Commercial versus operational drivers in reducing shipping emissions

As the European Union's drive to decarbonise the shipping industry is picking up steam, several players along the value chain could be impacted under new proposed legislation which would also include charterers accountable for emissions from their hired ships. The suggested amendments in the EU’s monitoring, reporting and verification (MRV) regulation, if approved, would mean that both shipowners and time charterers will have to comply with the requirements related to monitoring, reporting and verifying greenhouse gas (GHG) emissions from maritime transport. The new green regime dictates that the complete shipping value chain must minimise emissions from their operations and efficiency will be defined by their ability to reduce their environmental footprint, which will be a key differentiating factor in securing future charter deals. According to DNV’s performance advisory head Bjorn Berger, optimisation of ship operations has traditionally been dictated by the efficiency of delivery around the world that has typically meant being able to sail at full speed, thereby burning more fuel, to minimise costs for the charterer. “It has been driven by money, not emissions,” he says. Chartering an A-rated ship today is like buying an A-rated fridge and leaving the fridge door open The target set by the International Maritime Organization (IMO) calls for widespread uptake of lower and zero-carbon fuels, in addition to other energy efficiency measures, including operational and market ones. Limited freedom to optimise operations Dr Roar Adland, professor of shipping at the Norwegian School of Economics, recently questioned online via LinkedIn whether we should start thinking about shipping emissions in terms of having either commercial or operational drivers. By commercial drivers, he meant anything that is effectively decided at the pre-fixture stage, such as load and discharge ports, the specifications of the ship, where it is sourced from, the ship speed needed to meet laycan, laden speed clause, and cargo intake. The operational drivers are basically down to minor tweaks related to weather routing and local speed optimisation. Adland suggested that today 90% of avoidable emissions are driven by commercial decisions that happen long before the shipowner/operator gets involved and that the focus should be on ensuring that charterers and cargo owners optimise their supply chain and contracts to minimise emissions. He believes that the above can only be addressed in the pre-fixture stage, because: "Once contractual terms are set and the vessel chosen, you are left with very limited degrees of freedom in terms of optimising operations. The potential savings here are modest, yet this is where the vessel performance industry is focused today." According to Adland, this specifically means reducing charter party speeds when laden; fixing ships that are positioned such that they can meet laycans with reduced speeds; fixing ships with the shortest possible ballast distance; making hull fouling condition an explicit part of contracts; and coordinating to reduce port congestion. However, he argued that the various energy efficiency indices (EEOI and others) play almost no role in this process, writing rather memorably: “The energy efficiency indices risk becoming an excuse for not taking action where it matters. Chartering an A-rated ship today is like buying an A-rated fridge and leaving the fridge door open.” AI to the rescue Mike Konstantinidis, the CEO of Greece’s METIS Cyberspace Technology, a company focusing on machine learning and artificial intelligence (AI) for the shipping industry, agrees, but one way or the other, the challenging part is the implementation in real life as he wonders do both parties have realistic information on how much are the avoidable emissions of specific fleets. “The mentioned commercial decisions are in fact terms and conditions being agreed by both parties. If a shipowner has reliable visibility of the actual performance of the specific vessel, it would either agree or try to negotiate the terms before agreeing,” Konstantinidis says. Konstantinidis tells Splash Extra that in many cases shipowners rely on outdated information regarding their vessels, reflecting the particulars as a newbuilding or since a previous, not very recent drydocking and ignoring current conditions, such as main engine actual performance, hull and propeller fouling, and other additional auxiliary equipment consuming energy onboard including scrubbers or ballast water treatment systems. Chartering customers becoming emissions experts will accelerate the creation of a premium market for the best performing shipowners For him the close monitoring of the performance of the vessel versus the agreed terms becomes equally essential, if not strictly indispensable, to safeguard compliance during a voyage. “In legal terminology, abettor for the avoidable emissions are the commercial decisions/agreements, but the perpetrator is the one implementing those commercial directives with more or less success,” he asserts. According to Konstantinidis, to solve such a complicated problem such as the radical reduction of the emissions, it is more important than ever to utilise technologies of the internet of things (IoT) and sophisticated analysis powered by artificial intelligence (AI). One link in the chain Sigmund Kyvik, CEO of the Norwegian provider of a digital platform for measuring, reporting, and estimating shipping emissions, Siglar Carbon, also agrees with Adland that commercial decisions strongly influence shipping emissions, and an increased understanding of emissions related to these decisions is necessary to release the full potential of what the company calls the “commercial decarbonisation” of the shipping industry. Siglar’s experience shows that substantial, immediate and efficient reductions can be achieved when the emissions factor is given weight in commercial shipping decisions. However, Kyvik thinks that a full commercial picture needs to be drawn to understand the emissions implications related to commercial decisions. “With reference to the saying cargo is king, we need to remember that shipping only represents one of the cargo owners’ many commercial decisions,” Kyvik points out. Particularly in bulk shipping, commercial shipping decisions start long before a fixture, when the trading strategy, including destination of the cargo, is set. “Shipping represents a small part of the financial exposure of trading, but a large part of its carbon exposure,” says Kyvik. Kyvik believes that due to the complexity of commercial shipping decisions, it is hard to quantify the reduction potential related to each decision. “Adland’s qualified guess that 90% of avoidable emissions are driven by commercial decisions is interesting because it effectively underlines the scale of emissions reduction possibilities in the commercial space of the shipping industry. The number might not be far from the truth, but it would require a change in trading patterns, including the cargo destination,” says Kyvik. Commercial and carbon accountability gap closing Meanwhile, Ami Daniel, CEO and co-founder of maritime intelligence company Windward, claims that right now, the vast majority of considerations in the market are commercial and that recent EU regulations and the Sea Cargo Charter are aligned in putting the responsibility of carbon emissions in the hands of charterers. "We expect that within the next several months the market will bridge the current gap between commercial accountability and carbon accountability, effectively making carbon a valid consideration in voyage planning," he says. Similar to Konstantinidis, Daniel believes that data and AI can be used to optimise a few main parts in the pre-fixture stage by choosing the best performing vessels according to AI models trained on real data, optimising the ballast leg, and optimising the ETA and right speed. "In the same way, shipowners and operators can and should be using AI to constantly predict port congestion and adapt their speed to reduce carbon emissions,” Daniel says. Chartering managers are the key According to Adland, the Norwegian shipping professor, the most important people for shipping emission reduction today are in fact the chartering managers. “Yes indeed,” concurs METIS' Konstantinidis but he stresses that chartering managers need to be properly assisted in order to play an increasingly important role, as with top-down, empirical approaches and fragmentary, inaccurate information, they most probably cannot make optimal decisions. The task of slashing shipping emissions is, in other words, maximising time charter equivalent revenues (TCER), he explains. Konstantinidis reckons that maritime companies lacking the ability to monitor basic real-time data of their fleet performance will struggle to improve. "It is like asking the chartering manager to deactivate a bomb in utter darkness,” Konstantinidis says. Energy efficiency indices do not make sense if they are just reported once, Konstantinidis suggests. Those indices are extremely helpful when they are based on actual data automatically gathered from vessels and continuously reported in every voyage. Windward's Daniel estimates a chartering team can optimise its carbon footprint on a voyage-by-voyage basis. He thinks this is achievable to the tune of 5% to 20% fewer emissions per voyage. Kyvik from Siglar agrees that the role of the chartering manager is increasingly important to slash emissions, however, emitting CO2 from ships still has no direct cost, so direct economic incentives for charterers to cut emissions are lacking. Nevertheless, he sees a growing number of responsible cargo owners are leading the way, with most of Siglar’s chartering clients setting internal emissions reduction targets. “Ambitious companies operate with an internal carbon cost to incentivise carbon efficient commercial decisions and set emissions limits to their trading operations advocating that reduced emissions will be a future license to operate for commercial commodity trading,” Kyvik says. EU rules and regulations The latest report by the European Environment Agency and the European Maritime Safety Agency shows that shipping makes up about 14% of greenhouse gas emissions from transport within the European Union, making it the third-biggest emitter behind road vehicles, which account for 71%, and just behind aviation. Shipping will likely become a part of the EU emissions trading system (ETS) from 2023, being phased in over a three-year period. In practice, it means that shipping companies will have to buy and surrender emission allowances (carbon credits) for each tonne of reported CO2 emissions. Commenting on the report, German member of the European Parliament, Jutta Paulus, said: "To date, maritime shipping has not been subject to any binding emission reduction measures. It is incomprehensible why the European Commission is planning to involve maritime shipping only gradually in the reform of the EU emissions trading system." Paulus is negotiating on behalf of parliament with EU member states over the revision of the EU's MRV regulation of CO2 emissions from shipping. The EU MRV regulation will be amended so that data reported under its regulation can be used also with respect to the EU ETS. Pending adoption and the final terms, shipping companies should prepare for the EU ETS to be extended to cover maritime transport emissions. Specifically, commercial operators of the vessels, such as shipowners, managers, bareboat charterers and other stakeholders, should carefully assess and consider the potential responsibilities and opportunities that may be created under the extended EU ETS. Ballast distances Going back to Adland’s claim that most of the avoidable emissions can only be addressed in the pre-fixture stage, Kyvik argues that there is a lot of reduction potential in fixing ships with the shortest possible ballast distance, but to reach 90% of the distance sailed in the laden leg, hence the destination of the cargo would have to be up for discussion. Kyvik believes that in a future where emissions play a more prominent role in shipping decisions (due to the coming carbon price and pressure from finance institutions and the public in general), flexibility in the destination of the cargo might be weighed against the cost of emitting GHGs, but this is not yet the case. Tapping into the emissions reduction potential of the ballast leg is, however, a very good place to start. “Our experience shows that decisions related to the ballast leg, like ship position and speed, is the second largest emissions driver after the destination decision,” says Kyvik. He sees the largest potential for efficient and substantial emissions reduction in segments where commodities are traded in bulk, and shipping flexibility and optionality is traded actively. Siglar’s CEO stresses that in these cases, it is important that the charterers have the emissions insight to make data-driven and carbon efficient decisions. Siglar makes the emissions reduction potential explicit by comparing estimated emissions from alternative ships before fixture. “By comparing the alternatives, the charterer or cargo owner can easily find the most carbon efficient ship, whether this is due to the ship’s technical specifications, its estimated speed in both laden and ballast leg or its ballast distance,” Kyvik says. According to Kyvik, Siglar already has a solution that allows it to estimate future emissions and give charterers the insight needed to compare carbon consequences and make data-driven and carbon efficient decisions, whether for the next spot cargo, contract renewal, or a time charter. “As our chartering customers become emissions experts and are willing to pay up for the ships with the best emissions performance, we believe that this will accelerate the creation of a premium market for the best performing ship owners,” Kyvik maintains. Exposing ships to big data platforms There is an increasing pressure on the shipping industry to sharpen its environmental performance, driven by an IMO target to halve greenhouse gas emissions by 2050, EU and other regional regulations as well as banks and investors. Monitoring and reporting of data such as carbon-intensity measurements will be required in relation to GHG ratings for regulators, charterers, ports, banks and financial institutions, making this a rite of passage for shipowners in the future. In essence, digitalisation of ship operations creating the right data, in tandem with alternative fuels, should be a key enabler to optimise the energy efficiency of fleets to meet low-carbon standards and allow the relevant parties to make better decisions in the pre-fixture stage. According to the IMO, among the various potential fuel reduction measures, operational measures are easier to adopt as they do not require major investments, are readily implementable and can yield significant benefits in a short time. Digitalisation can also deliver a shift where charterers may take over the shipowner's role to include vessel operations within the entire logistical chain in order to meet environmental requirements. Exposing ships to big data platforms presents an increased cyber security risk but that's a story for another time.

Commercial versus operational drivers in reducing shipping emissions

As much as 90% of avoidable emissions today are driven by commercial decisions that happen long before a shipowner gets involved. Charterers are under pressure to optimise their supply chain and contracts to minimise emissions.

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