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Retrofitting to comply with new emission caps. Could ‘Green Finance’ be the answer?

Retrofitting to comply with new emission caps. Could 'Green Finance' be the answer

The IMO reckons that ships produce about 3% of global CO2 emissions, hence the move to reduce the current cap on sulphur emissions from 3.5% (in effect from 1 January 2012) to 0.5% as of 2020.  In addition to this, European shipping activities will come under the EU’s emissions trading scheme from 2021.

A failure to comply with these more stringent emission standards could result in shipowners not being able to use their ships.   However, there is currently little incentive for shipowners to spend money on retrofitting when it is charterers who benefit from fuel savings.

Once the new caps come into place, there will be two main options for shipowners to keep their existing ships in service:

  1. Spend significantly more on lower sulphur content fuel; or
  2. Retrofit ships with ‘scrubbers’ that eliminate pollutants (meaning that they can continue to use the same fuel)

The main issues with option 1 are that lower sulphur fuel is estimated to cost about three times as much as the fuel currently used by ships.  Unless there is significant retrofitting of ships the problem will only get worse and low sulphur fuel could become even more expensive.   This could have an impact on freight rates and charterers may struggle to obtain the necessary fuel for the vessel, which could result in off-hire issues.

In view of the above, retrofitting becomes more justifiable and ‘Green Financing’ may offer a solution that makes retrofitting an acceptable option for both shipowners and charterers.

The Sustainable Shipping Initiative has devised a form of green financing called “Save as you Sail”. The purpose of the scheme is to enable both shipowners and charterers to benefit from the efficiency savings that will come as a result of investing in the necessary retrofitting. The idea is that charterers will pay a fee on top of freight to shipowners that takes into account the expected fuel savings they will benefit from by virtue of the retrofitting.  This way, the charterers benefit (from efficiency savings) and shipowners are rewarded for making the changes.  In June 2016 the European Investment Bank announced EUR 250m funding for retrofits of this nature, and it is expected that other financers will follow suit. Perhaps Green Finance will provide the necessary incentive for shipowners to invest in retrofitting.

Whilst it is unclear at this stage exactly how the situation will develop as we get closer to 2020, what is clear is that as we approach that date, non-retrofitted ships will be worth considerably less than retrofitted ships.   Doing nothing is unlikely to be a viable option for ship owners.

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