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Attempting to realistically address Emissions from International Trade

(Speech delivered by HCS President George A. Gratsos at the seminar “Green Ship of the Future” organized by the Danish Embassy in cooperation with the Danish Export Association, on 23 June 2009)

Your Excellency,
Ladies and gentlemen,

Thank you for inviting me to speak at this Seminar organized by the Danish Embassy in cooperation with the Danish Export Association.

The Greek beneficially controlled fleet is the largest in the world, under the circumstances our expertise with regard to the operation of ships is quite substantial.

The world today is very concerned, and rightly so, about global warming and the environment. Shipping is the most cost and energy efficient form of transport which enables world trade and prosperity, regardless though we must also do our fair share in an effort to combat global warming. On this matter Greek shipowners have been closely following all developments and have had discussions with eminent scientists from around the world.

Through trade, world prosperity and therefore the standard of living of all peoples has improved. The enabler of this prosperity is shipping. It is therefore important that the measures that shipping will take to improve its performance do not reverse this process, or cause a modal shift to less energy efficient means of transport.

Before attempting to face this challenge one must have a full and clear understanding of all the facets of shipping. To this end I will dwell on some of the more important.

1. Ships do not emit when they are immobile, they move, and emit, only to execute a specific voyage because someone or something needs to be transported. Therefore the most important parameter is that of the carbon footprint of the cargo. It is the receiver of the cargo that decides on its origin, volume, when he wants it shipped and when he wants it delivered. He also pays for its shipment. The shipowner has no opinion on these matters. He negotiates the freight rate and executes the voyage instructions given.

2. The cost efficiency of shipping has been achieved over time with the construction of ever lager and therefore more efficient ships. In general, cost efficiency goes hand in hand with energy efficiency for ships of the same speed. Ships and ports have evolved over time to accommodate the cargo throughput required. The most efficient ships for the local conditions are used. Tramp shipping, through triangulation achieved by the closest ship having a cost advantage in the negotiation of a trip, ensures this efficiency. Ships engaged in regular service are of the optimum size as required by the trade. Commercial operators and shipowners are no fools. The allusions made by the “Second IMO GHG Study 2009” in paragraph 5.22 that “energy efficiency can be improved by using the right ships in a transport system” are misleading. The authors do not appear to take into account other cost factors such as off-loading containers from a mother ship to a feeder and the necessary return of the empty containers, the shipments of smaller quantities and at different times as required by some receivers etc.

3. When discussing the important matter of global warming and the contribution of the GHG from ships, the international community should be aware of all technical and scientific parameters involved and be in a position to evaluate trade-offs, in order to establish measures that in fact address global warming. For example the reduction of NOx from engines entails tuning that increases the engine’s specific consumption. Therefore to reduce NOx, CO2 emissions will increase. According to IAPECA, in order to produce sulfur free distillate the CO2 emissions from refineries will increase by 15% or so. Furthermore sulfur oxides act as a sun shield and have a cooling effect on the atmosphere. Therefore, on balance, it may be inappropriate to legislate the worldwide use of sulfur free distillates. It may be environmentally more beneficial to allow for the presently available bunkers to be used in the open seas.

4. The great majority of trade optimized ships are built on a production line basis as standard designs. The shipowner has little say in their hull form and machinery design. It should be noted that identical sisterships operated by the same company sometimes have different speed and consumption descriptions. After the ship is built, improvements in the performance of the hull and the propulsion system through modifications proposed by some, are not easy. They are costly and, since they are usually not guaranteed by the vendors, the uncertainty risk is large. The suggestion for the use of wind power should consider the unsuitability of such installations on ships that require clear decks. Furthermore reliability and ease of handling in commercial shipping is of the utmost importance.

5. Ship consumption, as a general rule, varies with the square of the speed for the distance traveled. So does the fuel bill the operator pays. This has been known for a very long time. The fixed (daily) costs and the variable (fuel) cost structure indicate that at a speed, daily income is maximized. Ship commercial operators will trade at the speed they maximize the daily income from the freight collected. The ratio of the FIO freight rate (freight level) per tonne of cargo carried to the cost per tonne of the fuel burned is the factor that determines the optimum trading speed for any ship. Since the cost of bunkers is in the denominator, the higher the cost of fuel the slower the ships will trade. The slower a ship trades the less it will emit. Therefore the principal determinant of a ship’s speed is the cost of fuel. Both in 1980 and 2008, when fuel prices went through the roof, ship speeds were reduced.

6. With the high fuel prices in 1980, a major breakthrough was also achieved in engine design. If I remember correctly it was shortly thereafter, in 1981, that Burmeister & Wain, a Danish engineering company, started manufacturing main engines having a specific fuel consumption about 15% less than previous designs. This lead was subsequently followed by others.

7. Ships, their machinery and equipment are maintained by their owners in compliance with all international requirements and according to the manufacturers’ instructions, therefore it must be assumed that the ship and its machinery are operating as designed. A higher price of fuel is incentive enough to economize in the unnecessary use of energy. If he achieves greater energy efficiency the shipowner will describe his ship’s consumption at lesser values for any given speed and therefore command a better time charter rate.

8. Ships, when fixed on time charter are fixed on the basis of a description given by the owners that advises of the ship’s speed and consumption at various speeds, both laden or in ballast as well as intermediate conditions. The ship is fixed on the basis of this description. Sister ships with different speed and consumption description will get different time charter rates ceteris paribus. When on time charter the fuel is paid by the time charterer. If the ship underperforms, i.e. makes less speed or consumes more fuel than is warranted by its description, the time charterer claims the underperformance or over-consumption from the shipowner. This exists in all contracts and is supported by case law. It is a pity that the “Second IMO GHG Study 2009” did not research this when writing para 5.25. which says that: in view of the fact that when on time charter the charerer pays for the fuel, this is an incentive for the technical operator to skimp on maintenance1.

9. Shipping, other than the international conventions has, over centuries, created a balanced, well developed, tried and tested legal system which must be taken into consideration. In the same paragraph the IMO GHG Study fails to realize the concept and law of an “arrived ship”, the concept of “laytime” and the law of “demurrage”, which is the time waiting in port longer than that agreed in the contract. It is self evident that a ship must be remunerated if it stays in port longer than the contracted time. Demurrage is paid in FIO fixtures by the shipper and the receiver depending on where it is incurred. The amounts involved are incentive enough for them to optimize their scheduling. It is not paid by container ships or liners, because of different contracts which include this risk and are therefore priced differently. What the authors allude to is the “just in time” arrival of the ship. Such good timing usually cannot happen because of the purchasing decisions of the receivers, infrastructure problems etc. The decisions for these matters are taken by others over who the shipowner or the commercial operator has no control. What though can be done is to dissuade, through higher bunker prices or port slotting arrangements, that ships race to port to beat each other as “arrived ships”.

It is only through a good and in depth understanding of ships and shipping that emissions from shipping can be addressed.

Ship Design Index
An important beginning is the design of more energy efficient ships. The Energy Efficiency Design Index is a good idea if a proper formula is created.

Throughout the years people have designed ships to various formulae to optimize dues or, in the case of yachts to handicap different designs. Invariably the outcome was the creation of rule beating craft but not necessarily of more efficient craft. It is therefore very important to devise the right formula. In commercial shipping, recent examples of such designs are the Open Shelter Deck general cargo ship, or the carriage of containers on deck so that they are not measured in port or canal dues etc.. These taxing formulas were later corrected.

The formula presently being discussed at IMO appears to be only an index that estimates the consumption required by various power sources on board per deadweight and speed. It is therefore insufficient to characterize the ship’s designed energy efficiency. As the formula is devised, all you have to do is to limit the ship’s speed and the ship design automatically becomes more energy efficient, which is not what a ship design index should be meant to achieve.

All ships are more energy efficient when they go slower. They may not though be more cost efficient. A ship’s optimum speed for any voyage depends on the ratio of the FIO freight rate to the bunker price. This, as mentioned previously, is the only criterion that influences the trip speed.

Ships’ energy efficiency should be compared at the category’s perceived desired operating speed, draft and therefore carrying capacity, as per the most energy efficient ships being produced today, and at a weather spectrum that approximates operating conditions. A more efficient ship design should consume less for the same deadweight at the same speed. Furthermore, much like the automotive industry, shipyards should be penalized for building ships of lesser overall efficiency. This is the only way forward.

The overall power generating systems on board (main engine, generators etc.) should be evaluated at various conditions of load. It is clear for example that, an energy retrieving system from the main engine’s exhaust could be used to power steam turbines to generate electricity or even transfer power to the propulsion system.

Such a system would be optimized for a certain engine load. When the price of bunkers substantially increases it would make no economic sense to operate the ship at the design speed. The exhaust energy would be substantially less at a lower speed therefore also the steam production, thus the system would not work as designed and the power generation would be substantially less. This would require other power sources which emit more to be used. Furthermore if more heat is not supplied the superheater elements would not work efficiently to supply the dry steam required thus, the wet steam produced would damage the turbine.

Under the circumstances a whole spectrum of possible operating conditions will have to be evaluated before such systems, which have existed for many decades, are deemed to operate effectively under various conditions and are therefore considered a worthwhile investment.

Beyond the ship design index, various operational and other indexes are being designed to satisfy some unclear perceived needs.

Going forward
If we want to address the problem we must focus on its root cause which is the behavior of the:

• receiver who wants to buy goods or commodities at the lowest CIF cost from wherever they are available, and the
• commercial operator who will choose the ship he charters from its description and run it at the speed at which he maximizes his profit.

These are the players that should be targeted.

On the other hand the shipowner or the technical operator has every incentive to improve his ship’s trading description in order to be able to time charter the ship at a higher rate. Shipping law is clear on the shipowner’s obligation to ensure that the ship performs as per her description. The remedies if she doesn’t are well known.

Any measure, to be effective, must be targeted and identifiable. Altering people’s behavior can only be achieved by making each person pay for the carbon footprint of his choice. The only way to achieve this behavioral change is through a bunker contribution or levy. The proceeds of such a contribution could be mainly towards ship R&D, as suggested by the Danish submission to IMO or additionally to other projects addressing global warming. The system, since the amount of the contribution will be decided on by a panel, can easily be adjusted to incorporate a cap for pricing purposes.

All other systems proposed have no focus, are complicated and are inappropriate for shipping.

Measures to improve the transport sector’s efficiency through higher fuel prices have been attempted before with good results. The tax on fuel levied in Europe and Japan as compared to little or no tax in the United States, helped improve the energy efficiency of the automobiles produced. This led to the marginalization of the American car manufacturers. Similarly it has been noted that when fuel prices rise, people limit their car trips. Ship engines and hull efficiency improved substantially in the early ‘80s in the wake of higher fuel costs.

On the other hand emission trading schemes appear to benefit mainly the sellers of the carbon credits, giving incentive for factories to relocate. Their contribution in addressing global warming appears limited.

Concluding, internalizing external costs is a sound economic principle that helps rebalance markets to provide for greater overall efficiency. For this to happen the cost factors must be correctly targeted.

Before deciding though to impose any market based instrument on shipping, nations should weigh the possible effect that such measures may have on globalization and world prosperity. The process of globalization is too important to risk its reversal.

Thank you

George A. Gratsos
President of the Hellenic Chamber of Shipping

1. “…..In cases where the ships are operated by a different company than the commercial operator, the technical operator may tend to minimize time in drydock (to minimize off hire cost) and other maintenance costs (e.g., painting costs) while at the same time handing the fuel bill to the commercial operator. It is evident that that contractual arrangements and incentives have significant influence on operation and hence on efficiency.”

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