Run a Green Ship
Many industries are preparing to undergo radical transformations in order to meet challenging environmental targets.
The most recent United Nations’ Climate Change Conference in Glasgow focused mostly on emissions and the development of a net-zero global economy. Yet for many industries, such as maritime transport, environmental risks often include pollution from activities other than the burning of fossil fuel. As maritime insurers work closely with their clients to develop risk mitigation strategies, it is extremely important to understand the environmental risks facing maritime companies and their insurers.
The International Maritime Organization (IMO) has implemented a new strategy to reduce greenhouse gas emissions from the global shipping industry by at least 50% (from 2008 levels) by 2050.
The IMO has been under pressure from governments, big cargo owners and other organizations to speed up efforts to drastically cut greenhouse emissions.
Smaller and older vessels have an outsized impact on claims and the environment.
Accounting for nearly 3% of global carbon dioxide emissions caused by human activity in 2018, the maritime industry is a significant contributor to greenhouse gases. Thus the International Maritime Organization (IMO) has implemented a new strategy to reduce greenhouse gas emissions from the global shipping industry by at least 50% (from 2008 levels) by 2050.
Yet some observers contend the IMO’s strategy is nowhere near adequate. “The IMO’s new strategy to reduce emissions falls well short when compared to the EU legislation as well as emission targets from many other foreign nations,” says Peter Townsend, founder of Ensign, a consultancy supporting marine insurance businesses. “The recently established Poseidon Principles for Marine Insurance—a global framework for responsible marine insurance—is looking at a much greater reduction in carbon dioxide emissions by following the latest EU legislation aiming to achieve climate neutrality by 2050, including the intermediate target of at least 55% reduction in emissions by 2030.”
According to the Poseidon Principles website, the framework allows for assessing and disclosing the climate alignment of insurers’ hull and machinery portfolios, enabling the insurance sector to implement transparency and establish a common, global baseline to quantitatively assess and disclose the climate alignment of the portfolios.
The IMO has been under pressure from governments, big cargo owners and other organizations to speed up efforts to drastically cut greenhouse emissions. Without new funds, however, the transition could take longer than expected. According to a World Bank study, the IMO could raise more than $1 trillion over the next three decades by charging a fee to vessel operators based on metric tons of carbon dioxide emitted.
Despite the criticism, the IMO has made some long-awaited industry changes by implementing energy-efficiency requirements for several new and existing ship types. As a result, in January 2020, the allowable sulfur levels in marine fuel oil have been lowered to 0.50% m/m (mass by mass) from 3.50% m/m, pushing vessels to opt for naturally low sulfur fuels, such as LNG, biofuel or marine distillate.
“Prior to the new sulfur requirements, vessels largely ran on heavy fuel oil—the worst quality of oil—with some inevitable consequences to the environment,” Townsend says. “The IMO legislation has increased the demand for cleaner fuels, but, most importantly, it has increased the production of such fuels, which many refineries didn’t produce much of.”
Abandoned Ships and Crew
The practice of abandoning vessels and their crews is rare, but the International Labor Organization’s database shows that cases increased to 76 in 2020 from 40 (+90%) as the COVID-19 pandemic left many ship owners unable to pay their debts and operating costs, such as crew wages or even the cost to send crew members home.
“There are just over 94,000 ships globally of over 500 gross tons in size. So 76, as part of 94,000, is an extremely low number,” says Marcus Baker, global head of marine and cargo at Marsh Specialty. “It is, however, extremely significant if you’re one of the crew members on that particular abandoned ship. Fortunately, there are mechanisms in place to get crew members home in those circumstances and to pay their wages, although implementing them is not always straightforward.”
From a humanitarian perspective, in fact, the situation has mostly improved. Thanks to the 2006 Maritime Labor Convention and its 2017 rules update, ship owners must have insurance coverage to assist the seafarers on board vessels, if abandoned. This type of coverage, which is included within standard marine crew benefits insurance, will cover as much as four months of outstanding wages as well reasonable expenses, such as “repatriation, food, clothing, accommodation, drinking water, essential fuel for survival on board and any necessary medical care.”
From a protection and indemnity perspective, insuring the abandonment of a ship is very complex.
“There is little that hull insurers can do to mitigate abandonment risks,” Townsend says. “Vessels must be classed in order to benefit from P&I coverage. So if a vessel becomes unclassed, the P&I coverage ceases.” In the case of an abandoned ship, classification is lost and P&I coverage dropped, when the vessel is no longer operated and maintained according to standards.
“Abandoned vessels usually become the problem for the port authority,” Townsend says. “If there is some form of finance outstanding, vessels become the property—and the problem—of the mortgagees.”
One option to dispose of those vessels is to sink them; however, that poses potential environmental, human health and navigational concerns. Despite being stripped of major items, vessels may still contain harmful pollutants such as oil, fuel, lubricants, polychlorinated biphenyls (PCBs), asbestos and floatable material, like plastics.
“In terms of environmental issues, most ports don’t want a ship to sit idle for years,” says Baker. “It can be a hazard to shipping and, potentially, a hazard to the environment. So they’ll want to find some way of getting that removed,” typically by either selling or recycling the vessel.
Most often, however, ports are left to deal with the consequences of abandoned ships. That was the case with the Rhosus, which stopped in Beirut, Lebanon, in September 2013 and was impounded due to multiple deficiencies. In 2015, the cargo—2,750 bags of ammonium nitrate—was offloaded to a warehouse in the port of Beirut, and the vessel, after being moved to the edge of the port, was left to sink in 2018. However, on Aug. 4, 2020, a fire ignited the ammonium nitrate offloaded from the Rhosus, causing a large explosion that killed more than 150 people and injured thousands in the Lebanese capital.
Decrease in Oil Spills
Despite the technological advancements in marine transportation, the maritime industry is still often responsible for the spillage of oil, chemicals and other substances. The risk of spills may always exist, but the industry has worked for decades to develop risk mitigation techniques. According to the International Tanker Owners Pollution Federation Limited, the number of oil spills from tankers has decreased substantially over the past four decades—from an annual average of 78.8 oil spills (and more than seven tons spilled) in the 1970s to 6.3 oil spills in the 2010s. This statistic is particularly remarkable when looking at the number of oil spills in proportion to the quantity of oil transported during the years. According to the United Nations Conference on Trade and Development, oil tankers carried an annual average of nearly 1.5 billion metric tons during the 1970s and nearly 1.8 billion metric tons in the 2010s. As the amount of oil carried increased during the decades, the number of oil spills decreased, suggesting safer transport of oil.
But accidents still happen. In May 2020, the Singapore-registered X-Press Pearl caught fire and released 25 tons of nitric acid, among other chemicals, off the coast of Sri Lanka. Two months later the Japanese-owned ship Wakashio spilled more than 1,400 tons of oil off the coast of Mauritius, an island nation in the Indian Ocean.
“Ironically, the majority of spills come from smaller vessels under 300 gross tons, which are sometimes underinsured or not insured at all,” says Russ Brown, a partner at Safe Harbor Pollution Insurance. He notes that, while the increasing size of vessels is being blamed for the growing severity of oil spills, smaller and older vessels have a much larger impact on claims and the environment.
“The risk with larger ships comes from the increased amount of fuel they carry,” Brown says. “Any small leak has the potential to spill large quantities of fuel. Similarly, we’ve seen an increase in frequency of spills from bunker vessels—used to refuel large ships—but the severity of the damage has remained low because the new fuels are cleaner and easier to clean up.”
In addition to working proactively to mitigate the cause of spills, the maritime industry has been collaborating closely with insurers to develop a global spill-response network. In fact, some of the insurers that offer pollution coverage almost act as emergency response organizations. First, working with ship owners, insurers help develop a vessel response plan. This outlines what the vessel will do in case of a spill and, depending on the geographical position of the vessel, which contractors and emergency responders to contact. The document also provides the crew a step-by-step guide to handling the emergency safely and efficiently.
Finally, insurers work closely with emergency responders and various coast guards to prepare them for spills. “We’ve built long-term relationships with the Coast Guard and have assisted in training and coordinating alongside them for spills,” Brown says. “Once, we flew 90 Coast Guard officers to an oil spill so they could experience and train during a real-life event. If they’ve never seen a spill before, it’s easy to overreact and treat a small spill like it’s a major spill and unnecessarily overspend in the response.”
Seaports Threaten Local Habitats
Seaports are integral hubs of maritime supply chains and greatly contribute to socioeconomic development for communities. But they can often negatively impact host communities. A 2007 study by the University of Montreal revealed that the top environmental issues of port authorities were water quality, air quality, habitat conservation and noise.
Some of those environmental issues are being addressed on a global scale, while others are at the discretion of each seaport. For example, the Ballast Water Management Convention treaty, which came into effect in 2017, requires all vessels globally to manage their ballast water—fresh or salt water that vessels hold in tanks to provide stability and maneuverability during a voyage—to a certain standard in order to avoid the discharge of invasive aquatic species that may disrupt the local marine ecosystem. Habitat conservation projects have been implemented on an individual port basis. For example, since 2005 the Port of Seattle has successfully implemented a suite of projects to improve ecological processes and functions critical to local fish and wildlife.
Air pollution, however, continues to be a critical environmental issue for seaports. A 2016 assessment by the Environmental Protection Agency (EPA) suggests about 39 million people in the United States “can be exposed to air pollution from diesel engines at ports and be at risk of developing asthma, heart disease, and other health problems” caused by greenhouse gas emissions of port-related activities. Adoption of sustainability initiatives within seaport operations—such as monitoring of air, water and sediment quality, as well as reporting of sustainability guidelines—is growing rapidly. But to mitigate the environmental and health risks created by port activities, insurers and governments should work with seaports to further facilitate sustainable initiatives and investments.
Many seaports claim to be “the most sustainable port in the world,” but recent research aimed at assessing sustainability initiatives and approaches adopted by ports shows which port may rightly claim the title.
Ports undertake environmental initiatives in response to social pressure but also to grow and increase their international competitiveness. These environmental initiatives are defined by the American Association of Port Authorities as “strategies and activities that meet current and future needs of port stakeholders while protecting and sustaining human and natural resources.”
The study assessed sustainability initiatives adopted in global ports by selecting 36 ports to represent three regions: North America (NA), Europe (EU), and Asia Pacific (AP). Ports were selected based on claims or pledges to be sustainable, as well as on the availability of information from port websites. Ports in Africa and South America were not selected due to lack of publicly available environmental data.
In order to analyze the sustainability of each port, the authors selected 25 indicators based on existing sustainability initiatives and operational norms. These indicators may include the presence of environmental management systems, port environmental review systems, the use of renewable energy, and various quality monitoring indicators.
From a regional perspective, EU ports lead in sustainability, as four EU ports have high sustainability scores (22-23 initiatives), eight ports fall under the moderate sustainability scale (11-21 initiatives), and no EU ports were found to have low sustainability scores (1-10 initiatives). North American ports followed with three regional ports having high sustainability scores, five with a moderate sustainability rating, and four with a low sustainability score.
From an individual port basis, the ports of Los Angeles and Gothenburg, Sweden, can claim to be “the most sustainable port in the world” as they have both integrated 23 key sustainability initiatives.
Click here to download and view the Port Sustainability Scores chart