The Challenges

1. Shipping and the EnvironmentGHG Emissions from ShipsThe Industry’s PerspectivebyErik.Ranheim@INTERTANKO.comManager Research and ProjectsCyprus - 20 May 2009 The European Maritime Day

2. The Challenges • The world demands greener shipping • Emission from shipping is dirty and harmful for the health and the environment • Annex VI now in place • GHGs emission from shipping is not directly regulated under the Kyoto protocol • IMO assumed to regulate GHG emission • Shipping recognizes that action is necessary

3. Basics?

4. Backdrop World focus – basic crises • Food / resources crises • “If anything, international trade has reduced the price of food over the years through greater competition, and enhanced consumer purchasing power."WTO Director-General Pascal Lam • Economic crises • It is widely recognized that trade stimulate world economic growth, which is regarded to be necessary to avoid a: • Climate crises • Which easily can create a vicious circle of resources and economic crises Catch 22 - conflicting interests? Shipping in the middle with few friends?

5. World trade by shipping by type cargo bn tonne miles Source: Fearnleys

6. Trends – Co2 emission, energy use, global trade Index There has been strong growth in shipping Source: Fearnleys/INTERTANKO

7. World primary energy demand IEA the Reference Scenario 1000 million tonnes oil equivalents Source: IEA

8. Engine break specific fuel consumption g per kWh Source: Lloyd’s Register Fuel efficiency in shipping has has improved

9. CO2 Emissions per Unit Loadby Transport Mode Large Tanker 1 Large Containership 3 Railway 6 Coastal Carrier 11 Standard-size Commercial Truck 49 Small-size Commercial Truck 226 Airplane 398 0 100 200 300 400 Units Relative Shipping energy efficient Source:Ministry of Land, Infrastructure and Transport (Japan): The Survey on Transport Energy 2001/2002 MOL (Japan): Environmental and Social Report 2004 9

10. Everybody must reduce emission CO2 emission does not mean much unless related to the size of the company and the nature of its operation Shipping represents only some 3% of GHG emission, but Emission is made up a multitude of small contributors Shipping carries ~ 80% of goods transported and volumes shows an increasing trend and The challenge is, therefore, to reduce emission by improving efficiency without unduly affecting trade

11. The Stern Report • Conclusions: • Human-caused alterations to the global climate may result in reductions of global GDP of anywhere from 5 to 20% per year • Current global economic crisis shows how a relatively small reduction of output, such as 1 - 2% of GDP, may already have considerable implications for trade • Climate change may initially have small positive effect, but longer term the effects will be very damaging. The benefits of strong, early action outweigh the costs. • Policy of action to be based on 3 elements: • Technology • Behavioural change • Carbon pricing Lord Stern of Brentford Later the situation is believed to be much more serious that outlined in The Stern Report

12. Shipping’s tools to reduce GHGs? • Technology • Design index • Ship Efficiency Management Plan • Behavioural change • Operational index • Cooperation with charterers • Improving logistics • Pricing of carbon • Emission trading Scheme (ETS), to stimulate entrepreneurship? • Levy • Compensation fund No general agreement on MBIs

13. CO2 reduction – Trade increasing 40 - 80 % increase if no efficiency measures taken World Fleet Energy Consumption Bridgeable gap?? 20 - 30 % absolute reduction onshore On-shore target Reference

14. Ship sizes and emission400 GT and above • GT ships CO2 emission from ships • >400 60,000 ~ 90% • >500 45,000 ~ 87% • >2,000 30,000 ~ 80% • >10,000 16,000 ~ 67% Source: DnV

15. Fair to the 3rd worldEnergy (oil equivalents) consumption and CO2 emission per capita(not including hydro or nuclear) Oil equivalents/capita CO2 emission /capita .. the only serious defensible principle is equal emission rights per capita, adjusted for past emissions. Source: IEA

16. The options to reduce GHG emission

17. Energy Efficiency Design Index - EEDI • Require a minimum energy efficiency of new ships • Stimulates technical development • Separates technical and design based measures from operational and commercial measures • Compares the energy efficiency of an individual ship to similar ships which could have taken its cargo • Wide support in IMO, except some developing countries* • Supported by INTERTANKO Sea trial Esther Spirit You cannot manage what you cannot measure To be based on, installed power, specific fuel consumption, correction factors to account for specific design elements, speed, dwt, the contribution from auxiliary machinery EEDI = Fuel consumption / cargo x distance *Wants “common but differentiated responsibilities” agreed under UNFCCC and the Kyoto Protocol.

18. The CO2 operational index • An instrument for evaluating quantitatively the effect of operational fuel efficiency measures, such as speed reduction or optimum navigation • Charterers great influence • Necessary to evaluate SEMP • Not immediately mandatory • No direct link to design index

19. Cap-and-trade The quotas system has already contributed with investments in the non-Annex I countries which will reduce of CO2 emission by 1,800 m tonnes (1.2% annually) for the period 2008-12 Word emission 2004 27,000 m ts, today some 30,000 m ts CO2 has become a commodity and CO2 trading a multi billion (€50 bn) industry Carbon Point

20. Cap-and-trade not enough? • For the period until 2012 so many allowances are given that CO2 price will be zero, for the period 2013-20, tighter, average prize some €35/tn • According McKinsey $75 per tn is necessary to make a sufficiently number of emission reduction initiative profitable, $45/tn expected and this will only cause half the needed reduction • Legal requirements necessary to limit emission from certain sectors, in addition to • Public support to emission reducing measures Jørgen RandersProfessor Professor at the Norwegian School of Business Asdministation

21. Aviation ETS scheme • All* flights to/from EU included as of 2012 • Reduction 2012 3%, later 5% cut p.a.** • Operators must submit plans by 30.03.11 • Use of revenues generated by auctioning allowances decided by EU by members • Complemented by technical/ operational CO2 reducing measures • Further unilateral and other agreements on global measures to reduce greenhouse gas emissions from aviation. • On 7 October the Environment Committee of the European Parliament called for shipping to be included in the revision of the European Union's Emissions Trading Scheme (EU-ETS). * smallest planes excluded ** Reduction target based of average emissions 2004-06 Europe basis for shore based ETS - decided aviation ETS - shipping next?

22. + Contributes to reduced CO2 emission by definition, Links shipping into onshore/aviation ETS Market based pricing of carbon Direct purchase of CO2 units from Administrator reduces opportunity for evasion. With enforcement by port states, implementation can initially be limited to Annex 1 countries (80% of world trade). Equal treatment of international trading vessels > 400 GRT regardless of ownership, flag state, or port of origin. Enables ship operators to invest-or-buy Dynamic- may stimulate entrepreneurship - Marine ETS still at conceptual stage, allowance allocation and/or auctioning needs to be defined Will require definition of a ‘CAP’ Fluctuating carbon market price introduces investment uncertainty for GHG reduction technology. Requires set-up of trading administration and agreement on an effective monitoring, verification and enforcement system. Effective enforcement will require the set up of a data exchange process involving all participating states. Requires strict investment criteria and monitoring of fund expenditure. ‘Critical mass’ of Annex 1 and non-Annex 1 countries must be signatory to be effective Shipping very fragmented compared to current onshore and aviation ETS ETS pros and cons Little understood by shipping people, some support from shipping (Belgian, Italian, Norwegian, Swedish and UK Shipowners’ Associations) Source: OCIMF with some adaption

23. Reducing global warming • Global warming: • A global problem, to be addressed globally. • A long-run problem, the long-run levels of atmospheric concentrations of greenhouse gases more important than the level of emissions in any particular year, as with • The costs of reducing the level of emissions will be much lower if it is done efficiently, i.e. comprehensiveness, covering all sources of emissions, countries and ways of reducing atmospheric carbon concentrations. Then two conditions should be met: • we need a global agreement, and a global agreement will require equitable burden sharing. • The shadow price of carbon should be approximately the same in all uses, in all countries, and at all dates • A system of taxes on carbon (that would operate like the VAT), would be a better approach than the "Cap and Trade" system of carbon trading Joseph StiglitzNobel prize economics Professor at Columbia University (United States) Formerly Chief Economist at the World Bank

24. Reducing global warming • On the "Cap and Trade" system, was easy to implement for major sources of emissions, but harder to implement for the multitude of small sources. It is also giving rise to distortions and transactions costs. A key issue is how to allocate emission rights, which are a valuable asset, worth perhaps $2 trillion annually (or 5% of global GDP). This issue has become a major stumbling block in reaching a global agreement, and the attempt to avoid taking on full implications of this issue is one of the reasons for distortionary policies (or for carbon in different uses being priced differently). Joseph StiglitzNobel prize economics Professor at Columbia University (United States) Formerly Chief Economist at the World Bank

25. + Contributes to reduce emission as fund is to be used to buy emission reduction credits, and to stimulate the development of and the use of emission reduction technology Equal treatment of international trading vessels > 400 GRT regardless of ownership or flag state Conceptually simple to implement Provides ship owner some certainty over costs Use of bunker delivery note as evidence of payment facilitates enforcement. Accuracy of the bunker oil consumption baseline will improve as global compliance is achieved. Data can be used for Annex VI supply/demand studies. Introduces an ‘invest-or-pay’ concept - May not reflect the price of carbon. Requires monitoring and adjustment of levy to achieve desired outcome. ‘Critical mass’ of major bunker supplycountries must be signatory for effective implementation. Issues of principle, governance and administration need to be resolved. For reductions in GHG emissions to be achieved, strict investment criteria and monitoring of fund expenditure are required. Setting the contribution level to the fund is subject to political pressures. The complexity of the bunker supply chain makes collection of funds by the Administrator unlikely to be 100% effective. Once introduced, a levy is unlikely ever to be removed even if the CO2 reduction target is achieved – regarded as tax No current president GHG Compensation Fund pros and cons Supported by BIMCO, INTERCARGO, JSA, MAS, HKSOA, UGS and INERTANKO under certain preconditions a tax is “a sum of money demanded by a government for its support or for specific facilities or services, levied upon incomes, property, sales, etc”, Source: OCIMF with some adaption

26. Gasoline price at the pump Dollar per litre Levy

27. GHG Fund proposed by Denmark Mitigation/Adaptation project R&D for highly efficient ships IMO-TC International GHG Fund Contributions ( per unit fuel) Contributing to the adaptation of developing countries and to investment to reduce CO2 emission (Compatibility of CBDR principle and uniform application of rules )

28. MBIs - INTERTANKO PRINCIPLES 1. Effective in contributing to the reduction of total GHG- funds collected be used to buy credits in accordance with JI & CDM. - stimulate leading energy efficiency technologies- stimulate innovation and R&D - encourage terms and conditions to improve logistics 2. Environmentally sustainable without negative impact on global trade and growth and should:- be cost effective - be able to limit distortion of competition - give credit for actions already taken which have already resulted in GHG reductions 3. Comprehensive, efficient, transparent and credible enforcement & monitoring - ship specific and based on actual fuel burned - governed by IMO - binding and equally applicable to all ships - practical, transparent, fraud-free and easy to administer- able to demonstrate compliance through proper monitoring - certainty & predictability of the scheme

29. Other initiatives to reduce GHG emission

30. Ship Efficiency Management Plan SEMP • SEMP for each ship in operation • SEMP to contain: • Best practices to save energy • Voyage optimization • Propulsion Resistance Management Programme • Other technical/operational measures • Voluntary Operational Index (for each voyage & over a period of time/voyages) • When IMO SEMP guidelines completed, INTERTANKO will based on this work out SEMP for tankers by pooling information

31. Industry initiativesShip efficiency management plan • OCIMF “Energy Efficiency and Fuel Management” – an appendix to TMSA 2* • OCIMF opens for consideration of c/p clauses to optimise the voyage and other operations to save energy during transportation *TMSA Tanker Management Self Assessment

32. Best Practices Advice, input: *Class *Charterers *Yards *Other owners *Others Participation from a wide range of tankers Applicability/effectiveness Dynamic continuous improvement INTERTANKO Membership 3,100 tankers Various, individual measures Monitoring, assessment Adjustment/corrective action Depend on fleet characteristics INTERTANKO a forum for sharing information and experience

33. Conclusion

34. Conclusions on emission to air • Shipping wants to be proactive and reduce emissions • Annex VI – industry initiative using cleaner fuels also reduce GHG emission (alt. abatement technology) • Reducing GHG emission • High costs for marginal effects on existing ships • ETS - large part of shipping sceptical, shipping expected to mainly be a buyer of credits • Levy - many governments sceptical (taxation), no precedent world wide • SEMP main mean to reduce emission from existing ships • Shipping prepared to contribute but shipping involves more than just the owner/operator – there is a chain of responsibility

35. Cypriot oil tanker "Haven" burning in the Gulf of Genoa The sea get sick, but it never dies Healing is a matter of time, But also of opportunity Greek proverbs Thank you

36. Appendices

37. Leveraged Incentive Scheme for GHG Fund (proposed by Japan) Labeling (Evaluation of efficiency improvement) Mitigation/Adaptation project R&D for highly efficient ships IMO-TC Refund (based on evaluation) [ 60% ] [ 40% ] Assistance to infrastructure development International GHG Fund Human Resource development Contributions ( per unit fuel) Recycling capacity building Contributing to the adaptation of developing countries and to investment to reduce CO2 emission (Compatibility of CBDR principle and uniform application of rules ) Leveraged Incentive for Efficiency Improvement (improvement effort will be rewarded in the form of refund.

38. ETS proposal for the shipping industry suggested by SEAaT Allocate allowances to Industry Central Registry IMO UNFCCC EU ETS Global Sectoral Report • Flag • Ship • DOC • Fuel Quantity • CO2 Emissions • Allowances Countries Other Entities Verifier Grant allocation to ships Ships can buy AAUs from Countries via the IMO Ships can buy CERs & EUAs direct from other entities Carbon Management process Surrender Allowances ISM Audit Shipping Companies Other Shipping Companies Shipping companies can invest directly in CDMs and JIs Buy & Sell credits Quantity Carbon Factor Fuel Input

39. How would this work on a shipping company level? (suggested by SEAaT) Start of compliance period Allocation to industry UNFCCC IMO Allocation to company e.g 1000 tonnes based on fleet shape During the compliance period Shipping Company Operates fleet within 1000 tonnes allocation 100 tonnes 400 tonnes 200 tonnes 300 tonnes Bulk carrier Ro-Ro Aframax VLCC Actual 150 tonnes Actual 150 tonnes Actual 250 tonnes Actual 450 tonnes End of compliance period - reporting Total allocation = 1000 tonnes Total actual emissions = 1000 tonnes Therefore no credits to sell or buy

40. Best practice on tanker emissions & energy efficiency 1. Programme for measuring and monitoring ship efficiency 2. Voyage optimization programme • Speed selection optimization • Optimised route planning • Trim optimization (ESP 2 - 4%) 3. Propulsion Resistance Management Programme • Propeller Resistance • Hull Resistance (ESP 1 - 6%)

41. World primary oil demand IEA the Reference Scenario mbd Source: IEA