Moving goods around the globe—from farms to factories to warehouses to stores—the shipping industry is a critical tool for global trade and movement of goods. In the era of climate change, the shipping sector accounts for approximately 3% of greenhouse gas (GHGs) emissions annually and needs to decarbonise rapidly in order to meet the Paris Agreement goal of 1.5°C. Fortunately, international shipping, lead by International Maritime Organization (IMO), has agreed to reduce its GHGs and carbon footprint by at least 50% of 2008 levels by 2050. To meet this 1.5°C goal, the shipping industry could be likely regulated with carbon taxes, enforcement provisions, or mandatory participation in carbon trading markets.
To get ahead of and take voluntary action to compensate unavoidable emissions, shipping companies can participate in the voluntary carbon market by purchasing verified carbon credits from a nature-based solution, such as a Verified Carbon Standard (VCS) certified forestry project. These projects offset carbon emissions in addition, may have additional Climate, Community and Biodiversity Standard certification proving the co-benefits to the environment, biodiversity and local communities. Shipping companies should conduct due diligence, however, to ensure their carbon credit investment is legitimate and maximises carbon reductions.
The Climate Change Carbon Reduction Conundrum & International Shipping
According to the Intergovernmental Panel on Climate Change (IPCC) AR6 Synthesis Report, the Earth has already reached 1.1°C global surface temperature warming above 1850-1900 levels in 2011-2020. Of concern, the average global temperature will likely exceed 1.5°C in the 21st century and continue to rise over 2.0°C if behaviors do not change. Countries party to the Paris Agreement have pledged GHG emission reductions in their Nationally-Determined Contributions (NDCs), but every degree of global warming will enhance and multiply the adverse impacts of climate change. Therefore, the maritime sector has an important role to reduce their GHG emissions and decarbonise quickly.
Despite a small dip in 2020, the international shipping industry’s global carbon emissions are on a rising trajectory, growing by 5% in 2021. They will need to decarbonise with a 15% reduction in GHG emissions from 2021 to 2030. The International Energy Agency has indicated that the shipping industry is not on track to meet its carbon reduction target. Thus, the shipping industry has an important and unique task ahead, to severely lower emissions through internal reductions from switching to lower GHG fuels and implementing vessel performance optimisation technology , as well as compensate all residual emissions through the voluntary carbon market by purchasing carbon credits from certified projects that contribute towards the global GHG reduction goal.
How the Voluntary Carbon Market Works for the Shipping Industry
The shipping industry can work towards decarbonisation by participating in the voluntary carbon market. A shipping company can buy carbon credits from a certified carbon reduction project, whether it is from a tropical forest protected against deforestation (REDD+) or a regenerative agricultural farm. To become a market participant, the shipping company can investigate different carbon offset projects to determine the best fit for price, additionality, scale, geography and type. Most carbon offset projects sell reduction or avoidance credits, which means that the project engages in an activity that reduces or avoids emissions that would have happened in the ‘without project’ baseline scenario. Other carbon credits may come from projects that sequester removal that sequester carbon from the atmosphere, these credits are called carbon removal credits, and represent the creation of a carbon sink, from the activity of planting trees such as afforestation, reforestation or revegetation.
Shipping emissions are also beginning to become regulated under emissions compliance markets, including the EU-ETS. On December 18, 2022, the European Council decided to bring shipping emissions into the emissions cap and trade market, which will take effect in 2024. Currently, only intra-European voyages would be included in an EU-ETS compliance market. Vessels will be required to report 50% of their tank to wake carbon dioxide emissions on voyages in and out of the EU and then 100% verified reported emissions for intra-EU voyages.
The shipping industry can learn from the aviation sector, who has taken steps to curb carbon emissions from flight travel. The aviation sector collaborated and eventually agreed to an international agreement to reduce carbon emissions. Known as Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), the agreement is the first global market-based measure to reduce emissions from aviation that uses a harmonised approach and permits carbon offsets through the acquisition and cancelation of emission units via the global carbon market. The shipping industry can collaborate to design and implement its own CORSIA-like global carbon trading system for offsetting basis according to a common baseline year.
Buying Carbon Offset Credits to Help the Planet
A shipping company may want to purchase carbon credits as a bridging option to compensate the carbon-intensive marine fuels used either in ports or on voyages where no alternative biofuels are readily available, either as a participant of a voluntary carbon market or as a regulated party within the EU-ETS starting in 2024.
When investing in carbon credits, shipping companies should conduct robust due diligence to ensure the project is legitimate and meets the highest quality. First, it should investigate whether the project is certified by one of the main accrediting bodies, which include the Verified Carbon Standard, Gold Standard, Climate Action Reserve (CAR), and the American Carbon Registry (ACR). To be considered a high integrity carbon offset, the project from which it is derived must be additional.
In order to be considered a high-quality carbon offset project it should provide a maximum of co-benefits for biodiversity, the local community and the environment, especially if the shipping company has Environmental, Social, and Governance (ESG) targets or supports the United Nations Sustainable Development Goals (SDGs). Contributions may include enhanced biodiversity protection or local jobs generated from the project. Investments in carbon offsets from carbon projects that do not meet the required standards may cause negative impacts and counter the positive impact of the carbon reductions, such as human rights abuses or land degradation, then the offsetting company could face backlash from its investment.
To purchase carbon credits, a shipping company may purchase them traders or directly from the project developer, either through the exchange based primary market or secondary market as private “OTC” transactions.
Case Study: Iron Ore Carrier’s Voyage between Australia and Japan
While incorporating carbon offsets is a relatively new concept for the shipping industry, companies have started to implement them in their decarbonisation portfolio with success. Recently examples of the use of carbon offsets are two Japanese shipping companies, Mitsui O.S.K. Lines, Ltd. (MOL) and Kobe Steel, Ltd., which announced that the companies had offset their carbon emissions from the fuel used in the ocean transport of iron ore from Australia to Japan. The companies purchased carbon offsets generated from the Rimba Raya Biodiversity Reserve project in Indonesia, the largest Reducing Emissions from Deforestation and Forest Degradation (REDD+) project in the world and certified by Verra, to offset the carbon emissions from the Capesize bulker under MOL’s operation, Shinzan Maru. The voyage lasted for 6 weeks, which generated an estimated 2,875 tons of carbon emissions for the entire process from fuel oil production to consumption. Both MOL and Kobe Steel have set a company target of achieving net-zero emissions by 2050, so purchasing carbon credits from a certified carbon offset project will be a key part of their goals.
Whilst it is key to compensate for GHG emissions, the shipping industry to work to implement a pathway towards zero emission shipping and make carbon offsets part of the solution. . Ideally, shipping companies should curb emissions throughout their supply chain and business practices, and implement the use of alternative fuels. Yet, carbon offsets offer the shipping industry an option to offset and compensate their unavoidable GHG emissions, decarbonise their business, and directly support carbon projects that can have incredible environmental impacts and co-benefits for local communities and biodiversity.
How much and how often shipping companies will offset initially will vary from company to company, but it is important to remember that some action is always better than inaction. Equally important is the way the compensation is communicated to stakeholders.
Contact Quadriz for further information and guidance how to offset and compensate today.