New Shipping Emissions Regulations Will Increase Caribbean Food Costs

The Caribbean is highly dependent on global trade and shipping, with the proportion of trade to GDP ranging from 90% for St. Vincent and the Grenadines to 104% for Guyana and 114% for Dominica (World Bank). High dependence on food imports has made the region extremely vulnerable to external factors such as weather and transportation costs. Given that the shipping industry is a facilitator of the import-driven lifestyles of Caribbean people, it is highly influential on prices and the availability of goods and food.

In response to growing concerns surrounding the massive carbon footprint of the shipping industry (the entire industry has a footprint the size of Germany or Brazil) the International Maritime Organization of the United Nations is implementing IMO 2020, legislation that will ban ships from using fuels with a sulfur content above 0.5% (compared with the current 3.5%) as of January 2020.

These regulations are projected to slash marine sector emissions by over 80% in international waters and prevent over 570,000 premature deaths between 2020 and 2025 due to respiratory ailments and cardiovascular disease. The legislation will also reduce the occurrence of acid rain, benefiting crops, forests, and aquatic species.

Legislation is needed to reduce emissions within the shipping sector; however, the regulation of emissions will likely translate to much higher costs of moving people, resources, and goods. Considerable trade exposure and close to 90% reliance on imported food makes the Caribbean particularly vulnerable to transport and fuel costs that are likely to skyrocket in the coming months.

Seabury Maritime’s Vice president, Nikos Petrakakos, has confirmed that IMO 2020 “is one of the most significant regulations impacting liner shipping in recent memory.”

The Caribbean Shipping Association predicts that IMO 2020 will pre-emptively increase operating costs by around 3% in 2019. 80% of ship owners are expected to switch from high fuel oil to marine gasoil at the cost of $60 billion— 55% more expensive than typical bunker oil— and the remaining 20% are expected to fit their vessels with scrubbers in order to continue to run high fuel oil. Given that fuel costs already represent more than 50% of operating expenses, the impact will be huge.

Once the new law goes into effect, higher fuel costs are expected to increase costs associated with port-to-port shipments by 20% in developed markets (ET2C). In the Caribbean region, where transport and insurance costs are already 30% higher than the world average and handling charges are two or three times higher than in similar ports in other regions of the world, (Food and Agriculture Organization) the impact on the end user is unavoidable.

The impact of logistics on the price of consumer goods is well known. In 2018, General Mills, makers of Cheerios cereal and Yoplait yogurt, Tyson Foods Inc., Hormel Foods Corp., and B&G Foods Inc. all said that they would raise prices to offset higher freight costs. The manufacturers indicated that freight costs in North America were at near 20-year highs at the time.

George Goldman, president of Zim USA, affirms that carriers would be “stupid” if they did not pass on the increased cost of fuel to their customers.

Many carriers have already announced that they will be transferring the costs of the new regulation to consumers. Maersk has determined that IMO 2020 will cause its yearly fuel costs to top $2 billion and has confirmed its plan to shift the costs in the short term. Other carriers are following suit, forcing defenseless importers to carry the brunt of future regulatory costs, on top of other market inefficiencies caused by limited economies of scale, particularly in vulnerable economies such as the Caribbean.

If there is any moral to this story, it is that the Caribbean needs to produce more of its own food. Small Island Developing States, with their extensive territorial waters, heavy import reliance, and significant exposure to external shocks, are susceptible to changes in the cost of international freight— food insecurity only makes this worse.

According to Barbados’ Minister of Agriculture, the Honorable Indar Weir, “Our exposure to external developments such as the cost of ocean freight and the impact of the much needed IMO 2020 regulations underscores our need for food security. It is no longer sustainable to rely on the external market for the vast majority of our food.”