Greek Business File, September-October 2020, No 127
By Dr Anna Bredima*
Guillotine or bonanza?
Shipping between sustainable funding “black out” and “green” financing
In the framework of international consultations aiming at the protection of the environment and especially the reduction of emissions, the EU has launched a coordinated effort for the timely application of obligations deriving from the Paris Agreement on climate change. The recent adoption of a new European Regulation on taxonomy triggered off the process of an EU-wide classification of economic activities that would be characterized as sustainable (green) for the purposes of financing by the EU. Shipping will be one of these activities, provided it can prove to the EU institutions that it fulfils the Taxonomy criteria. The question is which these criteria are and whether they will take into consideration the specificities and the international character of maritime transport. This is a very difficult exercise. Will the Greek and European shipping be able to “fit” on the Procrustean bed of this Taxonomy? All bets are on, this is an urgent matter and the stakes are high
The European Commission has been dealing recently with the adoption of rules for an EU-wide classification of environmentally sustainable economic sectors of for the purposes of their financing. The Regulation on the establishment of a framework to facilitate sustainable investment (the Taxonomy Regulation) 2020/8521 was published on 22/6/2020. Its details will be included in delegated Acts, the first of which expected on 1/1/2021 will last for three years.
The Directorate General on Financial Stability, Financial Services and Capital Markets Union (DG FISMA) of the European Commission is currently preparing the details of the first delegated Regulation. The Directorate General for Mobility and Transport (DG MOVE) participates in the deliberations to include air and sea transport activities in the sustainable economic activities. The consultants of the European Commission are expected to submit their report by September 2020. Therefore, the timeframe for consultations between private stakeholders and the European Commission is narrowing.
Taxonomy Regulation-Delegated Act
Just by reading the Taxonomy Regulation one realizes that it was not drafted with shipping and its international character in mind. Its immediate purpose is to classify all economic activities according to their reduction of greenhouse gas emissions (GHG) for the implementation of the targets of the 2015 Paris Agreement on Climate Change.
Indeed, it is a horizontal regulation of a highly bureaucratic nature. From the shipping point of view, one might say: “We are not interested in this regulation. We can find financing, apart from banks or the EU, through private funds”.
However, in reality, the Regulation will be of great significance for both the European and Greek shipping. Following extensive scrutiny from the perspective of reduction of CO2 emissions, if an activity is not characterized as “green“ and is relegated as “brown” or “black” activity, it will neither get finance from the EU nor from private funds. These funds will probably use the Regulation vis a vis their investors as an official recognition of the environmental criteria for the sustainability of their investment (irrespective of whether the funds are outside the sphere of influence of EU law). At the same time, European private investors will also use the criteria of the Regulation as a credible checklist as to where to direct their investments. Therefore, it is crucial to adopt the most suitable technical screening metrics for maritime activities.
Moreover, the Taxonomy Regulation and the delegated Act could also trigger off proceedings in non-EU countries which finance shipping to adopt relevant legislative measures with similar or different green criteria and metrics. As the maritime transport activity is par excellence international, the possibility of having different regional regulations on the assessment of green shipping activities should be avoided at any cost.
“Particularities of Shipping Regarding the Taxonomy”
As the first delegated Act is in the making, European shipping has realized that:
1. It must actively and speedily participate in the establishment of criteria since it cannot modify the basic principles of the Regulation.
2. The criteria for the classification of shipping as a green activity should be as close as possible to the relevant provisions and targets of the International Maritime Organization (IMO) in order to safeguard a level playing field for European shipping.
3. A one-size-fits-all solution cannot be applied to shipping due to its diversity.
Maritime transport has a particularity compared to other modes of transport: It is not a uniform mode of transport, as it includes different kinds of ships (bulk carriers, tankers, containerships, passenger ships, Ro-Ro ships, cruise ships, offshore ships, chemical carriers, auxiliary services ships) and different modes of operation (liner shipping, tramp shipping, deep sea shipping, short sea shipping, offshore shipping). All these specificities of maritime transport should be taken into account in devising the criteria of green sustainable financing. Otherwise, shipping will be characterized as a grey or black economic activity and the funding or financing sources will be closed to it.
Shipping is among the least polluting sectors, into account that 90% of world trade is carried by sea, international shipping has committed itself to a wide ranging research and development program for alternative fuels and technologies, less polluting types of ships, and transport operations. The Initial IMO Strategy on GHG Emissions Reduction (13 /4/2019) contains specific commitments for a short-, medium- and long-term program aiming at reduction of GHG emissions by 50% until 2050, compared to the basis year of 2008. Moreover, a host of international shipping organizations, the International Chamber of Shipping (ICS), BIMCO, INTERTANKO, Intercargo, CLIA, and the World Shipping Council (WSC) proposed to the IMO to undertake the funding for the creation of an International Maritime Research Fund (IMRF) with $5 billion for a 10-year period. In this ongoing process, European shipping supports the IMO for a smooth transition to the green economy.
Εuropean Green Deal and Maritime Taxonomy
The EU, politically bound by the European Green Deal adopted by the European Commission (11/12/19)2, proceeded to an even more ambitious program towards the establishment of a European Waterborne Transport Sector (Opatija declaration of 11/3 /20) stipulating zero emissions of GHG by 2050. Ongoing research and development brings about new technologies, less emitting or alternative fuels, and respectively less polluting types of ships. Shipping, in cooperation with the shipbuilding industry and marine equipment manufacturers, are devising solutions towards a more sustainable future regarding GHG zero emissions and waste of ship management. Thus, the criteria of the delegated Regulation to characterize maritime activities as sustainable economic operations should be indicative and not exhaustive, in order to include new technologies, other ship types and maritime activities to be invented or developed in the future.
In the present post-Covid-19 situation, European shipping is seeking to secure the supply chain to consumers through the transportation of cargoes (food, medicines, energy, raw materials) but also passengers on a world scale. Shipping consists, to an overwhelming extent, of small and medium sized enterprises (SMEs) and not just the round-the-world companies managing the floating fortresses that one sees in ports. This is even more true regarding Greek shipping with its several “family owned” enterprises. These companies have been severely hit by the pandemic in the short term for their liquidity and in the medium- and long-term for their financing.
In parallel, banking developments in Europe over the past few years have been leaning to a stricter capital requirements Regulation which has led to the decrease of ship financing in the framework of the Basel IV agreement. Consequently, the taxonomy process is of capital importance in devising the most suitable technical screening criteria for financing the energy transition of shipping to the era of full decarbonization and independence from coal and fossil fuels.
In the Greek mythology, Procrustes, the son of Poseidon, had an iron bed on which he forced passers-by to spend the night on their way between Athens and Eleusis. Those unlucky ones put on the Procrustean bed had to “fit” exactly either by being stretched or by having their legs cut off to that effect. By extension, a Procrustean bed is an arbitrary standard to which exact conformity is forced. Greece has gifted to the new European regulation its name. “Taxonomy” is an ancient Greek word. However, no one could imagine that this Regulation would put Greek shipping on the Procrustean bed of Taxonomy. It is now up to the Greek inventiveness to devise the most suitable criteria so as to cope successfully with this new challenge.
(1) Regulation on the establishment of a framework to facilitate sustainable investment (Taxonomy Regulation) OJ L 198/13
(2) European Green Deal, Communication from the Commission, COM (2019) 640 final