Supply chain cost fears amid carbon tax decision

Risk managers who rely on the global supply chain have been warned a key meeting to be held this week is set to push freight costs to record levels.

As the threat to supply chain and the implications for business interruption and contingent business interruption risks was discussed at the AIRMIC annual conference in Liverpool the Global Shippers Forum (GSF) has warned plans to hit the maritime sector with new carbon rules will only lead to higher costs to move goods across the world.

The global business organisation which represents cargo owners which export and import across international supply chains, has urged the maritime sector to look to insulate cargo owners and shippers from the brink of the carbon tax which is expected to be agreed this week.

Following the decade-long efforts of the International Maritime Organisation (IMO) to gain agreement on the so-called IMO 2023, a set of energy efficiency measures for existing ships, which finally take effect next year, Marine Environment Protection Committee (MEPC) will now discuss a further proposal put forward by the shipping industry to introduce a Carbon Tax on bunker fuel.  This is intended to incentivise a switch to lower carbon emitting fuel options and could eventually double the current price of tradition bunker fuels.

In the first instance GSF is urging regulators to make sure that the potential for shipping lines to remove older tonnage from the market, which they deem uneconomic to upgrade to progressively more demanding efficiency levels, is not used as a disguised means for capacity management resulting in higher freight rates.

Moreover, it added there is perhaps a more obvious danger to shippers. Given the widespread use of Bunker Adjustment Factors (BAF) and the rash of new surcharges ahead of the introduction of Low Sulphur Fuel in 2020, shippers will be wary of how much of this proposed Carbon Tax will just be passed through to them.

Director of GSF, James Hookham explained: “Shippers will be forgiven for thinking that the proposal, and its consideration at the IMO will inevitably result in still higher freight rates. That’s because the shipping industry has a very efficient mechanism for passing through higher fuel costs in the form of BAF; a surcharge to cover variations in fuel price. There are few reassurances in the existing proposals that a Carbon Tax won’t just be passed through as an added cost for shippers.”

Hookham added: “If the shipping industry is serious about Market Based Mechanisms as a route to decarbonisation, then it needs to insulate its customers from their inflationary effects otherwise emissions will be reduced by suppressing demand for world trade rather than by incentivising the step-changes in fuels and propulsion technology, so urgently required.”

GSF said it is urging the IMO members on the Marine Environment Protection Committee to give due consideration to the interests of those who constitute the drivers of international trade, exporters and importers, and given the potential sums of money involved, insist on any Carbon Tax mechanism be fully transparent with exposure to scrutiny.

“The MEPC needs to think through the realities of the shipping market and avoid simplified comparisons with experiences in other sectors of their economies,” said Hookham.

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