The Future of a Low-carbon Shipping Industry

What could a low-carbon future for the shipping industry look like? Paul Taylor, Global Head of Maritime Industries, offers a prediction of how it could accelerate the global energy transition in unexpected ways.

1. What role do maritime industries have to in driving the global economy?

It is not farfetched to suggest that the shipping industry is the backbone of the global economy. 11 billion tons of goods are transported by sea each year. This represents 1.5 tons per person, based on the current global population. Almost 90% of world trade is transported by ocean-faring ships, adding $350 billion every year via freight rates alone to the global economy. 

The shipping industry brings together many parts of the international supply chain via transportation of consumer goods (1.95 billion metric tons pa), raw dry materials (1 billion tons pa of iron ore, 350 million tons pa of grain etc) or the 2 billion tons pa of crude oil or refined oil products.  Shipping accounts for 80% of total exports and imports by volume for Europe, and some 50% by value. The transportation of raw materials in this way allows countries to create industries, construct new cities, house populations and transform resources into refined products for re-export. It also enables the development of emerging countries and supports all economies to develop sophisticated logistics chains.

2. How is the maritime industry adapting and innovating as a result of the energy transition?

The shipping industry faces its biggest challenge as it targets ambitious climate goals set by the IMO (International Maritime Organization), in order to achieve Net Zero by 2050. Unless stakeholders come together and embrace an innovative future of low or zero carbon fuels whilst putting in place operational efficiencies across the supply chain, the industry’s current share of global CO2 emissions of 2.6% could soar to 15% by 2050. 

The shipping industry is moving away from using carbon-intensive fossil fuels and opting for carbon-neutral or renewable fuels such as green methanol, green ammonia, bio or synthetic LNG and battery power to reduce emissions at sea, and in and around port. All stakeholders (shipowners, charter companies, port operators, shippers, fuel suppliers etc) need to come together to work on solutions that will ensure the industry can decarbonise in line with such lofty ambitions. Few of these fuels exist today as the renewable energy required to produce the green fuels does not exist in anywhere near the required quantity to drive the shipping industry. 

However, the shipping industry is already working on “Green Corridors” to build the vessels and the infrastructure to ensure the supply of green fuels on specific shipping routes is both realistic and in the near term. The sector’s efforts will be supported by the IMO and European government in the form of new carbon taxes on shipowners and charterers such as the Emissions Trading Systems (ETS) and Fuel EU Maritime whilst awarding CII efficiency ratings for each vessel with eventual penalties for non-compliant vessels. 

Whilst the shipping sector is on its own pathway, it’s worth noting the key role it plays in facilitating the energy transition of other industries. Huge car carriers transport electric vehicles from Asia to Europe whilst wind-farm installation vessels ensure that the world’s development of wind farms continues in line with ambitious climate goals. 

Furthermore, innovative new shipping markets such as CO2 transportation ensure that industrial emitters can meet decarbonisation goals using CCUS (carbon capture, utilization and storage) whilst ammonia transportation in bespoke vessels will develop into a huge market in the coming decades as the world’s development of green ammonia surges in the quest to meet Net Zero climate goals. These shipments would quite simply not be possible by road, rail or air. Shipping however provides a safe, secure and efficient mode of transport which drives the global economy forward.

 3. What impact do global frameworks like The Poseidon Principles have on the shipping industry?

The Poseidon Principles is the first agreement between banks to assess the environmental footprint of their investment portfolios in shipping and monitor performance on an annual basis. Voluntary initiatives like this are powerful as they create high standards of environmental stewardship, and this will help drive the prioritisation of an increasingly finite amount of capital to the shipping industry. 

Bank shipping portfolios may initially show misalignment to the IMO’s targets, more stringent origination of loans will ensure that capital for shipping loans is prioritised for those shipowners who can demonstrate commitment to the energy transition through investment in new zero-carbon vessels and retro-fitting existing vessels to meet IMO emissions standards. Through this, banks will re-align their loan portfolios over time in line with both the IMO ambition and wider NZBA requirements to meet Net Zero by 2050.

Whilst the Poseidon Principles respect free-market forces so each bank is free to arrange the financings it wants, re-alignment of portfolios to meet wider climate goals will only be possible in the longer term through a material change in lending behaviour amongst banks. Wider shipping market conditions will impact vessel efficiency, annual reporting by banks demonstrates transparently how the banks individually and collectively are moving towards their goals. Today, the Poseidon Principles focus solely on decarbonisation but, as the industry’s most powerful coalition, other important issues such as vessel scrapping, crew welfare and biodiversity could also be under consideration for the future.