The Price You Pay for Climate Policies: Understanding IMO 2020

In January 2020, a little-known rule went into effect that today regulates the kind of fuel maritime shipping vessels are allowed to use. Conceived of by the United Nations’ International Maritime Organization (IMO), the rule, known as IMO 2020, caps the amount of sulfur in carriers’ fuel at 0.5%, dramatically below the previous limit of 3.5%.

Although not considered a direct “greenhouse gas” like carbon dioxide and methane, sulfur can contribute to the formation of aerosols, which are believed to affect the earth’s climate. (As some of you might remember, the U.S. effectively banned the use of chlorofluorocarbon (CDC) aerosol cans back in 1978 out of concern for the ozone.)

Under IMO 2020, vessels are permitted to use dirtier bunker fuel only so long as they have “scrubbers” installed, but these exhaust gas cleaning systems aren’t cheap. Depending on the ship’s age, they can cost anywhere between $2 million and $6 million per vessel.

That price tag doesn’t factor in the opportunity cost of having a vessel out of service while the scrubber is being installed, not to mention the ongoing maintenance and hassle of disposing of the waste chemicals, which ultimately end up in a landfill anyway.

Nevertheless, many cargo shipping companies are opting for the scrubbers to avoid having to buy the pricier 0.5% stuff. According to the U.S. Energy Information Administration (EIA), there’s currently a $20-per-barrel differential between very low sulfur fuel oil (VLSFO) and high sulfur fuel oil (HSFO), a not-insignificant amount. When you consider that a typical Panamax-class vessel can hold up to 2 million gallons of fuel, that extra $20 really adds up.

Good Intentions, Unintended Consequences

My reason for sharing this with you is that, as is often the case, policymakers’ intentions may be good, but there are always unintended consequences—including additional costs that get passed on to customers and eventually consumers. I believe IMO 2020 has contributed to shipping rates that have remained elevated for over a year now, the other contributors being the pandemic, consumers’ increased demand for goods and the ongoing semiconductor chip shortage.