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Decarbonising Shipping: Working Together

Views: 29     Author: Site Editor     Publish Time: 2022-09-06      Origin: Site

In order to reduce the risk and impact of climate change, various fields around the world have formulated corresponding emission reduction targets. Among them, shippers, carriers, can play a role in accelerating decarbonization. However, it is currently in a predicament. Some shippers want a lower carbon supply chain and are willing to pay a premium for green services, but carriers need to secure enough demand with a long-term commitment to invest in low-carbon assets and infrastructure.

Recently, the World Economic Forum (WEF) Supply Chain and Transportation Action Group developed a demand-driven approach to help shippers and carriers collaborate. Two mutually reinforcing enablers are proposed: 1. a transparent and standardized billing and claims framework; 2. a coalition of green supply chain demands. This report also proposes a number of actions for stakeholders in the industry to consider how to implement these enablers.

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Demand-oriented, accelerating zero-emission transition

Supply chain emissions (Scope 3) account for a significant portion of all emissions. According to some companies' sustainability reports and the Carbon Disclosure Project (CDP), these emissions range from 93% to 99% of all emissions involved in consumer goods. Addressing transport-related supply chain emissions is a much-needed part of tackling decarbonisation.

As of May this year, more than 1,400 companies had set "science-based" targets. Based on science means the target is in line with the level of decarbonisation needed to keep global temperature rise in the range of 1.5°C to 2°C. Between 2017 and 2021, the cumulative number of companies that have approved science-based targets has grown at an annual rate of 119%, with 96% of targets covering Scope 3 emissions.

Decarbonising Shipping Working Together

Source McKinsey

Shippers are also taking steps to reduce their carbon footprint. A group of leading shippers said in interviews that they are willing to pay a 5% to 10% premium for sustainable logistics services. These shippers recognize the difficulties faced by carriers, which require significant up-front capital investment in low-carbon infrastructure. Therefore, they are willing to help carriers remove uncertainty by paying a green premium or signing long-term green logistics contracts. However, they also want to offer sustainable solutions that are backed by reliable industry sources and that the green premium is likely to decrease over time.

Despite growing awareness and willingness to act, the price of sustainable fuels remains high due to lack of scale. The Maersk Centre for Zero Carbon Shipping estimates that sustainable alternatives such as biodiesel, green ammonia, electro-methanol and other power liquids (PtL) will still cost 1.3 to 1.9 times as much as fuel by 2030.

This lack of scale is due to several factors. First, the global infrastructure to support sustainable fuels is limited. For example, as of February this year, only 32 airports provide sustainable aviation fuel (SAF) on a regular basis. Additionally, demand-side commitments from shippers remain sporadic and disorganized. This is because of the higher cost of green products and the absence of an industry-wide standard agreement, stronger demand signals will prompt carriers to make capital investments in green products.

A demand-driven approach can make it easier for carriers to participate in sustainable supply chains, meet capital expenditure commitments by aggregating shipper demand, and scale sustainable supply chains and transportation services.

Create a cycle of positive reinforcement to scale green transport products.

Decarbonising Shipping Working Together-2

Source McKinsey

Communication with stakeholders revealed that the industry now needs to develop a mechanism to incentivize large-scale adoption of green investments. These mechanisms will maintain competition among transport providers, gain industry-wide support, foster cross-industry collaboration, and facilitate access to green capital backed by clear demand signals. Two complementary enablers: a transparent and standardized billing and claims framework, and a green supply chain alliance, can meet these needs and create a cycle of positive reinforcement in green supply chains.

1. A standardized billing and claims framework

A standardized billing and claims framework decouples actual green products from virtual carbon credits. Supported by digital tracking, buyers of green shipping products pay a green premium in exchange for credits, enabling asset owners to demand reductions in direct emissions, or forwarders, shippers and end consumers to demand reductions in the scope of transport of specific goods 3 (Indirect value chain related emissions). These credits should be backed by reliable industry sources. The premium rises up the value chain and is reinvested as capital expenditure, radically lowering the cost of green transport products and allowing funding for “embedded” projects (emission reduction projects in the sector's own value chain).

There is now an opportunity to change that by developing industry compliant credits that are recognized by the market and backed by reliable sources. If industry-wide players report to one standard, this would increase the credibility and comparability of different sustainability projects and reduce the cost for players to verify the legitimacy of their emissions reduction initiatives. The project by the World Economic Forum and the Smart Freight Centre to develop a framework and accounting guidelines for the industry is a direct response to this need for standards in multimodal transport.

2. Green Supply Chain Demand Alliance

The Green Supply Chain Demand Coalition gathers and expands commitments to buy green products. Through such alliances, a clear and firm demand signal is transmitted up the value chain, informing research and development as well as carrier capital expenditure decisions. Such signals also signal improvements in transport sustainability to other stakeholders, such as policymakers. Procurement decisions remain in the hands of individual shippers, maintaining competition among carriers while allowing mechanisms for large-scale procurement, such as off-take agreements. Establishing a sustainability rating system to rank and select carriers could also foster cooperation among competitors in the alliance.

At present, there are also many green demand alliances, including: coZEV, BICEPS, SABA, etc. Each alliance differs in its membership and scope.

The supply chain-focused coalition, which will cover multiple modes of transport, greatly reduces existing complexities and enables shippers to participate in decarbonization efforts. They can also bring attention to different projects and highlight opportunities to use funds more efficiently for individual projects.

Decarbonising Shipping Working Together-3

Source McKinsey

Collective action is key

To put a standardized billing and claims framework into practice and further develop a coalition of green supply chain demands, sectoral stakeholders may need to work together at every stage of execution, from planning and establishing pilots to long-term operations. Shippers, carriers and the wider supply chain need to consider a number of actions when implementing changes.

Actions by shippers and freight forwarders

Shipper groups play a key role in financially supporting supply chain decarbonization, and they contribute to investment costs. In this regard, shippers can consider four actions.

1. Enter into longer-term contracts to reduce supplier uncertainty and increase procurement budgets to account for higher costs. Shippers can also participate in buyer coalitions to rally their commitments to buying green products, although purchasing decisions must ultimately be made by shippers in order to maintain competition.

2. Actively require logistics partners to provide sustainable products to speed up the decarbonization process. For example, last April, Salesforce announced that its supplier contracts now require suppliers, including logistics partners, to set carbon reduction targets and provide products and services on a carbon-neutral basis.

3. Set out to engage with end consumers, especially to understand the environmental impact of their choices, and to proactively shape consumer behavior. For example, companies can incorporate sustainability into their brands, leading consumers to choose greener freight. Studies have shown that incorporating sustainability messages into restaurant menus can increase diners' choice of vegetarian dishes by 35 to 100 percent.

4. Get involved. Shippers and forwarders can join a coalition of buyers to collect key data to support the decarbonisation of freight and participate in a pilot "bookkeeping and claims" framework with the wider freight community.

Actions by shipping carriers

Carriers may need to start planning now and invest in sustainable products to avoid losing long-term market share. To achieve this, there are three things it can incorporate into its business practices.

1. Provide sustainable solutions. Many shippers at the forefront of sustainability have already expressed their willingness to pay a premium for sustainable products and services. Customers are also willing to pay for green products. For example, a consumer survey showed that 57% of respondents were willing to pay an additional 10% or more for eco-friendly shipping and packaging. Operators can also work to reduce the cost of sustainable products, which is key to driving returns on such products.

2. Improve emissions transparency through technology, as shippers are seeking emissions transparency for their own sustainability reports and want to compare sustainable products from different suppliers. Maritime has developed the Clean Cargo Working Group (CCWG) to enable companies to measure their performance using a standardized reporting mechanism. Following this move, companies have enhanced their own digital reporting and made available to their clients based on the CCWG's basic reporting framework. Maersk, for example, introduced a digital dashboard to track carbon emissions in mid-2021. The dashboard enables its customers to track their carbon footprint across the supply chain and shows what they can do to reduce emissions. Other shipping companies such as Hapag-Lloyd have also deployed emissions calculators, enabling their customers to obtain emissions data across the entire transport chain.

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