Climate challenges in the

shipping industry

The main alternative to using compliant fuel is to fit exhaust gas cleaning systems, also known as scrubbers, which remove sulphur oxides from the ship’s engine and boiler exhaust gases. There are two types of scrubber, open-loop and closed-loop. Open-loop scrubbers return washwater to the sea while residues in washwater from closedloop scrubbers must be discharged onshore. Discharge from open-loop scrubbers, however, must meet strict criteria and a growing number of ports and countries restrict or prohibit the discharge of washwater from open-loop scrubbers within their waters.

Insurers are also concerned that teething problems with scrubbers could lead to a surge in machinery damage claims under hull and machinery policies – machinery damage is already the top cause of shipping incidents over the past decade. Technical and operational issues with scrubbers have already led to a small number of claims. Scrubber waste is corrosive and there have been incidents where this corrosion has caused wastewater to flood engine rooms, ballast tanks and cargo holds.

With the rush to fit exhaust systems ahead of the IMO 2020 deadline, there have also been incidents resulting from design flaws and quality of workmanship, including issues with manufacture, testing and installation of scrubbers. The quality of scrubbers also varies between manufacturers and yards, while there is no data on the performance of scrubbers over their life cycle.

“We have seen a number of incidents related to scrubbers and the use of low sulphur fuel. It is early days and we are monitoring claims to identify any emerging issues,” says Captain Rahul Khanna, Global Head of Marine Risk Consulting at AGCS.

“As a relatively new technology, understandably there have been a number of issues with scrubbers, including incidents of flooding of machinery and engine rooms. A growing number of countries have also banned open loop scrubbers, which puts some ship-owners in a difficult position. They now face the choice of having to replace scrubbers or use compliant fuel.”

Losses related to scrubbers and bunker fuels are likely to materialise in the months and years ahead, says Khanna. “If incidents involving scrubbers and low sulphur fuel persist then insurers might have to consider machinery deductibles or additional premiums. Issues with bunker fuel, in particular, could lead to expensive claims in the future if engines are damaged by incorrect quality of fuel oil,” says Heinrich.

In the coming decades the shipping industry will need to undergo a radical transformation if it is to meet challenging targets to cut greenhouse gas emissions. Investments in green technology will need to begin immediately, with due consideration for the risk and safety implications.

With around 90% of world trade currently transported by sea, the maritime industry is a significant contributor to greenhouse gases. The global shipping fleet is estimated to account for 2.2% of global CO2 emissions [3] and without action, emissions from international shipping could grow between 50% and 250% by 2050, mainly due to the growth of the world maritime trade, according to the International Maritime Organization (IMO).

In April 2018, the IMO adopted Resolution MEPC.304(72), its initial strategy to reduce global shipping industry greenhouse gas emissions by at least 50% (from 2008 levels) by 2050. Meeting the target could require $1trn to $1.4trn of investment in cleaner fuels and technology between 2030 and 2050, or an annual average investment of $40bn to $60bn over the next 20 years, according to a study [4]. If the shipping industry was to fully decarbonize, it would require a further $400bn investment, or a total of $1.4trn to $1.9trn, by 2050.

The IMO has made progress in implementing the strategy, and has already put forward plans to strengthen the existing energy efficiency mandatory requirements for some categories of new ships. It has bought forward targets from 2025 to 2022 for several ship types – including container ships, general cargo ships and LNG carriers. The reduction rate for container ships, for example, is set at 50% for vessels of 200,000 dwt and above, from 2022, instead of 30% from 2025.

Targets to cut emissions will shape risk for the shipping industry for years to come, according to Captain Rahul Khanna, Global Head of Marine Risk Consulting at AGCS. “IMO 2020, which aims to cut sulphur oxide emissions by 80%, has crossed a significant milestone, but the bigger objective is to tackle climate change and drastically reduce emissions of greenhouse gases. In the past the shipping industry has been criticized for not going far enough, and quickly enough, to address its carbon emissions, but the IMO proposals to halve CO2 emissions by 2050 should be taken seriously,” says Khanna.

De-carbonization is, however, very different from reducing sulphur emissions, which can be achieved through relatively simple measures, such as changing fuel or technical solutions like scrubbers, explains Khanna. “A 50% cut in greenhouse gas emissions is a much more challenging target to achieve, and one that will require the shipping industry to radically change fuels, engine technology and even the design of vessels. There is no single easy solution to this pressing issue.”

Each form of energy and propulsion has a different carbon footprint over its life-cycle. For example, vessels could reduce their emissions by switching to electric power, but batteries are carbon-intensive to produce, and the electric power will need to come from renewable sources. A growing number of vessels are powered by LNG, but this too has a carbon footprint and would not be enough on its own to achieve a 50% cut in emissions.

In addition to the technical challenge, de-carbonization will have regulatory, operational and reputational (corporate social responsibility) implications for shipping companies. Investors are increasingly shunning carbon-intensive industries, while regulators and investors are insisting on more transparent reporting of climate change risks and exposures.

Within shipping, the Poseidon Principles have been established to provide a framework to integrate climate change considerations into lending decisions and ship financing, promoting de-carbonization of shipping. “If the shipping industry is to meet the target of cutting carbon emissions by 50% it will need to start today. It is not possible to achieve these ambitious targets with today’s technology and vessels but it is encouraging to see that there is already a lot of work going on within the shipping industry to come up with solutions,” says Khanna.

“However, there is the risk that all the progress on addressing climate change could now stall with the focus on the coronavirus pandemic. There is a danger the shipping industry could lose momentum in its efforts to tackle greenhouse gasses and lose sight of the emission-cutting targets and this must not be allowed to happen.”

Record water levels on the Mississippi river in 2019 resulted in damage to vessels and shore side infrastructure, as well as causing major disruption for supply chains. As weather becomes more unpredictable with climate change, such events are likely to have a greater impact on trade and marine insurance claims. The Mississippi River and its tributaries form one of the most important commercial waterways in North America, and a river system that is critical to the transport of agricultural and manufactured goods across the country (for example, 60% of all export-bound US corn and soybeans are shipped along the river to terminals on the Gulf Coast) [5]. However, 2019 saw year-long disruption on the Mississippi River from high water levels, floods, fog and ice jams.

Record rainfall [6] in the midwest caused unprecedented volumes of water to flow into the river system in early 2019 – the volume was 64% greater than the 10-year average. The Mississippi River recorded its longest flood stage in its history, easily surpassing the 1927 flood record of 152 days. The high water levels and flooding closed locks and made large parts of the river unnavigable, forcing many shippers to move grain to ports by rail or by truck or accept lower prices in the domestic market, missing export opportunities.

According to Andrew Kinsey, Senior Marine Risk Consultant at AGCS, disruption on the Mississippi River in 2019 is just the latest example of how the influence of climate change can now be seen in marine claims. The 2019 floods caused at least $6.2bn [7] in damage, according to the National Oceanic and Atmospheric Administration (NOAA). It was one of 14 separate billion dollar weather and climate disaster events to hit the US in 2019.

“Last year was a historic year for water levels on the Mississippi River, causing delays on the river and congestion at locks. The Mississippi River and Ohio River floods in 2019 impacted the entire river system and supply chain, from barges delayed upstream through to the bulkers waiting for cargo at New Orleans,” says Kinsey. “We continue to see loss of life and a large financial impact from weather-related claims, in part a consequence of climate change. For example, the impact of fog and high water events on the Mississippi River caused the foundering of vessels, as well as damage to shore side infrastructure and warehouses.”