Shipping sets sail towards a greener horizon


As shipping accelerates its journey towards decarbonisation, huge investment and a united front are required across the maritime industry, Paul Taylor, Global Head, Maritime Industries, and Elodie Tarby, Vice President, Strategic and Capital Advisory, Maritime Industries share their insights in Marine Money magazine - article published on July 27, 2023

Shipping faces a huge technological challenge in cutting carbon emissions. While world trade depends on maritime transport, its 2.5% “share” of global greenhouse gas (GHG) emissions is sure to increase much further if the issue is not addressed urgently. Yet, so far, the maritime industry has been hesitant to make the significant investments required in emissions-cutting technologies.

The gamechanger needed is alternative fuels, without which the industry cannot materially decarbonise. But ship owners have yet to reach a consensus about whether ammonia, methanol, LNG, biofuels or hydrogen will prove to be the preferred way forward. The answer is probably “all of the above” while other operational measures like reducing ship speeds, improving hydrodynamics, upgrading the fleet and improving port time efficiency could account for about a third of the emission cuts required.

Against this backdrop, momentum is building for quicker progress. In early July, the UN’s International Maritime Organisation (IMO), shipping’s regulator, met at the MEPC80 to debate increasing its ambition towards carbon neutrality in 2050, re-setting targets for cutting emissions. The updated ambition should be seen as significant progress, yet it falls short of the 1.5-degree Paris Agreement goal. While there is some broad consensus that carbon neutrality by 2050 is achievable, widely held concerns exist regarding matching transport demand growth with a steep decline in emissions in the short term.

The IMO “re-set” appears less misaligned with the Science Based Targets initiative trajectory than industry observers expected, both setting a more stringent requirement for the introduction of zero carbon fuels by 2030. Yet, it highlights the differences in opinion within the industry on what is achievable in a given timeframe. The proposed introduction by the IMO of carbon taxes, together with the EU set of regulations, will create the impetus to drive the industry forward. At this point, there will be no place to hide and the retrofitting of existing vessels and the decision making on new technologies will accelerate sharply.

At the same time, the Poseidon Principles – signed by 30 financial institutions covering more than 70% of global ship finance – are raising their ambition, effectively extending bank commitment to measure and report the CO2 intensity of maritime loan portfolios in line with the new IMO ambition whilst a formal 1.5-degree trajectory is fully assessed. This will inevitably lead towards more stringent loan origination guidelines across the industry, whereby banks will eventually prioritise vessels that can run on new zero or lower carbon fuels and refinance the existing vessels that are the highest performers against a carbon intensity indicator rating. They will also seek new asset classes which are in line with the energy transition, e.g., wind farm installation vessels, CO2 vessels, etc.

The shipping industry is committed to decarbonisation but achieving it is a massive challenge because the alternative fuels needed do not exist in a scalable way today. While LNG infrastructure is mostly in place, the equivalent investment required to make, say, ammonia a viable commercial reality is approximately $1 trillion. This requires time, funding and a degree of certainty that it’s a preferred option.

A cost of $1.4 trillion–$1.9 trillion

Decarbonising more than 100,000 ships that transport 85% of world trade will be expensive. It’s estimated that a 50% reduction in GHGs by 2050 would have cost $1.4 trillion from 2030 to 2050, and complete decarbonisation would take $1.9 trillion, according to a study published by University Maritime Advisory Services and the Energy Transitions Commission.

The industry needs ship owners to take a leap of faith and future proof their fleets, but this is a big ask. There are multiple paths for decarbonisation, so shipowners need to be flexible. In order to be flexible, ships must be able to run on different types of alternative fuels, whether methanol, LNG, biofuels or ammonia. Ammonia is widely believed to be a suitable long-term option due to limited competition from other industries, its cost and relatively high energy density, but it still has many safety issues to address.

Who owns the emissions?

Yet it’s not just the ship owners who are responsible for maritime transport’s GHG emissions. How can the maritime industry pull together to agree a path for decarbonising shipping and making the necessary investments? Showing their interdependency, different parts of the maritime ecosystem share responsibility for the emissions of even individual voyages.

Ship owners get frustrated because they have to comply with regulations driving down GHG emissions, but they do not have sole control of the emissions. In addition to charterer decisions, the speed of travel and port waiting time are key contributors to operational efficiency impacting emissions intensity which can be outside shipowner’s direct control.

It’s not just the ship owners who need to invest in new fleets. Additionally, fuel suppliers must develop alternative fuels and associated logistics, ports must build new refuelling infrastructure, and cargo owners acquiesce to operational efficiencies as well as higher costs.

Just as the entire ecosystem bears shared responsibility for emissions, so the burden of the investment to come will be shared. In line with Societe Generale’s own internal “big shift” to focus on the energy transition’s value chains, the bank has built the expertise to provide finance and the strategic and capital advisory services which are now required across the entire maritime ecosystem.

The changes being introduced by the IMO and the Poseidon Principles contribute to the increased environmental stewardship which are setting off waves across shipping. For the shipping industry, the time for hesitancy is over.