The maritime industry must prepare for changing risks as it meets its net zero commitments

JThe maritime industry and its impact on the environment have recently received increasing attention, as it has been estimated that it emits around 940 million tonnes of CO2 per year, which represents almost 3% of global CO2 emissions. It is projected that if commercial shipping demand were to continue at its current rate, shipping emissions would increase between 50% and 250%. This is unlikely to come as a shock to anyone, given that shipping accounts for 80% of global trade. It is also important to put this into context, by the fact that cars and trucks account for 70% of global transport emissions, ships and aviation at a relatively low 15% each. While there is a lot of talk about the environmental impacts that cars and planes can have on the environment, there is relatively little talk – outside of the shipping industry – about proactive contribution and engagement. of the shipping industry to reduce its impact on global carbon levels.

The industry continues to look for other ways to reduce its impact, but it seems that the once ambitious goal set by members of the International Maritime Organization (IMO) three years ago – to halve gas emissions greenhouse gas emissions by 2050 compared to 2008 – is increasingly seen as insufficient. Indeed, the global regulator will review its global emissions targets in 2023, as part of its longer-term strategy and timeline.

Many shipping companies have made their net zero commitments and this year’s London International Shipping Week (‘LISW’) alone has seen a host of shipping companies make their commitments clear. One such company was Mediterranean Shipping Company – the world’s second-largest container shipping group – which publicly announced its commitment to net zero carbon emissions by 2050, as did Danish Maersk and French CMA CGM. . LSIW also saw Transport Secretary Grant Shapps announce his aim to see zero-emission ships introduced in UK waters in as little as four years. This is very encouraging for the industry given that one of the main barriers to driving environmental change is the cost and investment risk attributable to being a pioneer in the movement.

And it looks like those promises are turning into action: in August, industry giant AP Moller-Maersk became the world’s first major operator to order container ships that can run on green methanol, and struck a deal with Danish renewable energy company European Energy to supply low-carbon methanol to power its first “carbon-neutral” ship, which aims to sail in 2023.

But achieving these lofty goals will prove to be the real challenge. Although these different targets would significantly reduce the sector’s share of emissions, debate persists around the feasibility of this call given the sector’s existing infrastructure and the availability of clean fuel. Ahead of COP26 in November, more than 150 leading global maritime sector organizations came together in September to call on governments to develop policies that will support sector-wide decarbonization efforts. The demands include the implementation of emission-free shipping projects on an industrial scale; setting national zero carbon targets and providing incentives to achieve them; and introducing policies to make zero-emission shipping the default choice by 2030. All of these would require unprecedented investment and global cooperation.

Alexander Gray, Marine P&I Manager, Lockton

With all of these considerations in mind, companies are now turning their promises into decisive action. But what are the associated risks?

Whatever legislation is adopted, as with any commitment, the implementation of greenhouse gas regulations carries risks of climate-related litigation. Any increase in the amount and severity of regulation increases a ship operator’s potential exposure to liability. In particular, companies risk steep fines for regulatory breaches and future IMO regulations are expected to create compliance obligations for ship owners and operators. If companies publicly commit to certain targets – even if they are not binding – this can lead to future legal actions by shareholders against the company in question if they do not meet them, as evidenced by the doubling actions against climate change between 2017 and 2020 Although the protection and compensation coverage related to fines imposed due to a violation of IMO regulations is generally discretionary, it will certainly be an exposure that cannot be overlooked by both ship operators themselves and their insurers.

Additionally, if companies fail to disclose key business risks related to alternative fuels and emissions reductions or set clear targets, this could also lead to disputes over the disclosure of vital business information. .

Additionally, the specialized technology options currently being explored by the marine industry to reduce its carbon footprint are relatively new and have never been produced or deployed at scale. As a result, new on-board and on-shore technologies introduced to comply with any regulations will inevitably carry intellectual property risks and, given operating complications or specialist parts, will in turn increase the insurable value of vessels. As a result, hull insurance premiums may increase.

But more than that, new technologies also bring uncertainties that insurers may find difficult to underwrite: the calculation of exposure and the associated cost of risk will be the main challenge for hull and machinery insurers in order to determine the premium appropriate.

Depending on the timing and ambition of future IMO regulations on greenhouse gas emissions, this could lead to early scrapping and costly refurbishments affecting industry profitability. There will be new requirements for specialist parts and repairs, increasing the need for manufacturers and shipping companies to take out the appropriate cover. For example, upgrading engines to make them compatible with new carbon-neutral fuels will be costly, apart from the large investments needed to develop and acquire these low-emission fuels. Additionally, alternative fuels such as hydrogen, ammonia and methanol cannot yet be produced on the scale needed without generating significant and overall counterproductive levels of emissions.

Given these risks, there are significant insurance implications for nearly every business operating within the global maritime industry. Critical months lie ahead for the decarbonisation of ships, with world leaders currently meeting for COP26 in Glasgow and the next big IMO meeting on climate change taking place later in November. It is clear that decisive action must be taken now if any objective is to be achieved – and that regulations imposing such measures are imminent. And while much has been said about the impact of cars, planes and trains on the environment, the conversation around the impact of the shipping industry is undoubtedly about to heat up. scale up, both within the sector and more broadly.
Source: By Alexander Gray, Maritime P&I Manager, Lockton