Earlier this month, the UN International Maritime Organisation (IMO) reached an agreement to reduce carbon emissions in the shipping industry by 50% from 2008 levels by 2050. The implementation strategy for this plan is not expected to be finalized until 2023 and it has been suggested that it may be subject to review in 2028. However, mandatory rules have been put in place by the IMO for new vessels to increase fuel efficiency in order to reduce carbon emissions from ship engines. Some proposed measures for the plan “include speed reductions and tougher energy efficiency design rules in the near term, market-based levies and subsidies in the mid-term, and the development of zero-emission fuels further down the line (Stefanini).” The next meeting of the IMO’s environmental committee will not be until October.
Outside of the shipping and ship manufacturing industries, this new agreement is likely to impact the global supply chain of many companies engaged in international trade. Depending on the requirements agreed upon, it is likely the cost of transporting goods through shipping channels will increase to cover new ships and compliance upgrades to existing ships. Additionally, one of the proposed short-term measures is the speed reduction of shipping, which will slow delivery time significantly to international markets and increase product lead time. These cost increases and delivery delays may result in price increases for imported products and may reduce the viability of international trade with certain countries for some companies.
Chile and Peru have already spoken out against the short-term speed reductions to reduce emissions as these would negatively impact the export of avocados, cherries, and blueberries. These countries have submitted a 13-page document to the IMO requesting that the organization work on developing an “optimal speed” rather than a “speed reduction” while detailing the impact on fruit shipping, especially to specific geographies. One scenario that Chile provided in this document was the example of shipping cherries from Chile to Shanghai, China, which currently takes 33 days, but at the proposed slower speed would take 44 days, which is likely to impact fruit quality. In considering products like fruit, it is possible that these countries will need to discontinue exporting to countries that are too far away to maintain quality or will need to raise prices to make up for the cost of spoilage and additional man hours for the ship’s crew.
This change in the regulatory environment of shipping will impact a large number of supply chains for companies that are manufacturing or marketing globally. Additionally, the loss of cost and time efficiencies for exporters to specific countries may be advantageous for domestic companies that will not incur these additional costs. Going forward, businesses need to be aware of the potential cost changes that may impact their international sourcing or trade. In anticipation of these changes, companies should consider building additional margin into pricing in new international markets so that prices do not need to be raised in the future. Additionally, this may make some international markets less desirable for companies to enter if there is a long distance over which goods will need to be shipped.
Stefanini, Sara. Shipping to halve carbon footprint by 2050 under first sector-wide climate strategy. Climate Home News. http://www.climatechangenews.com/2018/04/13/shipping-halve-carbon-footprint-2050-first-sector-wide-climate-strategy/.