Public comment invited on new rules for low carbon ship-finance

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A new set of guidelines designed to encourage the financing and development of zero-emission vessels when built or ships able to decarbonise to reach zero emissions by the year 2050 has been published by the Climate Bonds Initiative (CBI).

It is a bold attempt to steer the shipping industry towards the Paris Agreement goals; bold because most of the fuel types and technologies required to achieve ocean going zero emission vessels are, as yet, either unproven or unavailable at scale.

The guidelines, known as the CBI Shipping Criteria, set out the vessel characteristics and the decarbonisation pathway for a ship to be eligible for financing via a certified Climate Bond. It is the latest in a series of industry specific standards produced by the CBI to encourage the growth of the Climate Bonds market.

Development of the criteria over the past 15 months has been led by University College London Drs Sophie Parker and Tristan Smith. They have been supported by representatives from industry and ship-finance, including Maersk’s John Kornerup Bang and Citi’s Michael Parker, as well as shipping technology firms such as Flettner rotor manufacturer Magnuss and clean energy producer ITM Power.

Considerable effort went into to determining what assets should be considered within scope. Although the primary focus of the criteria is on operational emissions, crude carriers, LNG tankers and other ships dedicated to carrying fossil fuels are explicitly excluded regardless of the level of their efficiency. Dry bulk carriers transporting coal, on the other hand, fall within scope, on the basis that they may also be used to transport other commodities.

Container ships are, of course, included, as are infrastructure dedicated to refuelling or recharging zero emission ships and renewable energy assets such as wind-turbines.

A vessel that is not already zero-emission can qualify for certified Climate Bond financing on the basis of a credible plan to reduce its carbon intensity, known as a Managed Reduction Plan (MRP).

The plan may include a retrofit to make the vessel zero emission or switch to low carbon fuel at some time in the future, possibly after the Climate Bond has matured. In the meantime the vessel would need to maintain its carbon intensity (measured by its Annual Efficiency Ratio or Energy Efficiency Operational Index) below the level set by the CBI. What may need further clarification, however, is how the shipowner – or indeed a subsequent owner – would be compelled to stick to the original MRP once the Climate Bond has matured.

Perhaps a greater concern for the CBI, given its advocacy for addressing climate change, is the self-imposed limitation of focusing only on operational emissions. As the CBI background paper makes clear this is purely for “practical reasons” since “it is not deemed feasible for an issuer [of a Climate Bond] to manage the upstream or embedded emissions of an asset at point of bond issuance”.

The unintended and unwelcome consequence could be that the total “well to wake” emissions of a vessel burning hydrogen or another zero-carbon fuel, such as ammonia, could actually be higher than if it had been using fuel oil. This could happen if the hydrogen or ammonia is produced using fossil fuels rather than renewable energy. However, the problem could be mitigated if these upstream emissions are accounted for and managed in the national emissions of the country where the hydrogen or ammonia is produced.

The CBI is currently conducting a public consultation on its shipping criteria which will run until 26 June 2020.

Paul Stuart-Smith
Chief Executive, Zero Carbon Finance

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