Australia: Trade & Transport Bulletin - Shipping And Climate Change Impacts

SHIPPING, THE CPRS AND CLIMATE CHANGE IMPACTS

Climate change is a significant issue for the shipping industry in Australia and worldwide. Growing media scrutiny following policy initiatives by the International Maritime Organisation, the proposed Australian Carbon Pollution Reduction Scheme (CPRS), an inquiry looking at coastal shipping and incidents such as the recent Moreton Bay oil spill, means the industry is being called upon to take immediate action.

At present, CO2 emissions from international shipping amount to less that 3% of the total world's emissions from all sources.¹ This is a very modest contribution, but in recent years shipping has been targeted by the media with the perception that, collectively, ships emit as much CO2 as some individual industrialized countries.

The problem faced by international shipping, from a climate change perspective, is that the demand for shipping continues to grow (even in the current global financial crisis) especially as the economies of China, India and Brazil continue to expand. In order to address the contribution of shipping to climate change, the industry is looking at a combination of efficiency measures and market-based measures.²

INTERNATIONAL CONTEXT

The International Maritime Organisation (IMO), with the support of the International Chamber of Shipping, the International Chamber of Commerce, national shipowners' associations, technical groups, NGOs and standard authorities such as the Australian Maritime Safety Authority, have been working fiercely to develop a workable global solution to address shipping's contribution to climate change.

The IMO is under increasing pressure from the European Union (EU) to develop a response to greenhouse gas emissions from shipping. The EU has indicated that if the IMO does not agree to enforce a binding emission reduction target in 2009 then the EU will take action to include shipping in the third phase of the EU Emissions Trading Scheme (EU ETS). The EU has already taken similar action with the aviation sector. At present shipping is not included in the January 2009 EU draft legislation on the operation of the EU ETS in its third phase from 2013 to 2020.

At the first inter-sessional meeting of IMO's Working Group on Greenhouse Gas Emissions from Ships, held in Oslo in late June 2008, good progress was made towards developing a mandatory emission control regime. Over 200 delegates with a range of expertise were charged with the task of developing the technical basis for and drafts of reduction mechanisms that were to be considered by IMO's Marine Environment Protection Committee (MEPC) at their meeting in October 2008 (MEPC 58). The regulatory package developed by the IMO's Working Group includes technical and operational measures addressing the energy efficiency of ships.

At the MEPC 58 meeting, MEPC approved part of the regulatory package with the balance to be decided on at the inter-sessional meeting of the IMO Working Group on 9 -13 March 2009. The 9 -13 March meeting primarily focused on the technical elements of reducing greenhouse gas emissions in respect to shipping. The outcomes of this meeting are eagerly awaited.

AUSTRALIAN CONTEXT

The House of Representative Standing Committee on Infrastructure, Transport, Regional Development and Local Government recently held an inquiry into coastal shipping policy and regulation (Inquiry).

The Inquiry's report entitled Rebuilding Australia's Coastal Shipping Industry (dated October 2008), states transport related emissions account for approximately 15% of Australia's emissions. According to the report, approximately 6% of Australia's emissions are freight related with shipping accounting for approximately 4% of the freight related emissions. The above statistics suggest that shipping is one of the more efficient modes of transport in terms of tonnes of freight (and passengers) moved per tonne of emissions created.

The Inquiry's report also recommended that the Australian Commonwealth Scientific and Industrial Research Organisation should work with independent scientists to study and report on the 'magnitude and location(s) of significant pollution from ship emissions in Australia'.

In addition, the Inquiry outlined its concern with the Government's proposal that the CPRS would only apply to the domestic trade and not the foreign trade, in which permit ships operate. The Inquiry stated that:

HOW SHIPPING IS DEALT WITH IN THE CPRS

Transport emissions will be covered by the CPRS. In particular, the CPRS will apply to upstream transport fuel suppliers but only in respect to domestic emissions, as defined under the international accounting framework.

Under the international greenhouse gas accounting rules, fuels used for international shipping voyages (known as 'international bunker fuels') are not counted in countries' national inventories. This includes fuels used on domestic legs of international voyages.

In submissions made to the Department of Climate Change, rail and maritime industry stakeholders expressed concern about the definition of international bunker fuel.³ Some stakeholders argued that competitive distortions will arise if the CPRS covers domestic maritime fuels but excludes fuels used by international ships carrying domestic maritime cargo.⁴ Similarly, rail industry stakeholders argued that long distance rail, particularly between Perth and Melbourne, could be at a competitive disadvantage unless an equivalent charge is applied to international ships carrying domestic cargo.⁵

The Government indicated in its White Paper on the CPRS (released in December 2008) that it agreed with the concerns raised by stakeholders and would put in place measures to ensure all shipping that carries domestic cargo faces an equivalent carbon cost. These measures have not been included in the exposure draft of the Carbon Pollution Reduction Scheme Bill (draft Bill) (released in February 2009). However, the Government has outlined in the commentary accompanying the draft Bill that there will be legislation released some time prior to the finalisation of the CPRS which will implement 'a maritime levy on emissions from shipping services provided by vessels engaged in international voyages carrying domestic cargo and domestic passengers'.

Section 12 of the draft Bill also provides that the CPRS will not apply to the extent that its application would be inconsistent with the exercise of the rights of foreign ships in the territorial sea, the exclusive economic zone or the waters of the continental shelf in accordance with the United Nations Convention on the Law of the Sea.

Under the CPRS, shipping companies are not directly liable for the emissions produced by their ships in transporting goods. Rather the companies that supply the fuel to the shipping companies will be liable for the greenhouse gas emissions resulting from the combustion of the fuel. This could lead to increases in the cost of fuel as the upstream fuel suppliers look to pass their carbon liabilities to consumers. It may also have an impact on the cost of material for building ships and other inputs needed for the shipping industry.

Depending on the proposal put forward by the Government with respect to international ships carrying domestic cargo/passengers, the CPRS may also have an impact on the competitiveness of the Australian shipping industry. Submissions are due on the draft Bill by 14 April 2009.

SHIPPING AND CLIMATE CHANGE IMPACTS

In addition to impacts associated with carbon regulation, the change in weather patterns caused by climate change will also have a significant impact on the shipping industry. Some of the possible impacts of climate change are:

• An increase in the frequency and intensity of extreme weather events. This may have an impact on the physical life of the ships, lead to a rise in loss or damage to cargo and also may require changes in the ship's design and specifications. Extreme weather events may also cause damage to ports and other shipping infrastructure, leading to more frequent port closures and an increase in the costs of maintaining and repairing the infrastructure.
• An increase in environmental incidents as a consequence of severe weather events. Take, for example, the recent oil spill and loss of a potentially hazardous cargo from the Pacific Adventurer that occurred at Moreton Bay in South East Queensland said to be caused or contributed to by Cyclone Hamish.
• Rising sea levels which may cause an increase in the frequency and intensity of storm surges and increase wave intensity. This may have an impact on ports and any other maritime infrastructure close to the coast. The impacts may include an increase in damage to port facilities and infrastructure and more frequent port closures due to an increase in the frequency and intensity of flooding.
• Additional risks to navigation of ships due to changes in the sea state and an increase in icebergs. This will occur as ice sheets and glaciers continue to break down because of a rise in global temperatures. Some inland waterways may also be impacted by varying water levels, affecting their navigability. Shipping routes could also need to be changed if frequently disrupted, with any access to changed routes needing to be renegotiated.
• Changes in wind velocity and patterns, which may lead to higher fuel consumption by ships.

All of the above impacts may lead to an increase in costs for the shipping industry through damage to infrastructure and ships, loss of cargo, increase in the cost of insurance and issues regarding the availability of insurance in certain circumstances. Marine insurance companies may well see an increase in climate change related claims. It is possible that over time, the impacts of climate change may make marine insurance untenable or prohibitively expensive in certain situations due to the high degree of risk that an accident or extreme weather event may occur.

Footnotes

1 IMO, Climate Change: A challenge for IMO too, September 2008; p 15.

2 IMO, Climate Change: A challenge for IMO too, September 2008; p 15.

3 Australian Government, Carbon Pollution Reduction Scheme: Australia's Low Pollution Future White Paper, volume 1, December 2008; pp 6 -11 to 6-12.

4 Australian Government, Carbon Pollution Reduction Scheme: Australia's Low Pollution Future White Paper, volume 1, December 2008; pp 6 -11 to 6-12.

5 Australian Government, Carbon Pollution Reduction Scheme: Australia's Low Pollution Future White Paper, volume 1, December 2008; pp 6 -11 to 6-12

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