Adapting the shipping sector to stricter emissions regulations: Fuel switching or installing a scrubber?

- We propose an economic assessment to help decision making in the light of recent marine regulation.
- Stochastic modelling is used to assess fuel switching or installing a scrubber.
- We consider hypothetical extensions of Emission Control Area.
- We analyse the CO2 emissions for scrubbers and the incidence if CO2 pricing mechanism is used.

This paper examines how the existing fleet in the shipping industry can be adapted to the new emission regulations through the two main techniques that currently exist: (a) the use of low-sulphur marine diesels; and (b) the installation of scrubbers. A method is presented here for drawing up an economic assessment of both these techniques under uncertainty. It enables the best option to be selected at any given time taking into account fuel prices (spot and futures), scrubber installation costs, the time that the vessel operates in an Emission Control Area (ECA) and the remaining useful lifetime of the vessel. The paper also considers the possibility of an unexpected change from a non-ECA navigation area to an ECA. The assessment is carried out in a manner consistent with marine diesel and crude oil spot and futures market quotes. Our results show the net present value of investing in the installation of scrubbers and investing in changing fuel types for different assumptions on how vessels are operated. We also analyse increases in fuel consumption and CO2 emissions as a consequence of using scrubbers and how they affects the financial analysis if such incremental emissions must be paid under a CO2 pricing mechanism.