I mentioned, a few days ago, that in the future, as the ‘open range’ that the high seas have been, since the days of Hubertus Grotius and the concept of ‘Mare Liberum’, becomes increasingly ‘fenced off’ by international regulations, shipping companies will make as much money through astute awareness of regulations as they do by trading ships on the freight and charter markets. We will go through Alice’s mirror, and nothing will be the same.
The IMO MEPC decision that shipping will cut its greenhouse gas emissions to half the levels of greenhouse gas emitted by ships in 2008 raises two questions, and a corollary:
- How will we comply?
- How will the new regulations be enforced?
And the corollary is, “How do we make money out of this?”
I think that “How do we achieve the required reduction in emissions by way of new or existing technology?” is likely to be the easy bit. Drafting and understanding the regulations is going to be much harder. I am going to suggest that the entire legal and regulatory ‘world’ of merchant shipping is going to change, and the new world of shipping will look quite unlike the old one.
In this business, “How will something be enforced?”, along with the unspoken – but more important – question, “How do I get round it?” always comes before, “How do I comply with the new regulation?”, so let’s start with what everyone wants to know, but dare not ask in public…
We will look at the naval architectural, ship construction and marine engineering solutions later, because not only are they more fun – and there are grounds for considerable optimism – but they are actually easier than the regulatory issues.
We need to have regulations which are transparently fair, simple, easy to understand, difficult to evade, difficult to use as a cover for corrupt practices and difficult to apply other than in completely non-selective and non-discriminatory ways. We also need regulations, which reward virtue and which punish vice. There is a trendy acronym for regulations which offer incentives –MBM – Market Based Measures – and we are going to be needing some, because all stick and no carrot does not make people keen to do the right thing; it just makes them keen to avoid getting caught.
The usual way that things are enforced, in shipping, indeed almost the only way, is by way of actions taken in ports, either by labour refusing to handle a ship and her cargo, or by Port State Control detaining a ship and preventing her from sailing. So let us assume that enforcement will, for practical purposes, be by way of Port State Control (PSC). We need to ensure that PSC applies the rules fairly, and that PSC is in a position to offer rewards as well as meting out punishments.
However, there is an elephant in the room. The elephant has been there, but not spotted, for a while now.
What follows is a thought experiment. Please suspend your disbelief for the moment, and read on.
Let us assume that ships will acquire yet another certificate, probably issued by a classification society, certifying that the ship’s design and outfit meets certain specified criteria for emissions control. On the basis of this document, which will form one of the ship’s trading certificates, another certificate might be issued by her flag state, specifying the total amount that she can emit to atmosphere.
We cannot call this a ‘Green Passport’ for the ship, because that name has already been taken, for the inventory of hazardous materials on board, under the 2009 Hong Kong Convention on Ship Recycling (don’t panic – it needs 15 ratifications or accessions, representing 40% of the world fleet, and when I last looked it had got six, representing 23% – so give it a year or two…)
We will have to call our new certificate something else. For the moment, lets call it a Certificate of Acceptable Service Emissions (a CASE?). This might state that the ship concerned will emit X tons of greenhouse gases and Y tons of greenhouse solids such as carbon particulates.
On the basis of that document, Port State Control officials will be able to compute how much greenhouse gas and particulates the ship has, in fact, emitted on her voyage to their port. They may check the ship’s bunker tanks and her bunker receipts. On that basis, they will be able, perhaps, to levy a carbon tax , as the Port of Rotterdam has suggested, or perhaps do something else.
Some of us are going to spot a wonderful opportunity for making money, at this point. Civil aviation has decided to go for an emissions trading scheme, something that the IMO has wisely, knowing how closely its ‘customer base’ resembles a waggon load of cats, eschewed, but the ingenuity of the shipbroking classes, who developed the forward freight agreement, will spot something.
We might construct a scheme in which the right to emit X tons of greenhouse gas per year becomes something that might be traded. Let’s just play with this one for a moment.
If we are going to cut climate –affecting emissions from ships by 50% from the 2008 levels by 2050, then we are going to need to enforce that, and if we are going to enforce it effectively then the right to emit climate affecting gases and particles (don’t forget the particles) is going to have a value.
Imagine that we are in 2049. The emissions of 2008 have been quantified. The fleet of 2049 is emitting precisely half that quantity of carbon dioxide, particulates, etc. But the market is looking quite perky.
You want to build a new ship, you have the finance arranged, and you have found a shipyard who are hungry for your order. But if you contract that ship, you will push the world fleet’s emissions over the limit.
The simple solution is to take an old ship or two out of service and scrap them, and to use the ‘rights to emit’ that those ships had, embodied in their CASEs, for your new ship. If you have an old ship that you want to scrap, and your new ship is going to emit the same amount, all is well. But if you do not, you are going to have to buy the right to emit for your new ship, by buying an old ship and scrapping her (in compliance with the Hong Kong Convention, of course) and using her CASE for your new ship, or just by ensuring that the old ship is seen to be permanently taken out of service and buying her CASE.
At this point, several thoughts occur. First, this is a bit like fishing vessel quotas in the European Union.
Some nations sell those with the boat, others award them to ports. Next, there is nothing new in our business, and we have been here before – specifically the ‘rights of bottom’ in the fleet of the British East India Company, 1601-1832. The HEIC didn’t own its ships; it time chartered them for the life of the ship (originally one round voyage, later with copper bottoms and teak construction, ten years) and gave the owner the right to replace his ship ‘on the same bottom’ when she was condemned by the company’s surveyors (oil tanker owners and major charterers – take note). This right had a very definite commercial value.
Let us now think a little further. It must follow that, if the right for a ship to emit greenhouse gases and solids has a value, and can be traded, the more greenhouse gases and solids a ship emits, the more valuable that ship’s right to emit them becomes.
A very well known bit of maritime law, the Law of Unintended Consequences, now rears its ugly head, encrusted with barnacles, and takes a great big bite out of the good intentions of the IMO.
Old ships, which emit lots of greenhouse gases, are going to be worth more, because of the right to sell their right to emit, than new ‘super eco’ ships which pollute little if at all.
But, if we don’t allocate the right to emit X tons of carbon dioxide, carbon particles, sulphur dioxide, and so on to individual ships, how is this right to be assigned? To flag states, perhaps? But that would cast in stone the size of various registers at the date when the right was assigned, and thereby take away from shipowners the right to choose their flag. To nation states who are members of the IMO (not all are!) on the basis of their populations at a given date? To nations which import and export cargo, on the basis of ton-miles at a given date? To places that will be most affected by global warming?
Let’s wrap up the thought experiment at that point. The problem appears to be a real one, and the answer is not, at this point, apparent.
More in the next instalment.