The European Union recently released plans to accelerate its already ambitious legislation to be carbon neutral by 2050. While the initial target was a cut of 40% compared to 1990 levels, the EU is now looking to raise the bar to 55% by 2035 instead. The legislation, titled Fit for 55, will represent an enormous effort to match up to goals outlined in the 2015 Paris Agreement.
On its own, Fit for 55 is ambitious, but what is more challenging is that it is up to the 27 individual EU members who have extremely varied climate, energy and transport-related capabilities to accomplish this goal. This is only complicated by the fact that the shipping industry is an international market, and global e-commerce is expected to grow to $1.4 trillion by 2025 — bringing a variety of challenging nuances to get needed products to populations.
Fit for 55 will incorporate agreements that apply across all industries to decarbonize. But with extreme growth in e-commerce in tandem, supply chains are likely to see significant pressure — especially with the current millions of metric tons of CO2 created by the shipping industry every year. Many facets of logistics networks in shipping will need to function as effectively as possible and technological innovations will require an unprecedented focus on efficiency.
Let’s take a look at the major factors outlined by Fit for 55 and the expected outcomes within the shipping industry.
A Price to Pay
There's no doubt that the EU is aiming to make polluting expensive. The first step in this direction was the introduction of the Emissions Trading System (ETS) in 2005, the world's first and largest carbon market. Operating in trade phases, the ETS works in defined time increments that can be adjusted to keep alignment with the overarching EU climate policy objectives.
After years of low prices, a mix of reforms and pressure for tougher climate legislation, there are now a multitude of restrictions that are making emissions an extremely costly byproduct. Under the ETS, emissions prices have been driven up to more than €50 per ton of emitted carbon, and the permits needed by over 11,000 power plants and industrial installations will be increasingly curtailed. To date, these industries collectively cover around 40% of EU greenhouse gases in total.
The Fit for 55 legislation will further limit the number of emissions permits to new parts of the EU’s economy. This will include maritime shipping and tougher conditions on aviation — regulating free permits and narrowing the allowances in these industries. All of these measures will be incentives for businesses across industries to step up to the plate and start integrating solutions, but as always, it isn’t quite that simple.
With each country responsible for its own 50-60% cutback, some countries with less infrastructure and more reliance on industries with pollutant after-effects will be at a strict disadvantage. Increasing fuel prices will significantly impact high-emitting countries such as Poland and Estonia as their economies embody the road transport and building sectors of the EU. On the other hand, countries such as Denmark have already built up advantages in their progressive and sustainable resourcing, serving as an important environmental example. In fact, Denmark’s capital Copenhagen aims to become the first carbon-neutral capital by 2025, 10 years before the finish line for the Fit for 55 has even been set.
The EU has invested in this program, but the question comes down to how much of a loan each country needs in order to match the legislation’s ambition. The current strategy is for the EU to be paid back, but in return, member countries will have extreme return on investment (ROI) — including better quality of life and sustainable efficiency across industries in the long run.
Emissions testing has been in place in the EU since 2020, but more transportation taxes are to come. The first-ever EU-wide CO2 emission standards for heavy-duty vehicles, Regulation (EU) 2019/1242, set out to reduce overall average emissions created by large vehicles as seen in the cargo transport industry.
Compliance is checked using simulation software that measures heavy-duty vehicles’ CO2 emissions and fuel consumption. The software, called VECTO, can be applied to specific loads, fuels and mission profiles — like long-haul, regional delivery or urban delivery — based on input data from relevant vehicle components.
Financial penalties in the case of missed CO2 targets apply. For the average driver, the EU has proposed a sweeping plan to phase out all gas-powered internal combustion engine vehicles by 2035.
The EU believes that 2025 climate goals can be achieved using technologies already available on the market. The 2030 target is set to be assessed in 2022 as part of the review of the regulation — creating an actionable plan for moving forward. To achieve the acceleration’s goal to have a 55% reduction by 2035, however, the EU will have to step up to make sure that both governments and businesses are pitching in.
These new standards will shape the future of the supply chain, but it is important to note that currently, shipping is built on a global network. A combination of high shipping costs, long lead times and growing trade restrictions are forcing a re-evaluation of sourcing decisions. This will potentially escalate the need for production to be closer to the market, meaning that infrastructure needs to be integrated locally. Analysts expect to see increased reshoring over the long term, with businesses shifting supply chains closer to home.
This translates to less reliance being placed on Taiwan and China, which means more investment locally and thereby less weight on international transportation for goods from Asia. One country taking initiative on this is France, which plans to launch autonomy in the production of chips by introducing semiconductor manufacturing in Europe. Setting itself the ambitious goal of doubling its share of the global chip market by 2030, France intends to start a trend of “strategic autonomy” and hopefully begin a trend of more locally sourced production across industries in the EU that have previously sourced from Asia.
In turn, this will stimulate increased demand for technology. Companies will soon be expected to track their own resources and be held accountable for updating their physical assets — whether that be through electric and autonomous vehicles, automated operations via robotic measures, or even carbon capturing. One of the biggest game-changers when it comes to efficiency, however, will be the wide application of artificial intelligence (AI) in the supply chain. AI will improve and drastically advance operational efficacy, advancing resource effectiveness in the transportation industry.
On the back-end, more efficient warehouses will be manifested through AI and the internet of Things (IoT). AI algorithms help to create anticipatory logistics — providing real-time data to optimize shipping volumes, capacity utilization and vehicle routing. This will reduce the number of empty runs and inefficient practices, all of which can decrease the output of CO2. In addition, with IoT sensors on physical assets, AI can determine more efficient tactics on the ground floor and help to optimize operations — reducing overall resource wastefulness.
Sophisticated analytics from AI and IoT also create more advantageous transportation solutions in the sky, water or roads. The reporting of inefficient practices seen in the field can occur through predictive analytics and demand forecasting powered by telematics. With this data, sustainable solutions are manifested, and applied innovations can provide a roadmap to enhanced feasibility. This enhances strategic last-mile planning and asset positioning where less-polluting resolutions such as electric vans or local pay-to-deliver drivers can be implemented — reinforcing the utilization of more local resourcing in urban infrastructures in the transportation industry.
Beyond Fit for 55, more consumers around the world are demanding sustainability from brands and businesses. With a push from all sides, the shipping industry will face only increasing pressure to adopt solutions.
Marc Meyer is chief commercial officer at Transmetrics.
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