3. Decarbonization and Sustainability
Consumers, particularly those in European markets, are paying more attention to the carbon emissions associated with the transportation of their goods to market. Shippers, ocean carriers, and logistics service providers will face increased pressure to assess and manage their greenhouse gas emissions. Nearly two-thirds of corporate boards have now incorporated ESG goals into compensation plans, and the U.S. Securities and Exchange Commission is developing disclosure requirements. But disparate data collection methods and a lack of visibility into all the tiers of firms’ supply chains mean that most firms will struggle with reporting even when they are eager to be compliant.
Indirect costs, buried in higher logistics costs, are set to increase in 2023. The International Maritime Organization (IMO) agreed in June 2021 to a new set of guidelines to cut the carbon intensity of all ships engaged in international trade. Two new measures will come into force in 2023. Individual ships will be graded on an A-to-E scale, and those engaged in international trade will have to apply for an International Energy Efficiency Certificate at their first inspection after January 1, 2023. From then on, they will have to demonstrate annual improvement in their operational carbon intensity, an expensive challenge for older ships. That may involve costly retrofits, or some ships may choose to “slow steam” — sail at a lower speed — as a simple way to reduce carbon emissions. Coupled with container lines’ newfound capacity discipline, the era of cheap international container shipping may be over.
New environmental regulations are likely to become a more important factor in manufacturing location choices as well. The European Union’s proposed Carbon Border Adjustment Mechanism (CBAM), slated to become fully operational in 2026, will put a carbon tax on imports of selected products so that ambitious climate action in Europe does not lead to “carbon leakage.” While the first phase covers carbon-intensive sectors such as cement, iron and steel, aluminum, fertilizer, and electricity, this could have a significant impact on sectors such as industrial equipment where a significant proportion of the product cost is steel, castings, and forgings. It could apply to a broad range of imports over time.