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IMO 2020: The Big Shipping Shake-Up

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IMO 2020 shipping Infographic

IMO 2020: The Big Shipping Shake-Up

Over 90% of all global trade takes place on our oceans.

Unfortunately, the network of 59,000 vessels powering international commerce runs on sulfur-laden bunker fuel, and resulting emissions are causing problems on dry land.

As today’s infographic by Breakwave Advisors demonstrates, new emissions regulations taking effect in 2020 will have a big impact on the world’s massive fleet of marine shipping vessels.

The Regulatory Impact

The International Maritime Organization (IMO) – the UN agency responsible for ensuring a clean, safe, and efficient global shipping industry – will be implementing new regulations that will have massive impact on maritime shipping.

The regulations, dubbed IMO 2020, will enforce a 0.5% sulfur emissions cap worldwide starting January 1, 2020 ─ a dramatic decrease from the current emissions cap of 3.5%.

Here are a few ways marine fuel will likely be affected by these regulations:

  • High-sulfur fuel oil will drop in price as the demand drops dramatically after January 1, 2020
  • Diesel, a low-sulfur fuel oil, will be in higher demand and should see a price increase
  • Refiners should also expect higher profits as refining runs increase to satisfy the new regulations

The Economic Impact

IMO 2020 will be one of the most dramatic fuel regulation changes ever implemented, with a significant impact on the global economy.

New regulations are certain to influence freight rates ─ the fees charged for delivering cargo from place to place. These rates can fluctuate depending on:

  • Time and distance between ports
  • Weight and density of the cargo
  • Freight classification
  • Mode of transport
  • Tariffs and taxes
  • Fuel costs

Rising fuel costs means rising freight rates, with much of these costs being passed to consumers.

In a full compliance scenario, we estimate the total impact to consumer wallets in 2020 could be around US$240 billion.

─ Goldman Sachs

The Environmental Impact

Not surprisingly, the world’s 59,000 transport ships, oil tankers, and cargo ships have a consequential impact on the environment.

Bunker fuel accounts for 7% of transportation oil consumption (~3.5 million barrels/day). Burning this fuel generates about 90% of all sulfur oxide and dioxide (SOx and SO2) emissions globally. In fact, the world’s 15 largest ships produce more SOx and SO2 emissions than every car combined.

These sulfur emissions can cause several harmful side effects on land ─ acid rain, smog, crop failures, and many respiratory illnesses such as lung cancer and asthma.

Changing Currents in the Shipping Sector

As IMO 2020’s implementation date nears, shippers have a few courses of action to become compliant and manage costs.

1) Switch to low-sulfur fuel

Bunker fuel use in the shipping industry was 3.5 million barrels per day in 2018, representing roughly 5% of global fuel demand.

Annual bunker fuel costs are predicted to rise by US$60 billion in 2020, a nearly 25% increase from 2019. Price increases this significant will directly impact freight rates ─ with no guarantee that fuel will always be available.

2) Slower Travel, Less Capacity

The costs of refining low-sulfur fuel will increase fuel prices. To offset this, shippers often travel at slower speeds.

For example, large ships might burn 280-300 metric tons of high-sulfur fuel oil (HSFO) a day at high speeds, but only 80-90 metric tons a day at slower speeds. Slower travel may cut costs and help reduce emissions, but it also decreases the capacity these vessels can transport due to longer travel times, which shrinks overall profit margins.

3) Refueling Detours

Adequate fuel supply will be a primary concern for shippers once IMO 2020 takes effect. Fuel shortages would cause inefficiencies and increase freight rates even more, as ships would be forced to detour to refuel more often.

4) Installing Scrubbers

A loophole of IMO 2020 is that emissions are regulated, not the actual sulfur content of fuel itself.

Rather than burning more expensive fuel, many shippers may decide to “capture” sulfur before it enters the environment by using scrubbers, devices that transfer sulfur emissions from exhaust to a disposal unit and discharges the emissions.

With IMO 2020 looming, only 1% of the global shipping fleet has been retrofitted with scrubbers. Forecasts for scrubber installations by mid-2020 run close to 5% of the current ships on the water.

There are a few reasons for such low numbers of installations. First, scrubbers are still somewhat unproven in maritime applications, so shippers are taking a “wait and see” approach. As well, even if a ship does qualify for a retrofit, cost savings won’t take effect until several years after installation. On the plus side, ships with scrubbers installed will still be able to use the existing, widely-available supply of bunker fuel.

Moving Forward

No matter which route shippers choose to take, the short-term impact is almost certainly going to mean higher freight rates for the marine shipping industry.

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Energy

Visualizing China’s Energy Transition in 5 Charts

This infographic takes a look at what China’s energy transition plans are to make its energy mix carbon neutral by 2060.

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China Energy Mix

Visualizing China’s Energy Transition in 5 Charts

In September 2020, China’s President Xi Jinping announced the steps his nation would take to reach carbon neutrality by 2060 via videolink before the United Nations Assembly in New York.

This infographic takes a look at what this ambitious plan for China’s energy would look like and what efforts are underway towards this goal.

China’s Ambitious Plan

A carbon-neutral China requires changing the entire economy over the next 40 years, a change the IEA compares to the ambition of the reforms that industrialized the country’s economy in the first place.

China is the world’s largest consumer of electricity, well ahead of the second place consumer, the United States. Currently, 80% of China’s energy comes from fossil fuels, but this plan envisions only 14% coming from coal, oil, and natural gas in 2060.

Energy Source20252060% Change
Coal52%3%-94%
Oil18%8%-56%
Natural Gas10%3%-70%
Wind4%24%+500%
Nuclear3%19%+533%
Biomass2%5%+150%
Solar3%23%+667%
Hydro8%15%+88%

Source: Tsinghua University Institute of Energy, Environment and Economy; U.S. EIA

According to the Carbon Brief, China’s 14th five-year plan appears to enshrine Xi’s goal. This plan outlines a general and non specific list of projects for a new energy system. It includes the construction of eight large-scale clean energy centers, coastal nuclear power, electricity transmission routes, power system flexibility, oil-and-gas transportation, and storage capacity.

Progress Towards Renewables?

While the goal seems far off in the future, China is on a trajectory towards reducing the carbon emissions of its electricity grid with declining coal usage, increased nuclear, and increased solar power capacity.

According to ChinaPower, coal fueled the rise of China with the country using 144 million tonnes of oil equivalent “Mtoe” in 1965, peaking at 1,969 Mtoe in 2013. However, its share as part of the country’s total energy mix has been declining since the 1990s from ~77% to just under ~60%.

Another trend in China’s energy transition will be the greater consumption of energy as electricity. As China urbanized, its cities expanded creating greater demand for electricity in homes, businesses, and everyday life. This trend is set to continue and approach 40% of total energy consumed by 2030 up from ~5% in 1990.

Under the new plan, by 2060, China is set to have 42% of its energy coming from solar and nuclear while in 2025 it is only expected to be 6%. China has been adding nuclear and solar capacity and expects to add the equivalent of 20 new reactors by 2025 and enough solar power for 33 million homes (110GW).

Changing the energy mix away from fossil fuels, while ushering in a new economic model is no small task.

Up to the Task?

China is the world’s factory and has relatively young industrial infrastructure with fleets of coal plants, steel mills, and cement factories with plenty of life left.

However, China also is the biggest investor in low-carbon energy sources, has access to massive technological talent, and holds a strong central government to guide the transition.

The direction China takes will have the greatest impact on the health of the planet and provide guidance for other countries looking to change their energy mixes, for better or for worse.

The world is watching…even if it’s by videolink.

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Energy

Visualizing 50+ Years of the G20’s Energy Mix

Watch how the energy mix of G20 countries has evolved over the last 50+ years.

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G20 Energy Mix share

Visualizing 50+ Years of the G20’s Energy Mix (1965–2019)

Over the last 50 years, the energy mix of G20 countries has changed drastically in some ways.

With many countries and regions pledging to move away from fossil fuels and towards cleaner sources of energy, the overall energy mix is becoming more diversified. But shutting down plants and replacing them with new sources takes time, and most countries are still incredibly reliant on fossil fuels.

This video from James Eagle uses data from BP’s Statistical Review of World Energy to examine how the energy mix of G20 members has changed from 1965 to 2019.

G20’s Energy History: Fossil Fuel Dependence (1965–1999)

At first, there was oil and coal.

From the 1960s to the 1980s, energy consumption in the G20 countries relied almost entirely on these two fossil fuels. They were the cheapest and most efficient sources of energy for most, though some countries also used a lot of natural gas, like the United States, Mexico, and Russia.

Country (Energy Mix - 1965)OilCoalOther
🇦🇷 Argentina83%3%14%
🇦🇺 Australia45%50%5%
🇧🇷 Brazil66%8%26%
🇨🇦 Canada47%13%40%
🇨🇳 China8%87%5%
🇪🇺 EU47%45%8%
🇫🇷 France49%37%14%
🇩🇪 Germany34%63%3%
🇮🇳 India24%67%9%
🇮🇩 Indonesia86%2%12%
🇮🇹 Italy66%11%23%
🇯🇵 Japan56%31%13%
🇲🇽 Mexico61%3%36%
🇷🇺 Russia29%50%21%
🇸🇦 Saudi Arabia98%0%2%
🇿🇦 South Africa19%81%0%
🇰🇷 South Korea20%77%3%
🇹🇷 Turkey46%47%7%
🇬🇧 UK38%59%3%
🇺🇸 U.S.45%22%33%

But the use of oil for energy started to decrease, beginning most notably in the 1980s. Rocketing oil prices forced many utilities to turn to coal and natural gas (which were becoming cheaper), while others in countries like France, Japan, and the U.S. embraced the rise of nuclear power.

This is most notable in countries with high historic oil consumption, like Argentina and Indonesia. In 1965, these three countries relied on oil for more than 83% of energy, but by 1999, oil made up just 55% of Indonesia’s energy mix and 36% of Argentina’s.

Even Saudi Arabia, the world’s largest oil exporter, began to utilize oil less. By 1999, oil was used for 65% of energy in the country, down from a 1965 high of 97%.

G20’s Energy Mix: Gas and Renewables Climb (2000–2019)

The conversation around energy changed in the 21st century. Before, countries were focused primarily on efficiency and cost, but very quickly, they had to start contending with emissions.

Climate change was already on everyone’s radar. The UN Framework Convention on Climate Change was signed in 1992, and the resulting Kyoto Protocol aimed at reducing greenhouse gas emissions was signed in 1997.

But when the Kyoto Protocol went into effect in 2005, countries had very different options available to them. Some started to lean more heavily on hydroelectricity, though countries that already utilized them like Canada and Brazil had to look elsewhere. Others turned to nuclear power, but the 2011 Fukushima nuclear disaster in Japan turned many away.

This is the period of time that renewables started to pick up steam, primarily in the form of wind power at first. By 2019, the G20 members that relied on renewables the most were Brazil (16%), Germany (16%), and the UK (14%).

Country (Energy Mix - 2019)Natural GasNuclearHydroelectricRenewablesOther
🇦🇷 Argentina49%2%10%4%35%
🇦🇺 Australia30%0%2%7%61%
🇧🇷 Brazil10%1%29%16%44%
🇨🇦 Canada31%6%24%4%35%
🇨🇳 China8%2%8%5%77%
🇪🇺 EU22%11%4%10%53%
🇫🇷 France16%37%5%6%36%
🇩🇪 Germany24%5%1%16%54%
🇮🇳 India6%1%4%4%85%
🇮🇩 Indonesia18%0%2%4%76%
🇮🇹 Italy40%0%6%10%44%
🇯🇵 Japan21%3%4%6%66%
🇲🇽 Mexico42%1%3%5%49%
🇷🇺 Russia54%6%6%0%34%
🇸🇦 Saudi Arabia37%0%0%0%63%
🇿🇦 South Africa3%2%0%2%93%
🇰🇷 South Korea16%11%0%2%71%
🇹🇷 Turkey24%0%12%6%58%
🇬🇧 UK36%6%1%14%43%
🇺🇸 U.S.32%8%3%6%51%

However, the need to reduce emissions quickly made many countries make a simpler switch: cut back on oil and coal and utilize more natural gas. Bituminous coal, one of the most commonly used in steam-electric power stations, emits 76% more CO₂ than natural gas. Diesel fuel and heating oil used in oil power plants emit 38% more CO₂ than natural gas.

As countries begin to push more strongly towards a carbon-neutral future, the energy mix of the 2020s and onward will continue to change.

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