Chemicals Update: Global CO2 Emission Charge and Its Implications for The Chemical Tankers Market

Shipping may become one of the first sectors with a mandatory global charge for CO2 emissions. It is widely known that the industry, which carries more than 80% of global trade volumes, is responsible for more than a billion tons of CO2 every year and efforts have been made to bring it to the net-zero target.

Since the introduction of the VLSFO in Jan 2020, shipping companies have invested time, effort and money into research and tested various solutions to cut down fuel consumption and emissions. Whilst it is clear shipping must become greener, progress has been slow and uneven due to regulatory uncertainty, technical challenges, and costs.

Meanwhile, the idea of taxing the emissions has gathered support for several reasons. First, the revenue generated could be used to speed up the development of low- or zero-carbon solutions to decarbonize the sector. Second, it would address and (hopefully) fix the economic externality of greenhouse gas emissions, by putting a price on it which would be paid ultimately by the end consumers of the transported goods. Third, such a mechanism would naturally weed out the older and more inefficient vessels which would be less competitive than newer, more eco-friendly ones. Providing rebates on the carbon charges for the latter may strengthen the market incentive towards a more efficient fleet. Fourth, a mandatory charge provides the most straightforward solution to move the industry further down the path of decarbonization.

At least that’s the theory…

Over the past days, at its latest meeting, the International Maritime Organization (IMO) has inched closer to agreeing a mandatory global levy on CO2 emissions. While it is still far from final, some countries have proposed a minimum emissions charge of $150 per ton of CO2-equivalent. Others, including the EU, China and Canada have submitted separate proposals for greenhouse gas emissions (GHG) pricing. Once agreed, the IMO plans to implement such a levy in 2027.

By then, at least 10% of the chemical tanker fleet will be 25 years old and above, but the portion of the inefficient, non-eco fleet would likely be twice as big. This would matter, if the $150/mt charge on CO2 comes into force. For a J19 vessel (18-22,000t stainless steel chemical tanker) the emission charge per ton of cargo carried on the China to ARA run would be about $19/mt for the less efficient vessels against $13/mt for the eco-vessels, assuming the voyage goes via Suez Canal. For an MR on the voyage Korea to US Gulf via Panama Canal, the CO2 charge would be about $13/mt of cargo for the non-eco vessel versus $7/mt for the more modern designs. More comparisons are presented in the table below.

Rebates on the CO2 charges for more environmentally friendly vessels will further skew the market to their advantage. On long-haul voyages, larger and more efficient ships (MR-sized ships burning less than 15mt/day, for example) will be preferred whenever possible, as they would be more competitive and the CO2 charge per ton carried cargo will be a lot more palatable and easier to absorb.

Operators of older and less efficient tonnage will have to lower their costs (for example, employing less expensive labour, using cheaper capital) in order to be competitive, or will see themselves priced out of the market. Some may redirect their ships to the sanctioned trades where they would be able to fetch a premium. However, most would have to either retrofit their ships with low-carbon solutions or scrap them. As usual, scrapping will probably be lower than projected and a lot will depend on the actual amount of the levy and how, when and where it will be implemented. But this is yet another factor that may keep the chemical tankers market tight for the foreseeable future.

By Plamen Aleksandrov, Market Researcher, Chemicals, SSY