How will industries react near term to the IMO’s 2023/2025 carbon targets?
Were it a country, maritime transport would be the world's sixth largest greenhouse gas (GHG) emitter. As world leaders discuss about the environment at COP26, we address the key question of what shipping is doing to decarbonize. In our Q-Series "Greening the waterways" (2018), we detailed the International Maritime Organization's (IMO) progressive targets, including sulphur (IMO 2020) and ballast water. We now turn to carbon emissions as the 2023 and 2025 deadlines approach, focusing on near-term industry reactions as long-term solutions are still unavailable. Supported by the sixth wave of UBS Evidence Lab's shipping executive survey, we expect equipment suppliers and early shipping adopters to benefit most from decarbonization, while seeing a mixed impact for refiners. We anticipate select freight users and, surprisingly, new build shipyards to be negatively affected near term.
The challenge: meet both the 2023 deadline and long-term carbon goals
The IMO requires new ship designs to progressively improve, cutting CO2 emissions 30%/50% by 2022/2025 (Phase 3) and 70% by 2050. For existing ships, IMO mandates a one-time upgrade in design in 2023 to match new ships’ CO2 target in addition to a 2% pa CO2 cut during 2024-26 through operational efficiencies. The latter falls short of the 6-7% pa cut required to meet the Paris Accord goal. But we see IMO efforts as significant as we expect ongoing revisions to narrow the difference. However, the targets are challenging given the short time, the scale (94% of fleet in scope for upgrades), the cost, and importantly, the lack of a definitive fuel to comply to changing rules over the 20- to 25-year life of a ship.
Is the industry prepared for the disruption?
Japan's shippers often use large ships, which makes it comparatively easy to shift to alternative-fuel vessels. Because the companies are aggressively working toward net-zero emissions, we expect the impact to be less than at competitors. If the balance of supply and demand improves for dry bulkers, tankers, and container ships with the start of operations under the EEXI/CII regulations, there could be a benefit as well.
We think European equipment suppliers will seize the opportunity and have been investing heavily in product innovation and M&A to benefit from the changes. This encompasses a broad range of technical solutions. The maturity of the offering differs by application and vendor.
Refiners are not yet preparing for a significant reduction in marine fuels consumption and reducing from product slates. However, annually 0.7-1% of the global refining capacity is upgraded from simple to complex and bottomless refineries, reducing the supply of marine fuels—particularly high sulphur fuel oil. The transition was accelerated due to IMO 2020 regulations.
