The Panama Canal, exposed to the effects of climate change

B In the second half of the year, the drought during most of 2023 forced a reduction in the issue of vessels and the volume of cargo that could navigate through the Panama Canal. Improved rainfall has allowed some traffic to recover in recent months. However, the fear of climate change reproducing episodes of this subject is leading the Canal Authority to study ways to increase the flow and thus ensure a flow that accounts for about 5% of international maritime trade.

A drought driven by the El Niño meteorological phenomenon has reduced water in the Panama Canal, causing lengthy and costly disruptions to international trade and supply chains. In its report 2022 World Trade Outlook, the WHO warned that "climate change is transforming countries' economic and trade futures and poses a serious threat to future growth and prosperity". Although a recent study insists on attributing the shortage of water flow in the Canal to El Niño, the Panamanian authorities are now forced to examine scenarios that climate change may cause.

Maritime transport, which accounts for 80% of the volume of world trade, is particularly vulnerable and highly exposed to the effects of climate change. The status in Panama comes on top of other geopolitical crises, such as the one in the Red Sea, where Houthi rebels are attacking vessels attempting to cross the Bab-el-Mandeb Strait. The fragility of the maritime transport system underscores the need for adaptive and sustainable measures to ensure the continuity of world trade in a context marked by climate uncertainty.

The year 2023 was the second driest year in the history of the Panama Canal watershed, whose locks discharge some 200 million liters of fresh water into the sea for each transiting vessel. To cope with the effects of the drought, the Panama Canal Authority (ACP) has been imposing restrictions over the past year on the draft of ships and, consequently, on the amount of cargo they can carry. In addition, it has reduced the issue number of ships that can transit daily. From an average of between 36 and 38 vessels in normal situations, in August it dropped to 32 and then the figure continued to decrease. October was the month with the least rainfall in the history of the Canal, so it was then decided that the following months would further reduce traffic: only 24 ships in November and 22 in December. The improvement in rainfall made it possible that at the beginning of 2024 the decline did not continue, but in January the quota was raised to 24, in April it was at 27 and it has been announced that in June it will increase to 32, with an increase also in draft. The loss of revenue in the current fiscal year (October 2023 to September 2024) due to the restrictions is currently estimated to be between $500 million and $700 million, higher than the $200 million projected in August.

The water that supplies the 80 kilometers of the road comes from two artificial lakes, the Alhajuela and the Gatun. The total capacity of both reservoirs is 1,857 cubic hectometers (hm3), of which 558 hm3 correspond to the Alhajuela and 1,299 hm3 to the Gatun. However, in 2023 only approximately 900 hm3 of water was stored due to the prolongation of the dry season. The last rainy season in Panama, which usually occurs between May and November, registered a deficit of 30% with respect to the historical average. In the month of October, it rained 41% less than the usual average, which placed the water level of the Gatun reservoir at 24.30 meters above sea level, compared to the 26.82 meters level expected for that date.  

The alternatives to increase the level of the reservoirs are limited, since the drinking water that supplies more than 50% of the country's population is extracted from them. The main solution proposal consists of damming the Indio River, to the west of Gatun Lake, and then drilling a tunnel through the mountain and driving the water eight kilometers to the main reservoir, affecting some 2,500 people living in the area. The project of the reservoir could allow between 12 and 15 additional daily transits, but would cost some $900 million and would take at least six years to build and fill. In addition, the initiative would require a modification of Law No. 28 of 2006, which prohibits the Canal from building new reservoirs. board Although the Canal's board of directors sent a proposal to the Executive in September requesting the pertinent legislative changes, to date there has been no response. The issue is intertwined with an ongoing election year, making it difficult to prioritize and advance the project water project.

Impact on trade and supply chains

Transit restrictions generated congestion in the Canal, which led the ACP to implement an auction system. This system allowed vessels without reservation to secure a quota to pass through the Canal, albeit at a considerable cost. In fact, some shipping lines paid as much as $4 million to avoid congestion and guarantee passage. These amounts are in addition to the existing toll rates, resulting in an increase in the total cost of the Canal passage.

The Panama Canal is crucial for maritime transportation, as well as an important source of income for the Central American country source . The Canal connects 180 maritime routes that reach 1,920 ports in 170 countries, and about 5% of global maritime trade transits through it. The United States is the main home country and destination of the interoceanic waterway, representing 72.5% of the Canal's cargo, followed by China and Japan, as indicated by data of report of 2023. Likewise, the strategic route contributes an annual average of 6% of Panama's Gross Domestic Product (GDP) and at least 20% of government revenues.

In recent years, traffic has been affected by the Washington-Beijing trade war and the disruption of international trade activity due to the Covid-19 pandemic. Peak figures were again reached in FY2022 with a transit of 14,000 vessels, carrying 518.5 million tons of cargo. At the close of FY2023, the lane recorded a 1.5% decrease in tonnage transported compared to the previous year, highlighting the consequences of the drought.

Alternative routes

The struggle to submit their products on time has led shipping lines to question the reliability of the Canal for global trade, sparking renewed interest in finding alternatives. In January, Danish company Maersk resorted to rail transport to bypass the Panama Canal. In this way, vessels in the Pacific will anchor at the port of Balboa, where they will drop off cargo destined for the west coast of North America or Latin America and pick up containers bound for Australia and New Zealand. Likewise, the Atlantic vessels will perform the reverse operation at the Manzanillo terminal, next to Colon. One of the alternative routes to the Canal is to transport goods between Asia and the United States through the Suez Canal to the U.S. East Coast. Another alternative is through the Strait of Magellan, which would involve a considerable detour.

Other potential routes have recently been developed, such as the Interoceanic Corridor of the Isthmus of Tehuantepec, a rail and road connection linking the Pacific Ocean with the Gulf of Mexico. The latest work of the government of Andrés Manuel López Obrador foresees the expansion of ports, the construction of a dozen logistics parks and the rehabilitation of thousands of kilometers of track, in the hope of increasing Mexico's participation in intercontinental trade between Asia and Europe.

* Information updated as of May 1, 2024.