How can the shipping sector unlock the 'first wave' of net-zero emission shipping?

Shipping faces one of the toughest voyages to net-zero of any industry. While there is broad consensus that zero-emission deep-sea trade vessels must be commercialized by the end of this decade if the sector is to stand any chance of reaching its 2050 climate goal of halving emissions compared to 2008, the low carbon fuels and technology solutions required for shipping decarbonization remain in their infancy.

Now two major industry-backed reports this week have attempted to chart a course for how the shipping industry could ramp up the adoption of the zero-emission technologies and fuels required to create a low carbon shipping sector.

The first, produced by the Energy Transitions Commission, urges the shipping supply chain to come together to support and fast track zero and low emission technology pilots. Unprecedented levels of collaboration are required, the group argues, to ensure that the patrons of the “first wave” of commercial zero-emission projects are not penalized by exorbitant operational and investment costs.

The report, published on behalf of the Getting to Zero Coalition, a group of more than 120 companies across the maritime, energy and logistics supply chain, argues that this “first wave” of commercial zero-emission shipping projects must occur within the next five to 10 years to put the industry on track to achieving the sector’s 2050 goal of reducing its emissions by half compared to 2008 levels. As such, fossil fuel producers, regulators, bunkering suppliers, equipment and vessel manufacturers, operators, cargo owners, financial institutions and governments must work together on these projects to minimize the gap between R&D and commercial deployment, the report stresses.

“The first wave of commercial-scale zero-emission shipping pilots must be realized in the next five to 10 years to provide the technological and commercial proof points that will unlock deployment at scale in the 2030s,” explained ETC director Faustine Delasalle, adding that the insights in the report provided a “foundation” for businesses and governments. While focused on green ammonia and methanol pilots geared at containerships, the authors claim the report’s findings will be relevant for a number of alternative fuels.

With ETC estimates pinning the cost of pilot projects at between $200 million and $900 million, depending on their size, the report calls on supply chain partners to split the cost of critical equipment, in particular bunkering and vessels, in order to spread the risk of investments and deliver the capital required to get projects off the ground. And in order to minimize upfront capital investment in new infrastructure, the analysis recommends that partners repurpose and retrofit existing assets where possible. Meanwhile, consortia should be established to set up a “chain of long-term voluntary offtake agreements” that provide market certainty and help reduce the cost of pilots on freight operators and, ultimately, end consumers, the report advises.

To alleviate first-mover disadvantage that historically has presented major barriers to the development of pilot projects, the report recommends that initiatives are strategically plotted in locations that have large potential for delivering the low-cost renewable electricity supplies required to produce green hydrogen, a key input in the development of ammonia and methanol fuels. This approach could provide a further boost to proposed low carbon industrial clusters where several sectors already share the cost of low carbon energy and fuel infrastructure, or focus on locations with large potential for clean energy and tax exemptions for industrial electricity consumers, according to the report.

The cost of renewable electricity required to produce green hydrogen — identified by the ETC as the largest expense for pilot projects — could be further reduced by ensuring partners enter into long-term corporate power purchase agreements to secure large volumes of clean power at the lowest cost, the report suggests.

In addition, a “green fuel premium” levied on cargo owners could fund some of these key technology trials, according to the ETC. Michael Parker, chairman of Citi’s global shipping, logistics and offshore business and Getting To Zero Coalition co-chair, estimated that the premium would have a negligible impact on the overall cost of consumer products, increasing the cost of a “high-end athletic shoe” by between 0.5 to 1 percent. “Despite the higher business to business costs of operating zero-emission vessels, the impact on end-consumer prices is likely to be limited,” he predicted.

The ETC report stresses that the deployment of zero-emission vessels is essential to reach the International Marine Organization’s existing decarbonization target — a 40 percent reduction in ships’ carbon intensity by 2030 compared to 2008 levels and a 50 percent reduction in absolute emissions by 2050 against the same baseline. Zero-emission ships are also needed to deliver on the “more ambitious” goal of net zero emissions by 2050 climate scientists recommend for all parts of the global economy.

The IMO’s climate goals have been recognized as insufficient to meet global climate goals, with the Climate Action Tracker initiative rating the sector’s current 2030 goal of reducing carbon intensity by 40 percent compared to 2008 levels as “critically insufficient” and in line with a devastating global temperature rise of 4 degrees Celsius, well over double the 2 C upper limit of the Paris Agreement.

Carbon regulation plans expected to approved later this month by the U.N. agency, after being endorsed by IMO member states in October, have sparked fierce criticism from green groups, who maintain they are too lax and will not reduce emissions this decade, partly due to the proposals delaying hard enforcement of operational carbon efficiency rules for ships until 2029. However, industry players contend that a new mandatory operational efficiency rating system, where ships are rated on an A to E grading system, will subject poor-efficiency ships to the power of the market and help accelerate the shift towards greener vessels.

ETC’s Delasalle emphasized the report was a testament to a disconnect between some of the industry’s key players’ desire to decarbonize and the U.N. agency’s slow progress on emissions regulation. “It comes in sharp contrast with the lack of progress made by the IMO on pre-2030 emissions and efficiency regulations lately,” she told BusinessGreen in an email. “It indicates that there is momentum in the industry and increases pressure on governments to fast-track the ramp-up of IMO regulations.”

However, a separate report that also explored how to accelerate the decarbonization of shipping took a markedly different stance on current emissions regulations, arguing that the current framework is already outpacing the industry’s ability to decarbonize.

Influential industry group International Chamber of Shipping (ICS) has published a report that calls on the IMO to introduce a new levy on maritime fuel to fund net-zero shipping innovation, noting a “huge amount of R&D” is required to establish the low carbon propulsion systems, vessels and refueling network required to decarbonize the sector.

The ICS — which has campaigned against strict regulation of carbon emissions in the past and was a main architect of the controversial proposals slammed by green campaigners as toothless — warned in a statement that such investment was required due to the fact that “pressure to regulate emissions is currently moving faster than the industry’s ability to keep pace.”

The group has called for the creation of a global R&D fund to scale up nascent zero-carbon technologies, such as ammonia and hydrogen fuel, and battery technology. The fund, first proposed last December by the industry group, would be overseen by the IMO and financed by a mandatory $2 per tonne levy on marine fuel that could rack up to roughly $5 billion over 10 years, it said.

“The reality is that companies need a centralized fund that can catalyze an intense injection of R&D investment to turbocharge projects,” said Guy Platten, secretary-general of the ICS. “Without it, we are not going to achieve zero-emission shipping. The proposed R&D fund will lead to the introduction of zero-emission ships across the maritime sector by 2030 and beyond.”

The ICS report notes that ammonia and hydrogen do not currently exist to the scale required by the shipping sector and would require capitalizing a significant proportion of the current electricity grid to meet projected demand. Meanwhile, it estimates that operators tempted to take an alternative approach to decarbonization would find a typical container vessel would require 70,000 batteries on board to sail for a week.

Questioned about whether the United Kingdom would support such a fund at the IMO, a spokesperson from the Department of Transport (DfT) said the government remains “fully committed” to the 2030 and 2050 carbon goals established by the U.N. agency in 2018. “Our focus now is on securing a good outcome on short, mid and long-term measures that will begin to reduce emissions from international shipping,” they said.

While there are major fears that the IMO’s recent decision to hold off strict operational emissions efficiency enforcement until 2029 has eased pressure on industry to decarbonize, the report highlights a sector that is well aware of the scale of the climate challenge and thinking practically about next steps.

The question is, as always, whether there is the political and investor will to finance and back expensive early-stage R&D projects in a fraught economic climate, and whether industry players are willing to volunteer to be the net-zero guinea pig. While the launch of firm criteria for climate bonds for shipping projects by the Climate Bonds Initiative should help generate a new flow of financing for greener maritime projects, it remains to be seen where and how funding will be channeled to unleash the fleet of green ships the world urgently needs.