Xeneta Finds Supply Chain Diversions Fuel Spike in Carbon Emissions

The Xeneta and Marine Benchmark Carbon Emissions Index (CEI) shows carbon emissions increased by 63% in Q1 2024 compared to Q4 2023 with regard to containers being shipped via ocean from the Far East to the Mediterranean. From the Far East into Northern Europe, carbon emissions increased by 23%. The index hit 107.4 points in Q1 2024 — the highest it has been since the index began in Q1 2018.

The CEI measures carbon emissions per ton of cargo transported across the world's top 13 trades. Emily Stausbøll, Xeneta market analyst, told American Shipper that container ships bound for the Mediterranean from the Far East traveled 9,400 nautical miles on average in Q4 2023 before the escalation in the Red Sea. As a result of the diversions around the Cape of Good Hope, the vessels now sail an additional 5,800 nautical miles.

"More fuel is being burned as a result of the longer voyage" said Stausbøll. "Ships are also being sailed at higher speeds in an attempt to make up time due to the longer distances, which again results in more carbon being burned."

According to the United Nations, maritime shipping accounts for nearly 3% of global greenhouse gas emissions. The U.N. stressed that reducing carbon dioxide emissions by 2050 is crucial in the fight against climate change. This means moving away from traditional fossil fuels to the utilization of zero-emission energy sources, such as hydrogen, ammonia, methanol or wind. The transportation sector (which includes shipping), is the second-largest contributor to global carbon pollution and is responsible for about 20.2% of the world's total CO2 emissions.

The European Union's Emissions Trading System (ETS), which started Jan 1, is the EU's plan to decarbonize the sector. Staggered out, ocean carriers would be charged for 40% of all emissions in the EU in 2024, 70% for 2025 and 100% from 2026.

"The logical expectation would be that an increase in emissions should result in an increase in emissions-related surcharges" Darron Wadey, an analyst at shipping consultant Dynamar, told American Shipper. "However, we are dealing with a nascent market here. The extra charges are based upon ‘permits' the carriers need to buy through the EU carbon market or by trading with each other. So, as traded instruments, their financial value will fluctuate (although the underlying pressure should be upwards as the number of permits will be reduced over time)."

Reviewing the surcharges, Wadey said there is a distinct lack of universality in the ETS surcharges the carriers are levying.

"We are only in the second ever trimester of this system, and the carriers are reacting differently" explained Wadey. "For 2Q 2024 Hapag-Lloyd's surcharges for Asia-Mediterranean, Middle East-Europe and -Mediterranean routes have increased by an average of 56% compared with 1Q. In contrast, Maersk's surcharges for 20' containers along the same routes have fallen by an average of 15% quarter-to-quarter."

Wadey said both carriers, their North Europe-Asia surcharges were actually reduced by between 8% and 14%, quarter on quarter. The surcharges' universality will be updated every quarter.

"Any changes in the ETS surcharges will have direct impacts for shippers, whether these surcharges move up or down" said Wadey. "This is because they are treated by the shipping lines as separate elements alike THC, bunker adjustment factors, equipment imbalance surcharges and so on, rather than integrated into the freight price."

Ben Nolan, maritime and energy infrastructure analyst at Stifel, said the Red Sea said rerouting will kill the emission targets and this is not the first time vessels have increased their speed to reach their final destination.

"Companies sped up ships and blew through targets a few years ago when container costs went through the roof" said Nolan. "Seems like economics always win out."

The inflationary impact Nolan said would be on assets that would be likely smaller, regional and generally older. 

"Larger vessels that only occasionally operate in EU areas should be able to pass on those costs" said Nolan. "However, it will certainly create a two-tiered market for those vessels like chemical and product tankers and container ships that spend most of their time in regulated areas. The ETS could push the older vessels out of the market, and draw in more modern efficient assets."

Wadey tells American Shipper his main concern about the Red Sea goes beyond the ETS and the impact on commercial shipping.

"Without a resolution to the crisis — it's now gone beyond it being short term — these diversions will become embedded into the supply chains with attendant and significant consequences for emissions and sustainability. This will make the already difficult task of realizing any date-stamped reduction targets all that more difficult."

The war on climate change and the reduction of CO2 leaves the logistics sector open to additional possible regulation. The European Union, Canada and Japan are among 47 countries supporting an international charge on the shipping sector's greenhouse gas emissions. Countries like China, Brazil and Argentina are against the measure, saying it would be disruptive to their economies.

"Excessive surcharges, as these exporting nations see them, could facilitate a realignment of some supply chains" explained Wadey. "However slight that may be, it is only natural they would want to protect their positions." 

The trade war was one of the earliest examples of how increased costs influence the migration of the supply chain. Wadey said they have seen changes in the shipping lines as customers look to diversify their supply chains. Nolan said it's not surprising China and Brazil are against the measure since trade would be more expensive with the added regulation and as a result discourage export.

With no end in sight to the Houthi attacks on vessels in the Red Sea, expect the war on rising CO2 to be challenging.

Xeneta data shows the surge in air cargo, with ocean freight going to the Port of Jebel Ali in the Arabian Gulf and then transported to the Dubai Airport for onward transportation to Europe and North America. Demand from Dubai Airport to European destinations has increased by 190% in March year over year.

"Not only is air freight more expensive than ocean freight, it is also far less sustainable, so this shift to hybrid sea-air services via the Middle East will result in increased carbon emissions per ton of cargo transported" said Stausbøll.

Stausbøll added that shippers are also using rail services again through Russia to transport goods from the Far East to Europe.

"Similarly to air freight, rail services are more carbon-intensive than ocean freight shipping" said Stausbøll. "Ocean freight container shipping is only one sector, but this clearly demonstrates the massive impact the Red Sea and war can have on carbon emissions and the climate."

The post Xeneta finds supply chain diversions fuel spike in carbon emissions appeared first on FreightWaves.