Marc Levinson

Tag: Climate Change

  • Greenhouse Gases and Open Registries

    The International Maritime Organization (IMO) doesn’t normally make headlines, but its new strategy to reduce greenhouse-gas emissions from shipping is a considerable accomplishment. If it succeeds, emissions from international shipping will be 20 percent below the 2008 level by 2030, and 70 percent below by 2040. “By or around, i.e. close to” 2050, the industry is supposed to have net zero emissions.

    That last commitment, which contains an escape clause allowing for “different national circumstances,” has drawn both praise and criticism around the world. Puzzlingly, though, there has been almost no attention to the specific measures required to achieve the IMO goals.

    This is not a minor issue. Some 105,395 ships of 100 gross tons and above are now on the seas, not counting fishing or military vessels, according to the United Nations Conference on Trade and Development (UNCTAD). The IMO itself doesn’t oversee them. Meeting the IMO’s targets will require action by national governments, which regulate the individual ships that fly their countries’ flags.

    But this regulation is often nominal. UNCTAD estimates that ships registered in Panama, Liberia, the Marshall Islands, Malta, and the Bahamas are responsible for 43 percent of maritime greenhouse-gas emissions. All these countries operate open registries, offering favorable taxes and light regulation to shipowners based elsewhere in return for vessel registration fees. All of them rightly fear that if they make it more costly to operate ships, shipowners will decamp to a more tolerant registry. In any case, most of them lack the bureaucratic apparatus and professional expertise needed to monitor the greenhouse-gas emissions of hundreds or even thousands of ships.

    Open registries, sometimes referred to as “flags of convenience,” have been controversial for decades. They have been blamed for the low wages and poor working conditions endured by many seafarers, the evasion of anti-pollution rules, and the use of unsafe vessels that are overdue for scrapping. Shipowners have successfully blocked efforts to limit their use. If the IMO’s emissions-reduction targets are to be met, countries with open registries will need to become enforcers.

  • Sustainability and Trade

    The cost of mitigating climate change is hard to put a finger on. That’s one conclusion from a recent conference on climate change and macroeconomics at the Peterson Institute for International Economics in Washington. Many of the economists who spoke argued that there is no conflict between sustainability and prosperity; in their view, keeping global temperatures at 1.5 degrees Celsius above pre-industrial levels, as urged by the Intergovernmental Panel on Climate Change, will require minimal economic sacrifice, at least in most countries. Others forecast that higher temperatures and more frequent severe weather events will make output and prices more volatile, or that the cost of renewable energy will retard economic growth. At this point, you can pick whichever conclusion you prefer.

    What I found most notable about this meeting was that international trade wasn’t on the table. To me, it seems likely that concerns about climate change will depress trade. Measures like the European Union’s Carbon Border Adjustment Mechanism and proposed U.S. legislation requiring studies of the emissions intensity of many imports will erode some of the cost advantage of foreign products. In addition, shipping powered by sustainable fuels may be far more expensive than shipping is today. For trade in liquor and tablet computers, higher freight costs may not matter, but shipping low-value goods long distances — the United States exported 4 million metric tons of hay last year — may become prohibitively costly.

    The importance of international trade in stimulating innovation, increasing competition, and making economies more dynamic is no secret. If measures to control climate change prove to be a drag on trade, they are likely to be a macroeconomic drag as well. That’s a possibility economists concerned with sustainability should not ignore.

  • The Bizarre Assault on ESG

    I confess to bewilderment at some U.S. conservatives’ assault on the use of environmental, social, and governance (ESG) criteria in investing. Conservatives in Congress, including a few Democrats as well as Republicans, tried to overturn a Biden Administration rule allowing asset managers for retirement plans to consider firms’ ESG performance in making investment decisions. Politicians in several states have sought to bar banks that employ ESG considerations from state-government business. Most recently and most bizarrely, some have blamed the abrupt collapse of Silicon Valley Bank on its commitment to ESG, despite very clear evidence that the bank was done in by turbocharged deposit growth and excessive investment in long-term securities.

    I know a bit about this. Two decades ago, when I worked at JPMorgan Chase, I developed the bank’s first ESG research products for institutional investors in stocks and bonds. Our research examined such topics as how regulations targeting plastic shopping bags and beverage containers would affect major plastics producers (not much) and whether water scarcity threatened the viability of certain industries in various countries (in come cases, yes). We weighed the investment potential of companies that manufactured solar, wind, and water-conservation products (generally with skepticism), and also urged corporate boards of directors to assign a committee to oversee management of ESG risks and opportunities within the firm.

    The risks we identified were real, and our contention that investing in solar cell manufacturing and wind turbines was a bet on government policy rather than on technology saved our clients from serious missteps. Unfortunately, in part because of our well-founded doubts about the profit potential of alternative-energy firms, our work didn’t lead to much stock or bond trading, which is why all of us involved in ESG research were let go in 2009.

    But that doesn’t change the fact that ESG factors pose real risks to the profits of corporations and to the ability of bond issuers, both government agencies and private-sector companies, to service their long-term debts. Investors in port authority bonds and the shares of real estate investment trusts need to understand the potential business impact of rising sea levels. Lenders to coal companies need to assess how many power plants will buy that coal a decade from now. For any bank or asset manager to ignore such risks because politicians think they should is the sort of state-managed capitalism conservatives used to be against.

  • Carbon Border Adjustments and Trade

    The European Union is on the way to taxing many imports based on their greenhouse-gas emissions. The plan, which was agreed by the European Commission and the European Parliament on December 13 but is not yet final, is one more factor likely to constrain the growth of international trade.

    The plan would establish an import taxation system called the Carbon Border Adjustment Mechanism, designed to force importers of certain products to pay for the carbon emitted in making their products. The tax would equal the amount an EU manufacturer would have paid to purchase permits for those emissions under the EU Emissions Trading System. The point is to stop the “leakage” that occurs when companies import products that would be subject to carbon charges if produced in the EU. Initially, imports of iron, steel, cement, aluminum, fertilizers, hydrogen, electricity, and products made from iron or steel will be subject to the tax, and some chemicals and polymers may be taxed as well. Imports from countries that tax carbon emissions as the EU does would not be taxed.

    Implementing this well-intended policy is likely to prove more complicated than EU officials are letting on. While calculating the tax on a bag of imported cement may be straightforward, accurately figuring the charge on a product containing steel from multiple mills drawing on multiple power sources may not be so easy.

    It’s possible that the new taxes will be ineffectual; if, for example, an Asian manufacturer simply ships fertilizer from an older plant to Africa while selling output from newer plants with lower carbon emissions to the EU, the tax might have no net effect on emissions. On the other hand, if the EU succeeds in convincing its trading partners to impose their own taxes on carbon emissions or if proceeds to require significant carbon border adjustments instead, some goods could become more expensive in Europe, and might therefore be traded less.

    This isn’t necessarily a bad thing. As the economist Joseph S. Shapiro has shown, countries’ failure to adequately regulate greenhouse-gas emissions provides a massive subsidy to international trade. Taxes on emissions could be one more factor weighing on trade as companies reconsider their supply chains.

  • “Normal” Isn’t Coming Back

    “Supply chain ‘normal’ appears on the horizon,” Bloomberg’s Brendan Murray reports. Murray presents lots of evidence that fewer vessels are queuing at container ports, fewer sailings are being cancelled, and most measures of supply-chain stress are less alarming. But the discussion at the Global Maritime Forum’s annual summit, which convened last month in the Brooklyn Navy Yard, only reinforced my conviction that slow growth of international goods trade lies ahead. In that sense, “normal” isn’t coming back.

    The hot topic at the Brooklyn meeting was decarbonization. The International Maritime Organization, a United Nations agency that attempts to oversee the unruly business of international shipping, has decreed major reductions in greenhouse-gas emissions from ships by 2050. A revised strategy, likely with more ambitious goals, is due from the IMO next year. In addition, vessel owners, especially owners of container ships that carry consumer goods, are facing pressure from their customers to curb emissions more quickly.

    Reducing greenhouse-gas emissions means finding a substitute for the petroleum-based fuels that now power almost all ocean-going ships. At the moment, though, there is no consensus about the best alternative. Some shipowners are building ships that can burn ammonia. Others are embracing liquefied natural gas. A much-touted option is e-methanol, which combines hydrogen with carbon dioxide captured from industrial sources. A few hydrogen-powered ships are already at sea. Battery power may work for short sea crossings.

    These approaches have several problems in common. They are very expensive: by one estimate presented at the Global Maritime Forum, the cost of moving a ton of freight with low-emissions fuels will be five or six times as high as with petroleum-based fuels. Ships will sail very slowly to minimize consumption of precious fuel, increasing cargo owners’ inventory costs. Ports and terminals, facing the need to provide a variety of fuels at each berth, may face large investments in fueling infrastructure so long as ship owners can’t agree on which alternative fuel to use. Port users will have to foot the bill.

    All of this will affect choices about shipping goods across the oceans. Although the sky-high freight rates of the pandemic years are behind us, the long-run cost of decarbonizing shipping will reshape supply chains. The days when international shipping costs barely mattered in making sourcing decisions are over.

  • The Cost of Slow

    A few days ago, I chatted with a shipping executive who made a bold prediction. The future of ocean shipping, he told me, is slow: the maritime industry faces great pressure to reduce its greenhouse gas emissions, he said, and steaming at lower speeds is the only way to do it. If my friend is right, he has identified an additional drag that will depress the growth of goods trade in the years ahead.

    After ocean carriers first tried out “slow steaming” around 2007, container ships required three or four additional days to cross the Pacific and as much as an extra week to steam between Asia and Northern Europe — long before pandemic-induced backups at major ports. Steaming slower still will make it even less attractive to send goods pegged to fashions and fads long distances by water. Manufacturers and retailers may choose instead to relocate time-sensitive parts of their supply chains closer to their customers, even if that means higher factory production costs.

    Slower steaming will influence globalization in less visible ways as well. As container ships travel more slowly, each ship will complete fewer round trips each year. That will effectively reduce the shipping industry’s capacity. At the same time, each voyage will entail more days of crew wages and mortgage payments than a similar trip today. This combination of factors means container freight rates are likely to remain higher than they might otherwise be. Containers themselves will have to be leased for a longer period in order to complete a shipment across the oceans, adding to the freight bill.

    And then there is the matter of inventory costs. In recent years, with interest rates near zero, the shippers who own the goods aboard those vessels queuing for a berth at major ports haven’t faced much of a financial penalty due to longer transit times. But interest rates aren’t zero any more, and the cost of owning goods during longer trips across the seas is no longer negligible.

    As I wrote in Outside the Box, trade in manufactured goods is likely to grow more slowly than the world economy in the years ahead. While container shipping rates seem to be descending from their pandemic peaks, slower steaming means that the days when transport costs were an afterthought may not return soon. Companies will have to take this into account as they decide what to make where.