20|20 Vision: Ensuring a Level Playing Field - The Challenge of Regulatory Compliance

by Adrian Tolson, Senior Partner, 20|20 Marine Energy
Friday April 8, 2016

The appetite and demand for regulating shipping has never been stronger.

The newly appointed International Maritime Organisation (IMO) Secretary General, Kitack Lim has stated that the fight against climate change is the UN body's top priority; we will have to wait until the Marine Environmental Committee meeting (MEPC 69) in mid-April to ascertain how serious he is.  However, the European Union (EU) is ready to introduce regulations unilaterally if the IMO fails to move fast.  Even China also has it own plans for controlling ship-generated pollution.

From a marine energy perspective the key date is 2020, when the IMO intends to introduce a global 0.5% sulphur cap for bunker fuel.  This depends on the results of the fuel availability study that will determine the shortfall of distillates, which will be announced later in 2016.

No one can doubt that the drive for regulation is intensifying. However, what is open to doubt, is how far maritime jurisdictions will go to ensure that new rules are followed.  It is an issue that is causing much consternation within the shipping industry, particularly amongst larger owners and operators who have committed to compliance, and understand the impact on their reputation, brand and associated enterprise value if they ignore the rules, and are caught. 

One body warning of the consequences of weak enforcement, specifically in relation to sulphur regulations, is the Trident Alliance, a coalition of ship owners and operators campaigning to have emissions rules strictly applied.  They believe, that while the 0.1% sulphur limit in ECAs has been in place for over a year, there are still significant gaps in enforcement.  The point being that if regulations are difficult to enforce in a comparatively small number of ECA zones, imagine what will happen when a stricter global sulphur cap is implemented.  While an element of their argument is based on the principles of 'fairness', they also stress the significance of the environmental and commercial consequences of a lack of enforcement.

Poor compliance penalises those operators who do comply, however, it also slows technical advances and stifles investment strategies.  There is also a large question over what it might do to the integrity of the shipping and bunker communities.  From a bunkering perspective, is there a moral obligation to provide products that ensure compliance?  Will physical suppliers refuse to deliver HFO to a vessel in the high seas when there is a 0.5% limit, and that vessel does not have a scrubber?

Volkswagen

Last year the car giant Volkswagen was exposed in a scandal that hugely damaged the company's brand, reputation, and share price, when it was forced to admit that it had installed special software  - 'defeat devices' - in some of its diesel cars to enable them to cheat on emissions tests. Investors are now suing Volkswagen for $3.7 billion. That is on top of other lawsuits and ongoing criminal investigations.

Some of the blame is being directed at regulators - particularly European regulators. They are charged with failing to challenge, or even spot, Volkswagen's behaviour. Volkswagen took the ill-advised path of falsifying emissions data in part because enforcement was lax.

The European Commission, which is supposed to oversee the implementation of its own environmental legislation, appears to have made no attempt to detect defeat devices in any research it carried out into emissions testing. The Commission blamed EU member states saying enforcement was their responsibility.  Some observers, in trying to understand the regulators' "hands-off' approach, have suggested they felt that the car industry had been pushed hard enough on emissions reduction and that it would be wrong to push them further by cracking down on cheating.

Perhaps it is too soon to draw parallels with the maritime sector, but it highlights the potential nightmare if the management of enforcement is not carefully considered.

Some member states have set out a firm position. The US is not shy of handing out significant fines and sentences, and indeed Ireland has announced that it is prepared to fine players almost $14 million for violating existing sulphur rules.

But the Trident Alliance is right to be worried. Major sectors of the shipping industry are under pressure. Freight rates have been falling, and competition is intensifying. Complying with emissions regulations is going to be expensive despite the low price of crude, and we should anticipate that it will be higher come 2020.  In many jurisdictions, avoidance and being caught is the cheaper option.  Fuel oil maybe cheap now, but distillates are still nearly twice as much as HFO, and not many have the liquidity to invest in scrubbers or LNG.

The danger is that this sympathy for shipping's predicament could translate into sloppy enforcement of emissions rules. That could create a challenging operating culture. Some ship operators might flout the rules in the belief they would never be caught, and if they are, the fines – in the main - maybe cheaper than complying; in other words, they believe it is a risk worth taking.

But somewhere down the line they would almost certainly be called to account, possibly with disastrous consequences for them and for the wider maritime community; especially if it was found that abuses were commonplace.

The International Bunker Industry Association (IBIA) recently threw its weight behind the Trident Alliance.  It stated that it shared the concerns about the impact that a lack of enforcement will have on society, the environment and a well-founded marine industry.  The question is what tangible action it will take to mitigate these concerns?

Whatever happens, compliance based on trust rather than oversight would likely prove a costly option.