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Decarbonizing the Ports and Terminals industry – is there a collective way forward?

May 2, 2023

The International Maritime Organization’s (IMO) decarbonization efforts have set a clear course to reducing emissions from the global shipping fleet, focus is shifting to ports and terminals.

While shipowners have the IMO to legislate, coordinate and enforce the adoption of ‘greener’ fuels and practices, the ports and terminals sector has no such global governing body, putting the responsibility into the hands of loose coalitions of port, municipal and federal authorities, and private operators, who have varying decarbonization budgets and appetites for climate action.

The challenge of the industry regulatory environment

Without a single authority such as the IMO, port bylaws are issued by ‘port authorities’ who gain their legal authorities through vehicles such as national maritime codes and port or municipal laws. However, port authorities which tend to be public bodies, in most cases do not control private terminal operators or industrial facilities located in and around the ports they regulate.

In this fractured regulatory environment, ensuring coordinated and consistent environmental initiatives will be essential to decarbonizing the ports and terminals sector without creating the types of competitive disadvantages that discourage first-movers and the technical innovation they bring.

Early plans in Europe and on the US west coast suggest billions will have to be spent (see details below) just to ‘electrify’ some of the industrialized world’s main maritime centres; seen from a global perspective, that signals a significant escalation of financial and business risks across the ports and terminals sector.

Just as clear, however, would be the social cost of inaction. While it is commonly cited that maritime trade generates 2-3% of global CO2 emissions each year, what is less frequently discussed and measured is the social impact each maritime hub has on the immediate communities where they are located, and where emissions output is often more concentrated.

For example, the European Commission estimates that, of the maritime sector's CO2 emissions for shipping, 6-7% is generated by ships at berth in ports within the European Economic Area, comprising 30 countries across Europe.

Alternative fuels and cleaner power supplies

To reduce these pollutants, the Commission recently proposed FuelEU Maritime legislation to boost the production and adoption of sustainable, low-carbon fuels; these soon-to-law (2025) regulations also oblige ships to transition to using on-shore power supplies (OPS), rather than burn carbon-based fuels while docked, and ports to facilitate the transition for both.

The cost of building the alternative fuels infrastructure (from 2025-2050) alone has been estimated at €9.9 billion, according to the Commission: €2.5 billion for hydrogen infrastructure and €7.4 billion for OPS. The legislation also commits port operators in the ‘TEN-T’ network of maritime ports to meet 90% of demand for OPS within this decade.

Of course, projected expenditures on this level are unlikely to be restricted to Europe, which tends to lead global maritime environmental legislation; nor are the tight timelines for the implementation of complex maritime-decarbonization projects.

Ports and terminals operators at the sprawling maritime complex in San Pedro Bay, home to the port of L.A./Long Beach, America’s busiest container-handling facilities, have been tasked with reducing to zero (by 2030) emissions from their cargo-handling equipment, in line with the 2017 Clean Air Action Plan (CAAP).

About $2 billion has already been spent on cleaner trucks, cargo-handling equipment and initiatives such as OPS, but the ports estimate that the full bill for new technologies, infrastructure and incentive programmes for CAAP strategies could reach $14 billion before all is said and done.

Costs that can’t be ignored

The social costs are increasingly obvious and documented: for example, the LA/LB port complex is southern California’s largest source of smog-forming pollution and is responsible for more than 10% of its emissions of nitrogen oxide, a gas that is 300 times more detrimental to the climate than CO2, according to recent study published in Nature.

From the insurers’ perspective, ports and terminals’ expenditures on this level herald a new period of financial and business risks for the sector; an interesting position for insurance markets focused on reducing financial uncertainty and risk transfer.

Naturally, with climate-conscious ports and terminals potentially facing business-altering clean up costs, there are plenty of examples of calls for access to the public purse, most recently in the UK, where recent research suggested that 70% of ports are already at the ceiling of available grid power.

Ultimately, costs will be borne by both the private and public sectors but the scale of investment required may be limited by the absence of globally enforced regulation.

A different asset class

Ports are a different class of asset than ships, which can be banned or scrapped when they don’t live up to emissions mandates. For one, they are fixed assets that are located strategically – usually in deep waters and close to large consumer bases or industrial sites; cargo owners (and, ultimately, consumers) would pay de facto commercial penalties for boycotting non-compliant ports and diverting cargo through less cost-efficient locales.

There are some signs that consumers are putting pressure on cargo owners to take responsibility for the climate costs of getting their goods to market by sea, but there is as yet little sign this pressure has diverted cargo away from non-compliant carriers or ports.

So, the impetus to decarbonize ports will have to come from port authorities, in accordance with the climate ambitions of each, and piece by piece.

This ‘patchwork’ quilt approach to reducing emissions from the sector could have the flexibility to offer bespoke solutions that suit local port communities, but there also will be some obvious challenges, not least of which will be ensuring that all efforts are aligned with the climate goals of legally binding global initiatives such as the UN’s Paris Agreement.

Coordination is key

Any lack of coordination will potentially pose wider challenges, such as: ensuring consistent verification of decarbonization efforts; pooling finances for technological research and development; setting industry standards for new systems and equipment; purchasing at scale; setting and coordinating best practices (for training, safety and energy systems, etc.); ensuring first-movers do not face disincentives, etc.

To the last point, there is a growing evidence that incentive schemes – such as those created by port authorities in Japan to encourage the transition to electric gantry cranes (as opposed to diesel) – will prove more successful locally at lowering emissions than carbon penalties, fines and other punitive instruments that can skew regional competition and deter business.

In the absence of global ports and terminals regulation, some port cities have joined forces to coordinate efforts. The C40 Green Ports Forum, a global alliance, is committed to creating ‘green shipping corridors’ (initially, between LA and Shanghai); it has tasked those two cities to publish an ‘implementation plan’ by the end of this year (2022).

Similarly, 23 national signatories to the UN’s Clydebank Declaration are committed to the creation of at least six green corridors, which it defines as ‘zero-emission maritime routes between two or more ports’, by the ‘middle of this decade’.

Increased risk of infrastructure cyber vulnerabilities

Based on early activity in the sector, it is reasonable to assume that part of transition to decarbonizing ports and terminals operations will involve greater electrification and automation of port infrastructure, which would raise the number of system access points for cyber-attacks.

Also, the IMO’s fuel decarbonization mandates for ships will oblige ports and terminals operators to source, store and supply new generations of marine fuels – everything from ammonia and hydrogen to methane and biofuels – with which the maritime sector in general has limited experience.

Some experts believe that the transition to a low-carbon future represents the maritime sector’s biggest technological change since the onset of containerisation; as with containerisation, the associated gains in business efficiency can be expected to drive cost-effectiveness.

However, this time, as ports and terminals operators try to strike the delicate balance between obligations to public safety and the commercial pressures for profit, environmental sustainability will need to play a greater role in building business resilience.

The insurance industry can play a role too in promoting and supporting the transition

Insurers are already required to develop their awareness of emerging risks to meet commitments to initiatives such as the Taskforce on Climate Risk Financial Disclosures (TCFD). In turn, the market can be expected to continue to expand its focus beyond basic asset and systems inspections to more complex risks such as those posed by climate change. This in turn will shift what insurers ask of prospective ports and terminals policyholders when their risks are being examined.

As with the current market for cyber insurance, a fundamental understanding of climate risks and adaptation may need to be in place before cover is even discussed.

It appears unlikely (at least in the short term) that the sector’s climate laggards will become entirely uninsurable. However, there is building pressure on insurers to adjust their portfolios away from carbon-intensive sectors; and there are growing reputational risks for those who chose not to. In this light, insurance options for heavier emitters could gradually diminish, similar to recent market appetites for coal terminals and arctic exploration.

While decarbonization will promote the longer term insurability of ports and terminals mitigates, regulatory compliance risks and creates market/reputational opportunity, the transition is also associated with several technological, market and legal risks. Many stakeholders will be questioning how they can best manage, mitigate and finance these.

This presents an immediate opportunity for insurers and their brokers to play a role in addressing uncertainty and supporting the transition, including by:

  • extending the use of existing bursaries for risk surveys to encourage activities that build understanding of the climate risks and corporate resilience
  • leading initiatives to develop insurance products in partnership with industry
  • developing initiatives to transfer knowledge, for example, related to risk awareness, assessment strategies and emerging regulation

Ports and terminals should, where possible, help to guide insurers and brokers in ways that help them to provide better support, including by:

  • designating responsibilities for sustainability and decarbonization to specific executives and tasking them communicating those strategies to insurers/brokers
  • taking steps to assess their business’s exposure to climate and transition risks, for example, by working towards TCFD alignment, and discussing outcomes and protection gaps with insurers
  • advising insurers and brokers on decarbonization challenges and knowledge gaps

This article has been written by the WTW Ports and Terminals Forum – a unique community created by WTW to provide a platform for the debate on the sector’s current challenges.


Head of Marine Asia

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