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How is the shipping industry being affected by climate change and environmental regulations?
In recent times, climate change and environmental factors have played a growing role in determining the green standards of many industries, government policies and supranational regulations. The seminal moment in the development of climate change regulations was the 1997 Kyoto Protocol, which set its signatory states binding targets for reducing greenhouse gas emissions. However, these emissions limits do not apply to the shipping industry.
The regulation of emissions in shipping has come instead from international maritime bodies and from the European Union. The International Maritime Organization (the UN maritime agency) has implemented two types of regulation, which comprise (i) technical efficiencies to be incorporated into the design and running of ships, coming into force in January 2013, and (ii) measures concerning the maximum level of sulphur emissions permitted in certain geographical locations. These are classified as Emissions Control Areas (ECAs), which currently extend across North American territorial waters and the North Sea. The European Union has also imposed limits for sulphur emissions at EU ports. Although sulphur emissions are not technically greenhouse gases, these measures do fall within the broader ambit of environmental regulations and have undoubtedly come about because of environmental considerations.
It is important to note that the shipping industry is divided into a number of key players which have different interests. Alongside ship owners, there are also charterers (who lease a vessel from an owner for a specified period of time or a particular voyage), shipbuilders and purchasers, and insurers. In the context of climate change, the various participants in the shipping industry face different challenges as a result of the technical and low-sulphur regulations.
A key issue arising out of the technical measures is the increased commercial risk for ship owners and charterers in the event of a vessel failing to comply with regulations when she is under a time charterparty (a contract for a vessel's hire for a specified length of time). The Court of Appeal decision in The "Elli" and The "Frixos" (2008) determined the default position that it is the ship owner's responsibility to ensure that modifications required to a vessel as a result of international regulations are undertaken. However, the principle would vary depending on the terms of the charterparty. Similarly with regard to shipbuilding, the question of who would be liable for the cost of complying with technical regulations while a ship is still under construction arises - the shipbuilder or the buyer? The terms of the contract need to be sufficiently clear to avoid uncertainty leading to a potential dispute.
Another recommended measure for compliance with the technical regulations - and a consequence of the steady global increase in fuel prices - is a greater tendency toward slow steaming (the deliberate reduction of vessel cruising speeds). However, the more frequent use of slow steaming has a number of legal implications. These include whether insurers, namely hull and machinery underwriters who cover the physical damage risks inherent in marine operations, would be liable for damage caused by slow steaming. Sailing at a slower speed can be damaging to ships' engines, which are designed to run at full power.
Reducing sulphur emissions
The implications for the shipping industry of complying with the regulations on sulphur emissions limits are perhaps starker than those of the technical measures. Vessels may either need to be fitted with scrubbers, which remove sulphur from exhausts to ensure cleaner emissions, or use different types of fuel such as liquefied natural gas (LNG). Aside from its high cost, scrubber technology is still relatively new and largely untested. With regard to LNG, it remains unclear whether the global supply of this fuel is capable of meeting the shipping industry's operational requirements. In addition, given the anticipated higher demand for low-sulphur fuels such as LNG and diesel, they are likely to become more expensive over time.
There is the option of diligent fuel switching (ie, burning low-sulphur diesel when entering ECAs), but this creates its own problems, the most prominent of which lies in the complications of segregated tankage and reliance on changing fuel at the right time. Ultimately, increased costs are likely to be unavoidable in complying with these regulations.
It is inevitable that given current political concerns surrounding climate change and the environment, the regulatory regime for shipping will grow. Indeed, new types of regulation have been proposed, including market-based measures such as emissions trading schemes. As an industry that was largely unregulated in previous years, the sweeping nature of these measures may represent one of the most significant challenges the shipping industry will face over the coming years, both in terms of cost and legal uncertainty as to which parties bear the risk for compliance or penalties for breach.
Joshua Williams is a second-year trainee at Ince & Co LLP.