A Carbon Tax for Shipping: The Hard Path Of Good Intentions

by Chris Morgan, Global Head, Credit, Delta Energy Fuel Supply & Trading
Tuesday June 29, 2021

Shipping and especially bunkering has been trying very hard to improve its environmental impact lately. It is a laudable thing.  I am all for carbon taxes. I think the IMO 2020 legislation was a very positive thing at its heart and after the hand-wringing and bleating, shipping is unquestionably a better industry for having brought in this huge change.

Perhaps emboldened by this, the reports of carbon taxes being applied per tonne to emissions are just as well-intentioned. Reports on this site recently suggested that these could, were they implemented, somehow mean something like a US$300/MT price hike for low sulphur bunker fuel.

Now the intention here is to clean up shipping which we can all get behind. But what it probably does not intend is the shockwave that such a seismic move would create if those numbers are accurate.

It creates a shipping problem.

Companies simply may not be able to afford to buy fuel oil any more. If you aren't making enough freight/hire to cover your opex for an extended period, then you have some stark choices. It is precisely the smaller/mid level bulk, ro-ro and tanker trades with older vessels that would find a switch to LNG or methanol or hydrogen fuel cells or whatever least achievable or affordable, that this jump in bunker costs threaten the most.

Then you have the likely emergence of a zero emissions tax strata to the market in certain places where black market or sanctions-restricted fuel oil can be supplied much, much cheaper than the taxed, legal stuff. Surely such a move would create a noteworthy demand increase for this under-the-table business. With my compliance manager hat on, this concerns me. Are we all ready to deal with this?

Let us not forget that, whilst bulk and box are doing very well right now, all the main shipping markets have been dealing with chronic tonnage oversupply for a couple of decades now and it is this surfeit of ships that has helped keep freight rates low. It isn't difficult therefore to see a mass cull of the ships belonging to the owners who could not afford to convert them to renewable fuels and couldn't afford to run them on fuel oil, even the low-sulphur fuels. Again, with an environmentalist hat on this is a good thing.

The problem is, with my credit manager hat on, I worry. Great swathes of the shipping market simply won't be able to pivot in time and could be lost.

This then creates a credit problem.

Our portfolio risk goes up. It is easy to say we will just tighten up on credit, but how much tighter can you go? The old mantra of  "safety through knowing your counterparty" only works until it doesn't. Instances of needing to arrest vessels because the owners/charterers cannot pay, will go up. Even if you get everything right and have your processes down, loss rate increases. Credit insurance premiums go up, so the cost of doing business goes up…

This then creates a financing problem.

The value proposition of bunkering as something to support or invest in becomes a bit more nebulous for the banks, credit insurers, trade financiers and listed-shareholders. This becomes even more difficult when you realise that if the herd move to zero emissions/.renewable fuels takes place that rapidly, then suppliers and ports are going to start needing gas barges, storage, new infrastructure and so on equally quickly and these things are neither cheap nor quick. Bunkering would need to enter an unprecedented capex phase to cope with the demand pivot. That money isn't free and it isn't a divine right.

Bunker companies will need to adapt. Regular readers of this site will be aware that Delta has recently been certified by the ISCC to trade biofuels and have alternative fuels right at the top of our agenda in terms of how we expand our business and can help reduce the GHG emissions that our business generates. We're working on further certifications to ensure we keep up with the latest environmental regulations and are able to trade the most sustainable feedstocks and products in the market. We have to go further in future and we will do that. Change is necessary, and we must all do our bit.

Sometimes doing the right thing is hard.

Sabrina Chao in the recent Lloyds List Podcast stressed the importance of collaboration between those who make the rules and those who need to abide by them and she is absolutely right. The hope is that the folks pressing ahead with this difficult move do think of or have dialogue with bunker companies and their customers and look at staggering or weighting the carbon taxes for a period long enough to let us all make the jump. What happens next is a shipping, credit, compliance, financing and management issue as well as an environmental imperative and those who do not or cannot adapt to it will struggle to survive. It will be interesting to see which way things go on this, and how quickly they do move.

All that remains is to applaud the decisionmakers for not kicking the carbon can down the road any longer and to ensure moving forward we are part of the solution to this, not part of the problem.