It may not have a maritime coastline, but in the coming years, Switzerland will be on the front line regarding measures intended to make sea-bound transport greener.
After the signing in 2015 of the Paris climate agreement, shipping, together with aviation, was largely left out of pledges set by the United Nations members. The argument was that its greenhouse gas (GHG) emissions could not be attributed to any specific nation.
“The view was that the sea is large and one could go on polluting. This view is very clearly coming to an end,” explains Giacomo Luciani, a professor specialising in commodities trading at the Graduate Institute in Geneva.
Maritime transport is expected to see emissions increase by as much as 250% by 2050, with the greatest rise in consumption in emerging markets, according to the International Maritime Organizationexternal link (IMO). That would considerably grow shipping’s share of total GHG emissions from the current 3%.
In April, the IMO – a specialised agency of the United Nations – adopted a non-binding agreement to curb emissions from ships by at least 50% below 2008 levels by 2050.
But the most pressing task at hand for shipping companies is to reduce the sulphur content of their fuel from 3.5% to 0.5% by 2020. That’s when an IMO cap will come into force. Sulphur emissions from ships are reportedly external linkresponsible for causing 150,000 premature deaths annually and 7.6 million asthma cases globally.
What implication for Switzerland?
As a leading global hub for international trading, Switzerland is also home to an important ecosystem for the shipping sector, including some of the major players in shipping, such as MSCexternal link, the second largest ship operator in the world, as well as many associated service businesses.
With less than two years before sulphur cap enters into force, Swiss companies including shippers and large trading companies are scrambling to decide how to be compliant.
Various alternatives exist for reducing sulphur emissions. Shipping companies may either switch from high sulphur fuel oil (HSFO) to low sulphur products such as gasoil or biofuels – which may involve changing or adapting engines – or virtually sulphur-free LNG (liquid natural gas), or install scrubbers, exhaust gas cleaning devices, prior to the cap deadline.
In June, the newspaper Le Temps wrote that the Geneva-based MSC planned to invest $2 billion (CHF1.9 billion) to install scrubbers on its fleet. Le Tempsexternal link (in French) calculated that this would be equivalent to fitting scrubbers on half of the company’s fleet.
The company’s media manager, Giles Broom did not comment on the article but told swissinfo.ch that MSC was planning to install the filters on a “significant portion of our fleet”. He said nonetheless that it was at the same time “evaluating all the other options, as for a fleet of this size, there is not one single solution”.
Meanwhile, Swiss-based commodities traders which rely heavily on shipping are also considering measures that need to be adopted in the next year and a half.
In an email Glencore wrote that the company was focused “on various aspects of preparation including supply agreements, blending of 0.5% fuels, scrubber financing as well as other IMO 2020 related projects”.
Trafigura, another trader, said in March it will install scrubbers on its new fleet of crude oil and product tankers.
Mercuria recently announced it would be offering shippers finance deals to install scrubbers. Such deals typically commit transporters to buy a certain amount of marine fuel at a discount which would then help pay off the scrubber within a reasonable period of time.
Others affected by the new regulations are businesses that operate refineries which may see losses if there is a shift away from the so-called bunker oil currently in use. Traders Vitol and Gunvor, both headquartered in Geneva, operate refineries in Europe.
At $5-10 million per vessel, scrubbers are considered the cheapest way for larger ships to comply with the 0.5% sulphur cap, also due to the lower cost of the HSFOs. This option compares to the much higher costs of fitting individual ships with clean-fuel-producing hydrocrackers – which break down petroleum molecules into simpler molecules – or build or upgrade refineries to produce lower sulphur fuels.
But some shippers are weary of possible regulatory changes that may ban exhaust gas cleaning devices in the future.
Meanwhile fitting ships with new technology or for new refineries to be built is a question of capacity, with concerns amongst some industry insiders about bottlenecks. It takes years before a new refinery becomes fully operational.
One expert at a Swiss trading house told swissinfo.ch that when it comes to compliant fuels, “there has been very little for shippers in terms of fuel blend samples so far. If you are a shipper you will not take on any fuel and run the risk of running into technical or operational issues on your vessel”.
So far, only 400 of an estimated 90,000 ships have installed scrubbers.
Professor Luciani admitted that compliance with the new rules will involve major investments to adapt newer vessels’ engines, scrapping older ships and building new vessels that run on alternative fuels.
Sea changes ahead
Ultimately, he says, shippers will have to fall in line with the new rules.
“They can’t use the old stuff any longer. They will be fined if they do. Period. It’s like leaded gasoline. What was the incentive to shift from leaded to unleaded gasoline? You were simply told that you couldn’t use leaded gasoline any more.”
Traders just react to the market and rules affecting supply and demand, the professor believes. “They buy and sell. They are indifferent. They would trade less of the high sulphur residual fuel oil and more of lower sulphur products. It doesn’t make a difference.”
The new regulations on sulphur emissions in marine transport, also known as IMO 2020, will cap these to 0.5% from January 2020, from the current 3.5%. But the limit still sharply exceeds the 0.001% sulphur limit authorised in diesel used in vehicles in Europe. In 2014, a report by the US environmental think tank National Resources Defence Council found that in China one container ship polluted as much as half a million trucks.