Ship Energy Efficiency

Why regulatory action is needed to save energy and fight climate change

By Jos Delbeke, Director-General of DG Climate Action, European Commission
Spring 2015

Shipping is already the most energy efficient mode for most transport needs. The size of today's ships creates economies of scale that help provide the same level of service with less energy and emissions than before. Nevertheless, shipping is responsible for 2.5% of global greenhouse gas emissions today, and these emissions are growing.

The good news is that there is significant potential to reduce emissions from maritime transport. Energy efficiency measures and practices can bring important fuel cost savings at low or even negative costs.

These 'low-hanging fruits' make a compelling case for action. According to the second greenhouse gas study of the International Maritime Organisation (IMO), the UN body in charge of maritime transport, existing technologies represent an emissions reduction potential of up to 75%, with associated fuel cost savings estimated at €60 billion per year by 2020.

Why is this reduction potential largely untapped today? Mainly because of market barriers that hamper the uptake of cost-effective measures.

  • Firstly, split incentives. The party paying for the investment in an efficiency measure (the ship owner) is not the beneficiary of the associated fuel cost savings (the charterer of the ship). This does not create the conditions and incentives for highly cost-effective investments to occur.
  • Secondly, lack of access to finance. In today's difficult economic context, ship owners do not necessarily have sufficient cash to invest into energy efficiency.
  • And finally, the sheer lack of reliable information. Charterers, or potential buyers of ships, do not have access to reliable and comparable data on ships' fuel consumption and efficiency, and thus cannot consider this important aspect when taking business decisions. In addition, ship owners cannot increase the market value of their ships by investing in efficiency, as this is not reflected by market prices. Economists call such non-transparent markets a 'lemon market' where low quality products can easily compete with high quality products.

To overcome these market barriers, regulatory action is needed. With this in mind, the European Commission proposed in 2013 a staged approach to reduce greenhouse gas emissions from shipping. It consists of the following steps:

  1. Measuring ship emissions by introducing a system for monitoring, reporting and verification (MRV)
  2. Defining a mid-term emission reduction target for the sector
  3. Introducing further regulatory measures to incentivise emissions reductions at least possible cost

A robust system for MRV is a prerequisite for any regulatory measure to reduce emissions. It should also by itself contribute to removing market barriers. This is why, as a first step, the Commission put forward a legislative proposal for an EU-wide legal framework for MRV. The EU institutions reached a political agreement on the proposal in November 2014, and final approval by the European Parliament and the Council is expected in May 2015.

Under the new Regulation, from 1 January 2018 onwards all large ships using EU ports would be required to annually report their CO2 emissions. The approach is lean and pragmatic as it relies on using existing documents and equipment. The data will need to be independently verified and then annually reported. The Commission will make aggregated data publicly available on a "per ship" basis. The Regulation also includes a revision clause to align the EU system to a global system once adopted by the IMO.

At global level, the IMO started its work on greenhouse gas emissions already in the 1990s. The first outcome of this work was the Energy Efficiency Design Index (EEDI) adopted in 2011. This measure sets minimum energy efficiency requirements for new ships built after 2013. This is an important step forward, as the EEDI is expected to reduce the sector's greenhouse gas emissions by 20% by 2030 compared to a 'do-nothing scenario'.

But this measure alone does not deliver sufficient emissions reductions. IMO partners have recently put much effort and hope on ideas to establish further efficiency standards that would also cover the existing fleet, as well as operational measures to test efficiency indicators. These would be based on a step-wise approach starting with an initial data collection phase, equivalent to the EU's MRV Regulation.

Developing and adopting such measures by 2016 should be the top priority for IMO members. The EU will continue to push for effective action at international level. Industry support will also be essential to make this happen. 2015 will see the intensification of global talks for a new climate agreement due to be sealed in Paris at the end of the year. All sectors, including international shipping, are expected to bring their fair contribution. It is therefore important that the IMO, at its 68th session of the Marine Environment Protection Committee, sends a strong signal about its commitment to contribute to these global efforts.

The EU, however, is not waiting to act. By going ahead with its new legislation, it can build up data and experience to help inform and influence international discussions towards a more climate-friendly global shipping sector.