Ocean carrier push for carbon pricing mechanism not without risk

If there is one consistent and increasingly vocal theme coming out of the liner shipping industry, it's that an effective carbon pricing mechanism must be put in place on a global level to ensure customers will help fund the energy transition in the container sector.

With the concept of a carbon tax known to be controversial among member states of the International Maritime Organization (IMO), the repercussions from regulators falling short can't be ruled out: ocean carriers having to shoulder a disproportionate share of the staggering costs to decarbonize, thus hurting industry financials — especially among smaller carriers — and possibly leading to yet further industry consolidation and less choice and competition.

Avoiding that scenario has led carriers to advocate in increasingly high-profile ways to ensure that an effective price on carbon results from deliberations — set to take place over the next two years at the IMO — intended to put regulatory teeth behind its commitment last year to eliminate greenhouse gas (GHG) emissions from shipping by or around 2050.

"Decarbonizing shipping will not be achieved by a single company. It will take the efforts and involvement of all the stakeholders," CMA CGM Chairman Rodolphe Saadé said in a mid-February statement that included comments from the CEOs of Evergreen, Hapag-Lloyd, HMM, Maersk, Mediterranean Shipping Co., NYK Line, OOCL, Ocean Network Express, Swire Shipping, Wallenius Wilhelmsen and X-Press Feeders.

Passing along the costs

Reflecting the high priority placed on achieving a carbon tax, it is the top item on the World Shipping Council's (WSC's) "Six Critical Pathways to Zero-Carbon Shipping." In December, multiple carrier CEOs at COP-28 posed for a rare photo while signing on to an "unprecedented collaboration" that includes "an effective GHG pricing mechanism."

A rough analogy to the scenario carriers are facing came in mid-February, when the Civil Aviation Authority of Singapore said that as of 2026, it will require outbound passengers at Changi airport to pay a fee to fund airlines' use of higher-cost sustainable aviation fuel. It is part of a plan for sustainable aviation fuel to represent 3% to 5% of all jet fuel used on outbound flights at the airport by 2030. Seen from the perspective of airlines, that is a much more preferable approach than requiring airlines to use sustainable fuel but leaving it to them to pass the cost on to passengers in a freewheeling competitive market.

Similarly, the highly competitive liner shipping industry, judging by its minimal profitability over a period of decades prior to the COVID-19 pandemic, would face challenges passing along the higher cost of zero-carbon fuels in an environment of overcapacity and low freight rates that are frequently the reality during normal business cycles.

Even today, the industry is finding it very difficult to pass on zero-carbon fuel costs to a majority of shippers; a very small percentage of shippers currently are willing to pay more for zero-carbon products, according to carriers and forwarders.

Risk to smaller carriers

Thus, it's no surprise the issue is front and center for container lines. To implement its zero-carbon goal agreed to last year, the IMO committed to pursuing both fuel standards and a carbon pricing mechanism.

But some who closely follow the IMO discussions believe that due to the controversial nature of a carbon tax — which some member states view as raising costs for their citizens or forcing them to shoulder burdens more appropriately borne by others — the agency will be more likely to find consensus on fuel standards. This would be similar to the low-sulfur fuel requirement imposed in 2020, meaning that costs get imposed directly on carriers who then must figure out how to pass those costs along to customers.

"The sulfur cap introduced by the IMO in 2020 led to increased costs for ship owners, who had to invest in cleaner fuels or sulfur emission-reduction technologies," said Peter Jameson, managing director and partner at Boston Consulting Group. "This historical precedent suggests that regulatory mandates can drive industry-wide changes, albeit with initial financial burdens on operators."

The much larger impact of decarbonization costs could force smaller and less efficient liners out of the market, thereby accelerating the steady march of consolidation. Between 1996 and 2022, the share of the top 20 carriers in container carrying capacity grew from 48% to 91%, according to the 2022 United Nations Conference on Trade and Development Review of Maritime Transport.

"If there is a great variance in that additional cost across different liners, the ones with lower underlying costs — e.g., the largest liners with green fuel offtakes, digitization, organizational muscles, etc. — will get a relative advantage by being able to create their required profit margin at lower prices," Jameson said. "I do not see that increasing green shipping regulation in isolation will push liners into difficulties; rather it could exacerbate already existing dynamics — disproportionately impacting smaller liners with less strong decarbonization capabilities."

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.