Q&A: Managing Carbon Fallout from the Red Sea Supply Chain Disruption and Beyond

John McCaw, Vice President of Sustainability Solutions, Breakthrough. Image Credit: Breakthrough

Most recently, the US and its allies have been responding with air strikes to a series of attacks by the Houthis after the group fired on an international shipping lane and US-owned cargo ship in the Gulf of Aden. Shipping giant Maersk has also said it's unclear whether Red Sea trade would resume in days, weeks or months and consequences to economic growth could be significant.

The Red Sea serves as a key link to the Mediterranean via the Suez Canal, constituting 12% of global shipping traffic. Moreover, 40% of Europe's oil and gas imports pass through this route according to the IEA. Disruptions in the canal divert ships around the Cape of Good Hope, extending voyages by approximately 12 days and increasing demand and prices for bunker fuel.

But while frequent diversions are driving up freight rates, they're not the only thing getting out of control. To get the latest on the emissions impact of the Red Sea situation and the EU's new emissions trading system (ETS) that became effective on Jan. 1 2024, we caught up with John McCaw, VP of sustainability solutions at Breakthrough, for insights into how this new phase of regulation will impact ocean shipping.

Q) What's the latest breakdown of the Red Sea situation? What are you seeing so far out there in terms of freight disruption, fuel costs and reroutings? And, is there an end in sight?

We see a number of long-term implications facing the industry such as risk-related charges, maritime shipping rate increases, higher fuel costs and emissions, more demand for bunker fuels and slower transit times—all of which impact transportation decision-making.

Satellite imagery also highlights the absence of container vessels in the Red Sea region and the increase in activity around the Cape of Good Hope. Freight that is being diverted around the Cape of Good Hope will present shippers with new decisions: Do the adjustments made by their carriers initiate a chain reaction of changes further down the supply chain? How do I mitigate inflationary pressure?

We also see West Coast ports particularly benefiting from this disruption due to shorter transit times from Southeast Asia. West Coast imports have soared to as much as 50% of total imports, averaging 48% over the past three months. If the disruptions persist, we may witness a further influx of freight entering the US through the West Coast.

Q) With frequent diversions leading to increased emissions, how do you see this impacting shippers' sustainability goals in the near term?

We expect to see up to a 40% increase in emissions for shippers diverting away from the Red Sea route to use the Cape of Good Hope route. While every shipper will be impacted differently based on a combination of factors, those that have a clear picture of their emissions profile and their emissions reduction opportunities have the opportunity to offset other areas.

To stay on track with shippers' sustainability goals in the near term, it will be important to consider diversification from a freight and energy perspective. If you know that one trade lane is going to produce higher emissions over the next 6—12 months, having a list of lanes by emissions reduction potential can help make up that difference. On each lane, you can select more fuel-efficient carriers, move from truckload to rail or even select carriers consuming alternative energy. Emissions can be viewed like a stock portfolio. Yes, the Red Sea lane is down, but if we can improve emissions elsewhere, we have a better chance at bridging that gap.

As of Jan. 1, the EU emissions trading system (ETS) has now come into full effect. What does this mean for the maritime shipping industry in terms of sustainability and what proactive measures can they take to prepare for this new phase of regulation?

This is one of the more significant developments to shape the maritime shipping landscape. ETS is a cornerstone of the EU's policy to combat climate change and is a cap-and-trade system that limits the overall emission of carbon dioxide. In the maritime sector, the EU ETS will gradually include emissions based on ship size and type. By 2024, 40% of maritime emissions will be covered, increasing to 70% in 2025, and reaching 100% by 2026.

This new regulatory phase presents shippers with two options: buy allowances or reduce carbon emissions. While the former may seem like an easier solution in the short term, reducing emissions is ultimately a better investment. It will be crucial for shippers to work closely with their partners to ensure they are also taking steps toward sustainability. Through the power of collaboration, more effective solutions can be developed and implemented. However, some shippers may still need to invest in allowances. Each allowance has a market price, transforming carbon into a quantifiable and cost-bearing entity. 

In the future, the EU plans to aggressively reduce the number of allowances within the ETS. As the number of allowances decreases, the price is expected to rise, underscoring the urgency to reduce emissions. Fortunately, the rise of carbon-focused analytics, automation and technology represent viable solutions for reducing emissions and complying with the ETS in the years to come."

Looking at the bigger picture, carbon-neutral fuels in maritime shipping are set to be costly and scarce in supply. How do you see decarbonization playing out in the long term for shipping and what other resources do shippers have at their disposal or should consider?

In the long term, I believe maritime shipping is on course to become a polyfuel-driven industry where multiple carbon-neutral energy sources, including methanol, hydrogen, ammonia, nuclear and additional energies we are not commonly discussing today will be available. Technology could speed up this transformation, given the scenario modeling and forecasting capabilities.  

Yet feedstock limitations, which are set to remain in low supply over the next few years, could hinder progress. Fuels from waste are in high demand due to the fact they meet policy objectives in the US and Europe. Biofuel is also a prime focus for maritime shipping. According to the IEA, 13% of biofuel production will come from waste and other residues by 2027, up from 9% in 2021.

In the interim, shippers can effectively pool their freight together to assure carriers that there is adequate, consistent demand for low-carbon fuels. This demand will help create confidence that additional low-carbon capacity can be supported, and then additional orders for low-carbon vessels can be made."

About John McCaw

John McCaw, Vice President of Sustainability Solutions, leads Breakthrough's go-to-market function to operationalize sustainability practices across the world's most reputable household brands. John's transformative leadership encourages and supports organizations to incorporate GHG emissions as a factor in all transportation network decisions. His subject-matter expertise includes transportation sustainability trends, best practices for decarbonization, and regulation and policy for scope 1 and 3 emissions reduction, among other carbon-focused topics. 

Prior to Breakthrough, John spent 20+ years working for a variety of Silicon Valley-based companies driving sustainable, innovative industry change and revolutionizing their companies through technology, data, and market knowledge. John earned a bachelor's degree in accounting from Purdue University.