thinking and investments, financiers are in a key position to look after their own financial interests while also ushering the industry towards a profitable decarbonization.