Will the Corona Crisis Help or Hurt the Freight Decarbonisation Agenda?

Policy-making might be Key to a Low Carbon Future Scenario in Freight

The freight and logistic sector ensures a smooth operation of supply chains in order to provide companies, countries and people with the goods they need in times of crisis and in “normal” times. The Corona crisis causes multiple short- and longer-term disruptions for the sector, ranging from getting stuck at borders and ports, higher transport prices, a gloomy outlook for freight transport demand and an increasing shortage of truck drivers due to sickness and self-isolation.

In this challenging time, the long-term need to decarbonise freight transport is understandably a lesser priority for shippers, carriers or governments. However, as the Corona crisis will pass but the climate crisis will not, it is useful to look at the implications of the Corona crisis for freight transport decarbonisation.

This article analyses this through the lens of the logistics decarbonisation framework by Prof. Alan McKinnon. This framework identifies five parameters that governments and companies need to influence to decarbonise logistics:

1. Reducing the demand for freight movement:
Within the bounds of logistics management this involves reducing the freight transport intensity of economic activity

2. Shifting freight to lower-carbon transport modes:
Taking advantage of the wide variation in carbon intensity between modes

3. Improving asset utilisation:
Using vehicles and warehouse capacity more effectively

4. Increasing energy efficiency:
Reducing energy consumption relative to freight-tonne-kilometers and warehouse throughput

5. Switching to lower carbon energy:
Reducing the carbon content of the energy used in logistics

Logistics Decarbonisation Framework

(Source: A. McKinnon (2018) Decarbonizing Logistics – Distributing Goods in a Low Carbon World, p.24)

Reducing the demand for freight movement

• Freight transport demand drops along with the lower economic activity across multiple sectors. This leads to a significant but possibly only short-term climate benefit at the cost of severely negative consequences for freight transport enterprises and for the millions of people working in this sector.
• The potential economic after effects of COVID-19 (recession, lesser consumption and production) may supress freight transport demand for a longer period than passenger transport. The latter might quickly rebound when the health crisis is over.
• In mid- to long-term, the supply chain vulnerabilities experienced during COVID-19 may lead to changes in the geography of international trade as certain industries choose to source more of their products from suppliers in less distant countries or in their own countries. Such a ‘nearshoring’ or ‘reshoring’ strategy with less trans-continental and more regional or local supply chains will shorten the average transport distance.
• Shorter freight transport distances imply less fuel consumption and thus less CO2 emissions. However, this benefit could be compromised when a more carbon-intensive transport mode is used for the main haul (e.g. mode-shift from shipping to long-distance road).
• The social-distancing pushes digitalisation of life and work aspects and with that the dematerialisation of the economy. This causes less demand for specific industries like printing, pulp and paper. The reduction in transport demand may be offset however by increasing energy demand for servers.
• With interrupted global supply chains, 3D printing gains more attention. For example, the technology is being quite extensively used in the manufacture of face visors and components for ventilators.
• With more E-Commerce activity due to stay-at-home policies, urban deliveries and their associated emissions significantly increase. At the same time car traffic by shoppers drops. Overall, E-Commerce has been found to have a better carbon-efficiency than traditional retail shops.

Shifting freight to lower-carbon transport modes

• As demand for passenger trains scales down, more infrastructure capacity is temporarily available for freight trains. In “normal” times, such space on the rail is a key bottleneck for rail freight.
• Intermodal rail freight in Europe currently operates relatively smoothly. It is demonstrating to be the most reliable, resilient freight transport mode (trucks are delayed due to congestion at borders; container ships are delayed due to quarantine; less capacity for ‘belly freight’ in passenger airplanes etc).
• Another factor that currently helps the unusual competitive edge of rail over road is that the human interaction in intermodal networks is minimal and that the first-and-last-mile truck trips are usually done by local truck drivers who are currently more available than long-distance drivers.
• Observers note a solid and growing demand for intermodal rail freight within Europe as well as on the transcontinental new silk road connection.
• On the other hand, mid to long term, supply chain reorganization (e.g. a reinforced nearshoring trend) may lower demand on certain high-density routes and thus lower the opportunity of railways/shipping. One-belt-one-road investments on railways may dry up. Newer railways anticipating high economic return may become a financial liability.
• It is too early to tell if there can be a sustainable shift in the modal split, but the crisis provides a welcome image boost for rail freight which could have lasting impact.
• Governments consider massive stimulus programs to restart their economies, with probably significant spending on infrastructure. There are plenty of investment opportunities in promoting an integrated, multimodal system for freight and logistics (e.g. intermodal interfaces like port and rail terminals). However, the fast-growing scale of government debt may limit the extent of these stimulus programs

Improving asset utilisation

• Some industries and goods are currently in high demand (e.g. food and pharmaceutical products) and thus generate higher transport volumes, whereas the opposite occurs in many industries which either produce less or have shut down temporarily. Delivery services are busy due to a boom in E-Commerce.
• As demand for shipping goods decreases and as production patterns and locations change, truck operators may have trouble to find loads for the backhaul and to get full truck loads in general. As a result of an increase in empty truck trips and less average loading, the carbon intensity of trucking increases. The same applies to rail operations which are even less flexible in addressing empty container problems.
• Truck overloading may become an increasing phenomenon as the economic crisis puts truck operators under pressure to maximise their productivity beyond the legal weight limits. This will apply more in countries where enforcement is lax, and penalties are low.
• Operators can enhance their productivity by using digital freight matching services. Some service providers in the US and Europe have opened their platforms during the COVID-19 crisis to share free-of-charge versions of their products.
• The crisis has generally improved the conditions for supply chain collaboration. To save costs and to facilitate supply chains, logistics enterprises now have a higher incentive to share their logistics assets.
• Companies are forced to relax the just-in-time principle and maintain higher inventory levels in order to protect themselves from supply chain disruptions. This will help to avoid that trucks run around half-empty and thus improve logistics efficiency.
• Domestic freight transport markets are commonly dominated by a high number of small and medium size operators with relatively low profits. The economic fallout of the Corona-virus drives many of these enterprises into bankruptcy, thus jeopardising the livelihoods of people employed in freight transport.
• A consolidation in the trucking industry might benefit logistics efficiency as larger fleets tend to be more flexible and efficient in using their loading capacity.
• If there were a significant contraction of the trucking industry this could also affect the freight modal split.

Increasing energy efficiency

• Falling fuel prices reduce the incentive for companies to invest in the fuel-efficiency of their truck fleets. In addition, freight companies might put investment in fleet modernisation on hold as their profits shrink and as uncertainties increase.
• The IEA argues that low oil prices offer a great opportunity to eliminate fuel subsidies and or to introduce taxes, as e.g. transport companies are less likely to feel the effects of subsidy removal while fuel prices are down.
• Large corporations will continue to demand for greener freight transport services. These big players have corporate climate targets which they are unlikely to abandon. Therefore, the pressure on transport and logistic service providers in developed markets to increase efficiency and to reduce emissions will remain in the mid to long term.
• Furthermore, existing HDV fuel economy standards in many major freight transport markets ensure that truck manufacturers must continue improving vehicle technology in the future. Some large corporations in Europe have called on the EU to maintain its climate ambition and its vehicle emission limits for LDV and HDV despite the crisis, emphasizing the importance of regulatory credibility.
• After the 2008 global economic crisis, some countries introduced vehicle scrappage programs as a stimulus for their domestic automotive industries. Scrappage programs should start with getting the oldest and most polluting vehicles off the road. In addition, they should be coupled with stringent environmental standards for the new vehicles in order to ensure that state of the art fuel-saving technologies and zero emission vehicles become mainstream.

Switching to lower carbon energy

• The transition to clean energy and e-mobility will continue yet might slow down and take longer to take hold in the freight transport sector. Fleet operators are likely to delay investment into more expensive low emission vehicles, unless strong incentives are put in place.
• HDV fuel economy targets stay in place and will continue driving technological change, yet policymakers need to withstand pressure by the automotive industry to water them down.
• Truck makers may increasingly form joint ventures in order to reduce development cost of new technologies (e.g. Daimler and Volvo’s fuel cell alliance).
• With the increased appetite for online-shopping, there is more traffic of urban delivery vehicles and more business for the associated companies. As these last-mile deliveries have a high potential for electrification, and fleet operators make profits, there is hope that electrification trends can be maintained.
• The clear skies during the lockdown times could generally increase public interest in zero emission vehicle technologies.

The Corona crisis has helped the freight and logistics sector to boost its public policy profile. Instead of ‘freight blindness’, there is now a growing appreciation and understanding of the freight sector among the policymakers and the general population. This could also benefit the freight decarbonisation agenda. As the above analysis has shown, the current and potential climate impacts of the Corona crisis in the sector are quite diverse and go both ways. Whether the future scenario is high or low carbon, depends to a large extent on policy-making. Thus, we have a compiled a set of policy recommendations below.

Policy recommendations

• Fleet modernisation programmes are a good opportunity to revitalize the domestic vehicle industry (where there is one), yet they must be coupled with strong environmental standards for the new vehicles. Scrappage programmes should focus on getting to oldest, most polluting vehicles off the road.
• Transport infrastructure investments must not be limited to roads – to avoid a further lock-in into a road-dominated freight transport system. Investments into intermodal connections are crucial for realizing an integrated intermodal transport and logistics system and for maximizing the synergies and sustainability benefits of all modes of transport. This counts especially for emerging economies whose logistic infrastructures expand rapidly.
• After all, this crisis has shown just how essential logistics workers are. Thus, countries should invest in the human capital of people employed or interested in the freight and logistics industry in order to enhance the competence level of the logistics workforce. This will help the economy over time through lowered logistic cost and may generate environmental co-benefits if, for example, areas like truck driver training or fleet management skills of SMEs are included.
• Alliances or mergers of smaller industry players into consortia or cooperatives with a more professional and economically sustainable operation could mitigate the crisis impacts on local trucking industries. Such a process can be facilitated by revising the regulations that set the criteria for accessing the occupation and market. Fiscal incentives, facilitation in accessing credit and loans for fleet renewal can be helpful tools to encourage operators to collaborate or consolidate.
• Governments can support collaboration between logistics enterprises by facilitating multi-stakeholder collaboration and knowledge exchange

Acknowledgements: A big thank you to Alan McKinnon, to Sudhir Gota and to Martin Schäfer for their helpful comments on the analysis, and to Linda Schill for her editorial support.