IMO 2020—Strategic Decisions and Covid-19 Shock

While international shipping transports more than 90 percent of global trade to people and communities all over the world, it is also a major pollution source. In order to minimize air pollution and protect the environment, the IMO requests that all carriers and vessels adopt a new global sulfur limit of 0.5 percent for ships’ fuel oil (in contrast with the previous limit of 3.5%) from 1 January 2020. This new regulation, without a doubt, significantly impacts firm operations. Three potential solutions are suggested for carrier firms: (1) to install a sulfur-oxide scrubber, (2) to switch to low-sulfur fuel oils, or (3) to switch to liquid nature gas (LNG) for existing vessels or build new LNG vessels for newly planned vessels. The first option allows vessels to continue using high-sulfur fuel, but the cost of installing a scrubber is high. The second option requires a low initial investment, but will be challenged by potential price hikes. The third option uses an almost toxic-free alternative material, but requires a major rebuild and, hence, is costly. This case aims to discuss the consequences of such a top-down regulation on carriers’ financial and operational performance, on carriers’ choices among the three options, the implications on supply chain partners and consumers with respect to these options, and finally, whether such a regulation is effective in reducing sulfur emissions.

1. Illustrates how firms react to an environment policy change. 2. Analyze the pros and cons of the three options, and explore the driving force and firm characteristics during firms’ decision. 3. Discuss how this new regulation affects consumers and supply chain partners. 4. Discuss how Covid-19 changed the business environment, in particular, from both the demand and supply sides, and the effectiveness of the IMO 2020 regulation.

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