Carbon Risk and Mitigating Strategies in the Maritime Industry: An investigation into the financial risk of the energy and climate transition, and its main drivers

The shipping industry accounts for a significant share in global GHG emissions. Especially since Business as Usual (BaU) scenario studies project that the emissions due to shipping could increase by 50 [%] to 250 [%] in the period to 2050 (IMO, 2015), shipowners face a potential regulatory threat. Major climate regulations for shipping already entered into force, and a range of possible instruments may be applied going forward. Possible instruments are among others, tightened EEDI limits, port discounts, ETS, or a Carbon Tax. Besides the risk of direct regulation, there is also a risk of being indirectly impacted by energy and/or climate regulation in other sectors. The direct and indirect regulations can adversely impact the operations, cashflow, and economic value of enterprises of existing shipowners and charterers of ships. Shipowners and financiers that are unaware of these developments, or that do not take timely mitigating actions, may potentially face considerable financial losses.This research investigated and ranked the level of Carbon Risk for shipowners across several sub sectors. The objective of the research was to: define, measure, and reveal the level of Carbon Risk for shipowners and to assess mitigating strategies as part of the assessment of the bank’s exposure to Carbon Risk. Typical core drivers, factors, and dependencies have been studied from literature in order to come up with an effective approach to capture the threat of Carbon Risk. As a result, a Carbon Risk framework is been developed, showing (inter)dependencies between all Carbon Risk factors. By developing the framework, this research contributed to the current understanding of the (inter)dependencies between Carbon Risk factors. In addition to the framework, typical Carbon Risks have been identified for the shipping industry.This research focuses on Structural Risk. A Carbon Tax is used as a proxy for Regulatory Risk and demand substitution (i.e. a 20 [%] reduction of cargo) is used as proxy for Substitution Risk. By distinguishing vessels by type and size, we account for different technical, operational, and market characteristics. We focus on crude oil tankers, container ships, and bulk carriers because they are the three most significant sectors from a CO2 perspective (IMO, 2015). The presented findings about the difference in impact between sub segments could have implications for risk premiums which financiers can set on loans. Also, given that the DCF of fuel-efficient investments is positive related to a Carbon Tax, it is assumed that fuel efficient technologies and retrofits become more viable. Even before regulatory certainty, it is advised that shipowners and financiers (as part of their Carbon Risk mitigation strategy) research fuel efficient mitigation options (technological investments) under different Carbon Tax levels. Even without Carbon pricing, efficiency measures generate significant cost savings. When there is certainty about future market-based measures, early adaptors/investors of viable fuel-efficient measures (under future regulatory conditions) will benefit most of the investment and improve their competitive position. Also, when shipowners act sooner than competitors, they lower the risk of scarcity of resources (yards, engineers).SDPO.18.043.mMarine Technology | Ship Design, Production and Operations | Shipping Managemen