Low-carbon management in the shipping industry and the absence of economic


Incentive Structures: A Case of Market and Non-Market Failures?

Text by Serafim Agrogiannis, PhD Candidate in Business Administration at Misum

Navigating the aspects that distil the situation to its very essence requires openness. Not a polarized stance in the debate about uncritically urging firms to raise their environmental performance standards. Such an approach is underpinned by the aim to disprove criticism of the industry lagging behind in sustainability efforts where such a verdict is invalid and to raise awareness and possibly improve amongst other the utilization of low-carbon management where disapproval is due.

Climate change is more topical than ever. Unnerving times about its impact have pervaded considerations of the shipping industry’s role towards GHG emissions reductions. The latest study of the International Maritime Organization (IMO) depicts a current increase of 70% and projects escalation up to 250% by 2050 compared to the baseline year of 1990. This reveals an estimated increase of 200-300% in shipping activity (IMO, 2014) and according to the European Parliament’s report it will comprise of almost 17% of global carbon emissions if left unregulated (ENVI, 2015).

Such evidence serves as an eye-opener. It has vindicated a multitude of tenets held dear by proponents arguing against the shipping sector’s exemption from the Paris Agreement on climate change in 2015. The IMO’s reaction has been to persuasively establish the case that forthcoming carbon data collection requirements would supplement existing initiatives and formulate a coherent response for alleviating the industry’s impact on climate change. Parallel to this, is the new EU regulation (2015/717) on monitoring, reporting and verification (MRV) of carbon emissions for all ships reaching European ports effective from the 1st of January 2018 onwards. Both initiatives reflect a willingness to deal with information asymmetries through increasing transparency and data reliability.

But how do these attempts relate to the market overall? The majority of the shipping sector functions under a risk-based approach adopting only the necessary measures compliant with legislation and operational on-journey ramifications for achieving fuel efficiencies (Poulsen et al., 2016; van Leuween and van Koppen, 2016). In this case, stringent environmental, safety and health standards for reasons of customer/shipper vetting procedures (e.g. oil industry) and for certain management guidelines such as the International Safety Management (ISM) code prevail. Even in the container segment, which is alleged to be more advanced concerning environmental considerations, large shippers only partially deal with carbon management. Instead, reputational and cost reduction concerns prevail. Such a cost-cutting strife and commoditization eradicates any potential of incentive-shifting solutions. This largely invalidates proponents’ stance (e.g. Vandenbergh, 2013; King et al., 2012) for market based measures (MBM’s) and the internalization of environmental externalities. Add to this the weaknesses in data accountability, ambition as well as improvement levels (Scott, 2017) and the landscape becomes clear.

Apart from this indisputable market rigidity, the industry context itself is challenging. First, shipping is extremely capital intensive, freight with cyclicality related to the world economy as well as the time lag in order to couple supply and demand of ships. As such, sustainability-related postulations remain far from a straightforward matter where elaborations encompass dynamic and uncertain juxtapositions against cost-effectiveness and corresponding time horizons in order to evaluate potential trade-offs through certain technology investment choices and related bunker prices. Second, regulation within the industry constitutes the main driver towards environmental upgrades. The existing Energy Efficiency Design Index (EEDI) as well as the Ship Energy Efficiency Management Plan (SEEMP) illuminate a reality where attempts are made to further reduce GHG emissions. Given that the majority of shipping market segments point towards intense competition, these compliance strategies are viewed as means of retaining current position within the industry. With respect to differentiation, market segmentation practices within the different segments (e.g. cargo, dry, bulk) pose varying contract award criteria where cost, quality, flexibility and reliability have stronger effects on shipping firms’ environmental performance compared to product differentiation advantage through the ships themselves “offering the services” in question. Third, and given the outsourcing of the ship management function, many shipping firms focus on the applicability of best practices toward carbon reduction through task specialization and knowledge diversity allowing for the creation of unique bundles of resources and capabilities.

As a remedy, the discussion should embrace a wider perspective. Adopting a supply chain context (e.g. LSP’s) or its procurement function, could unveil potential of improvement. Issues proving material in the near future would also include shipbreaking procedures and the extent that strict working and environmental conditions, exceeding the baseline set by the United Nations’ Hong Kong Convention, are met. Given that recycling of steel is treated through a global commodity lens, the price paid for dismantling a ship is crucial: the lower the shipyards’ standards, the greater the profit potential of the shipping firm due to reduced commission prices paid. Recently, the EU published a list of approved shipyards that abide by certain standards and as an extension shipping firms could potentially agree on an industry-wide level to accept recycling practices conducted in certified shipyards. Revitalizing supporting infrastructure and making respective facilities more competitive and sustainability lenient through ports’ energy and environmental upgrade as well as their seamless integration with maritime operations and hinterland connections could provide added value and promote specialized shipping service clusters.

A steady hand could be offered by the financial sector as well. The newly announced initiative from ABN AMRO, ING and NIBC banks about the Responsible Ship Recycling Standard (RSRS) is telling. The introduction of alternative financing options in the wake of the global financial downturn almost a decade ago and due to stricter liquidity regulations for the banking system (e.g. Basel III) seems promising towards forging new partnerships empowering responsible and patient capital on the investors’ side and augmented oversight of key sustainability results.

Beyond doubt, sustainable shipping presupposes an engaged scholarship approach. Not sticking our heads in the sand. Empirical matters should be combined with multi-functional conclusions in terms of anticipating and influencing the type of knowledge needed for enlightening academic and practitioner spheres. In addition to normative research this calls for issue-oriented inquiry answering the wide diversification of practices involved within the policy-practice field, financial systems and supply chain management.

This is what we do at Misum. All the academic staff and colleagues have deep knowledge and tackle leading issues within our certain disciplines in a collaborative manner. The overarching aim is to invite attention from all across the policy, intellectual and practical spectrum in order to effectively tackle the challenges on the pressing and changing world of not only sustainable shipping but the role of business and society and their reinforcing interplay. We seek to further strengthen the ongoing dialogue about the most central concern nowadays: how to possibly make amendments in current business practices accompanied by appropriate policy-imbued interventions towards the benefit of the common good.

Written by Serafim Agrogiannis, PhD Candidate in Business Administration at Misum

The Challenge of Mobilizing Finance for Renewable Energy


Text by Max Jerneck, PhD and researcher at Misum

Alternatives to fossil fuels are slowly gaining ground –  much too slowly for the world to have any reasonable chance of avoiding catastrophic climate change and ocean acidification. To speed up the process, there would have to be a sea change in investment patterns. Mature low carbon technologies such as solar and wind are attracting increasing amounts of investment but there is a limit to how much they can expand without coming up against the constraints of intermittency, i.e. the fact that they only generate electricity when weather conditions permit. Breaking into the mainstream would require overhauled electricity grids and technological breakthroughs in energy storage technology. To achieve a real transition from fossil fuels to renewable energy, continuous investments in innovation is needed. Mobilizing finance for this task is a real challenge.

Technological innovation is normally not a very good investment. Potential gains are inherently uncertain, and often do not accrue to innovators but to followers who refine the technology. In the case of low carbon technology, competition from incumbent industries makes the prospects dimmer still. For investors to bet on low carbon technology, they would have to be either wildly over-optimistic, or simply unconcerned with financial returns. These types of investors are always needed to bring technologies to deployment, according to economist and venture capitalist William Janeway. Governments are needed to finance the initial unprofitable phase of development, which often lasts decades, and speculators are needed to bring it to market. Only in a bubble does money pour freely and widely enough for technology to be rolled out, tested and tried in the field. Before the 2008 crisis, a combination of these two motivations drove a minor boom clean technology investment. Governments in Spain, Germany, Italy, and other countries paid generous subsidies for renewable energy, enticing irrationally exuberant investors to pour money into the sector. After the financial crisis and Europe’s turn to austerity, subsidies dried up and investors realized that they had lost half of their money.

Venture capital worked well in an unoccupied technological field such as computers (which also had heavy state-backing from the military) but energy is an occupied ”legacy sector”, where market power has merged with regulatory power, fortifying it against disruption. Creative destruction in such a sector is not be easy, particularly since fossil fuels also experience rapid technological advances, as in shale extraction, fracking, etc. The MIT technology review recently published an article called Why bad things happen to Clean Energy Startups, that chronicled the downfall of Aquion energy, an energy storage startup which apparently had done everything right, yet still went bankrupt. The venture capital model for financing clean technology is,”broken,”  another recent MIT report states. The clean energy transition cannot be financed by the private sector alone; it needs to be supported by governments.

One place where the government has invested quite heavily in renewable energy technology lately is China, where state-owned banks and local governments have generously supported the development and expansion of solar and wind energy. In fact, it is possible that government financial support has been too generous. Critics argue that ”soft budget constraints” provided by government weakens incentives for innovation, and keeps uncompetitive ”zombie” firms alive, leading to serious problems of overcapacity. For years, there has been rumours of an impending solar shakeout in China, but it has yet failed to come. Given resistance from local governments supporting their home firms, I am not sure that it will. Overcapacity can be resolved in two ways, by reducing supply or increasing demand. The Chinese may do so through a combination of measures, either by allowing or engineering a consolidation among renewable energy firms into a few national champions; by increasing domestic demand through installations; by shutting down renewable energy’s main competitor coal; or by increasing demand through foreign installations along the One Belt, One Road route. All of these policies are pursued with varying levels of success. It remains to be seen which combination of options prevail; I may return to them in a future post or article.

I am personally not sure that excess capacity in China’s renewable energy sector should be viewed as a problem. It has been the main cause of the steep decline in solar costs over the past decade, and is compelling chinese officials to increase domestic demand. It has allowed a constituency to take form around the technology which will be hard to unseat. Excess capacity represents facts on the ground which makes the advance of renewable energy harder to reverse. Starting with the 12-five year plan in 2011, solar energy has become one of China’s important strategic industries, which will presumably form a foundation for dominance in electric vehicles and energy storage as well. Since the Chinese state does not seem to apply any financial constraints, the only limiting factor is the technological prowess of Chinese firms, which seems to be growing year by year.

The most advanced emerging technological segments, however, are still dominated by western firms and laboratories. The question is how to bring these through the first difficult phase of development, an important task to advance energy storage and promote exploration to avoid lock-in to the dominant designs currently favored by China. The West is much richer than China and should have no problem mobilizing finance for this task. What is lacking is a sense of urgency and a strategic view of the economy. Five year plans are no longer in fashion, even in France.

Mariana Mazzucato has argued that development banks could fulfill this role. In Europe, that would be the  European Investment Bank or the European Investment Fund. Risky investments in innovation do not sit well with the bank’s mission of providing returns to its shareholders, however. To provide the financially unconcerned actors that are needed, investments might have to be backstopped by central banks. Much like quantitative easing has instilled investor confidence in sovereign bonds, promises to buy equities in innovative startups could do the same for venture capital investments in renewable energy. Central banks have bought various financial assets from old-economy firms since the crisis. A post on FT ALphaville earlier this year by Alexander Barkawi titled why monetary policy should go green pointed out the carbon economy bias of these programs. They are in violation of the Paris Agreement, which states that all financial flows be made consistent with low carbon growth. Venture capitalists do not invest in emerging low carbon technologies because they do not see a viable exit option. Having such an option provided by central banks could alleviate those concerns. Western nations do not have the institutional, political or ideological capacity to finance new industries at any level near that of China, but  the commanding heights of the financial system are still under government control, and could in theory be coupled with venture capital to drive the transition. Given the reluctance of western political leaders to address even immediate afflictions such as mass unemployment, and even willingness to exacerbate them, it is almost impossible to imagine them proposing sensible, let alone bold or visionary, policies to address the much more intangible and slow moving threat of climate change. But these are the sort of ideas that should be lying around in the next crisis.

Written by Max Jerneck, PhD and researcher at Misum