Unintended consequences

Author Ben Winkley

The law of unintended consequences is that actions have unanticipated outcomes. A theory developed from the meeting of philosophy and economics during the Enlightenment, it applies to decisions made by individuals — and doubly for those made by legislation.

A modern case in point is the International Maritime Organisation (IMO) cap on sulphur emissions from shipping, which comes into force on the first day of 2020.

The IMO’s intentions are good and the cap is an example of a self-confessed dirty industry taking substantive steps to cleanse itself. It will significantly reduce the amount of sulphur oxide emanating from ships. The intended consequences of this are, in the IMO’s own words, “major health and environmental benefits… particularly for populations living close to ports and coasts”.

The unintended consequences arise from the changes to the process of refining necessary in order to produce lower-sulphur shipping fuels compatible with IMO 2020. Argus has written extensively on this.

Plant upgrades will reduce bottom-of-the-barrel production as 2020 nears. This has already caused shortages of bitumen in northwest Europe, where supply is likely to tighten. Buyers are frequently paying significant premiums for product, and these costs will pass on to municipalities, local authorities and city administrations still reeling from a decade of spending cuts. An unintended consequence of cleaner seas, then, is less frequent road repairs — and greater potential for damage to vehicles and delays to journeys —and more expensive construction costs that stymie plans to build more homes.

Refiners will shift to middle distillate production to cover IMO compliance needs, but bottlenecks could mean that non-shipping consumers of middle distillates face higher costs. Swiss bank UBS forecasts airlines could bear the brunt of this, with an average 6pc impact on earnings before interest and tax for European carriers next year and a potential 21pc hit in 2020. Although UBS’ calculations do not factor in any potential for airlines to pass on these costs, the price of flying to now-cleaner coastal resorts may feasibly become that bit more expensive.

A rise in diesel prices will affect the costs of running light and heavy goods vehicles. One unintended consequence of that is on the business model of delivery services that make up an increasingly large part of developed world economies.

None of this renders the IMO plan unsound. Indeed, it is showing rare leadership in the field of environmental responsibility. The IMO cannot be responsible for the unintended consequences of cleaning up the shipping sector’s act.

Consequences are typically unwelcome, but IMO 2020 may eventually, and equally inadvertently, provide stimulus to counter them. Any hint of permanence in the high middle distillate prices could push cash-rich companies that operate in the delivery sector to consider exploring electrification; airlines may explore biojet further; and alternatives may be sought for asphalt as a road-building product.