The shipping sector needs to decarbonise, fast – if it were a country, it would be the sixth-largest emitter of carbon dioxide. While the industry is getting used to new regulation brought in at the start of this year by the International Maritime Organization and green fuels are being hastily developed, the measures taken so far have been criticised by some for not going far enough. Jenny Messenger talks to three industry leaders about how the sector is tackling its green responsibilities.
A cargo ship built today will have a lifespan lasting anywhere between 10 and 30 years. By the time it ends its days in a ship-breaking yard, maritime trade will have been transformed, if plans to decarbonise run smoothly.
The green shipping corridors that have begun to crisscross the oceans will map the world, populated by a global fleet running on climate-friendly fuels like methanol or ammonia, or perhaps even equipped with mechanical sails.
Right now, though, the shipping sector faces a set of questions rather than certainties: which fuel will win out? Who will bear the cost of decarbonisation? And fundamentally, will shipping meet its green deadlines?
The International Maritime Organization (IMO), a UN agency responsible for regulating shipping, is currently working towards a double target, though this may change when it reassesses its greenhouse gas (GHG) strategy later this year. It is aiming for a reduction in total annual emissions by at least 50% by 2050 compared to 2008 levels and a reduction in carbon intensity by 70% by 2050, compared to 2008.
From January this year, shipowners will have to record the carbon intensity indicator (CII) of ships over 5,000 gross tonnage, a measurement that links CO2 emissions with how much cargo a ship carries and how far it travels. Ships will be rated from A to E, with those at the lower end of the spectrum (D and E) required to submit a plan of corrective action.
Yet other players in the industry are pushing for a swifter pace of change to keep in line with the Paris Agreement, which would mean a more ambitious target of net zero by 2050. Among those calling for this is a group of financial institutions gathered under the rubric of the Poseidon Principles, a framework for assessing the climate alignment of ship finance portfolios worth more than US$185bn.
Adam Hearne is chief executive and co-founder of CarbonChain, an AI-powered platform that tracks carbon emissions and covers nearly 100,000 ships worldwide. Its CII calculator can show a ship’s rating, or what it’s likely to achieve.
GTR: What does the new IMO regulation mean for the shipping sector?
Hearne: I would say 2023 is a landmark moment for leadership. In my opinion, we’re hitting an inflection point where it’s no longer good enough to try to take the bare minimum compliance approach. Leaders in private companies, at a human level, want to do the right thing, and this is their chance to really show by example. If they are putting it at the top of the agenda in 2023, then it’s good business. In 2024, it’s almost a concern if you’re not putting it at the top of the agenda.
GTR: Are the new measures likely to make shipping costlier in the long run?
Hearne: The question of who bears the cost comes up a lot. Ultimately, the final delivered good is more expensive, but it could be cheaper in the long run, if there are more government subsidies towards greener sources of energy.
The incumbent companies have an incredible amount of influence. If you’ve got a multinational company that broadly stipulates it wants an A-rated or B-rated vessel in its logistics plan, then a lot of the competitive nature of the shipping industry seems to react to that. That’s something that is worth taking note of this year, as the regulatory backdrop is getting firmer.
GTR: To what extent does the pace of decarbonisation depend on individual companies taking the lead?
Hearne: When we look at the distribution of performance in ships, it is that longer tail of the worst-performing ships that are sometimes orders of magnitude worse. But there is no incentive to go from a B rating to an A rating at this stage, and you could say that is a gap. It’s also a question of how to make that transition as fair as possible for all. I think it is a collaborative effort to try to accelerate it.
The longer we delay this transition, the more abrupt it becomes in future. I speak as someone who personally had their home in Australia flooded last year, and then bushfires a couple of years before that. For the leaders out there who aren’t thinking too much about it, they should look at it as something that will affect the next generation and their children, so we should tackle it now. Decarbonisation is a team sport, and it’s time to collaborate on this issue together.
GTR: Are banks prioritising financing for ships that have a better CII rating?
Hearne: We’re seeing generally facilities are getting tied to transparency, firstly, and secondly decarbonisation. I imagine as the sources of data become more robust and reliable in the future, banks will have a better ability to provide incentives as needed or to gain transparency in the first place.
We see banks having an incredible appetite to allocate capital to areas of opportunity that need investment in updated technology, or more renewable ways of working.
GTR: Do you think the measures taken so far are stringent enough?
Hearne: I do think we need to see stronger incentives from regulators, banks and producers to be more ambitious. It’s not that they don’t reward lower carbon activities and products, but they just don’t have the robust, trusted information to prove that these initiatives are actually having the right effect. There are also a lot of embedded emissions in the ship itself – the steel can vary greatly in terms of that. But I don’t think that is acknowledged as much as it could be.
There are some companies that claim a lot of carbon neutrality on things based on offsets they have purchased, and then there are other companies that might have invested in very direct technological advances that have reduced the long-run carbon intensity of their asset. The companies that have really put effort into it should get a bit more credit for what they’re doing. But I think that will naturally emerge over time – we’ll start to see the real players acknowledged for their efforts.
Captain Rahul Khanna, who has spent 14 years onboard merchant ships, is global head of marine risk consulting at Allianz Global Corporate & Specialty.
GTR: What progress has the shipping sector made so far on decarbonisation?
Khanna: The shipping sector’s decarbonisation efforts are progressing and also rapidly evolving. The pace and progress of these efforts are influenced by a range of factors, including technological developments, regulatory frameworks and market forces.
One key indicator of progress is the reduction in carbon intensity, which is the amount of carbon emissions per unit of transport work, such as per tonne-mile. The industry will need to accelerate its adoption of energy-efficient technologies and fuels, such as wind propulsion, biofuels, hydrogen and ammonia. The CII regulations should help accelerate the pace of transition.
Market forces are also driving decarbonisation efforts in the shipping sector. Increasingly, consumers and investors are demanding sustainable and low-carbon supply chains, and shipping companies are responding by adopting cleaner technologies and fuels. New ships with engine propulsion using biofuels and methanol are already in service. The availability and affordability of such low-carbon fuels will also play a significant role in the sector’s decarbonisation efforts and in part are dependent on upstream producers.
Overall, while progress has been made in the shipping sector’s decarbonisation efforts, much more needs to be done to achieve the targets set by the IMO. We also need to keep in mind these targets are less ambitious than the net-zero target being set by many other industries and the IMO will face further pressure to revise these targets.
GTR: What would you say is the role of financial services in speeding up decarbonisation?
Khanna: Recognising the winds of change, the banking and insurance industry is already committing additional capital towards building and operating cleaner ships. The Poseidon Principles adopted by the banking and insurance industry are also a step in the right direction.
These initiatives will help further the transition by forcing the finance and insurance industry to gradually move towards ‘greener’ portfolios and away from polluting tonnage.
GTR: What are the potential effects on the global supply chain as shipping becomes less carbon-intensive?
Khanna: Global supply chains will be impacted in multiple ways by the decarbonisation of the maritime industry. It is well established that there will be a higher capital cost in green shipping at least in the initial years until technology brings the price down. This will have a knock-on effect on supply chains with possibly higher costs at first but may result in the lowering of costs in the long term due to the high-efficiency fuels and engines that will invariably develop.
Trade routes may also change as new products and commodities are developed with different producing regions around the globe. Newer risks are already surfacing, which are forcing the industry to amend shipping methodology – for example, the enhanced risk of fire from Li-Ion battery transportation and storage, more electric cars being transported by sea than ever before – and this is only expected to grow, and new production centres of ammonia and hydrogen as demand increases.
Robartus Krol is director of shipping finance at ING, one of the signatories to the Poseidon Principles.
GTR: What role do banks play in decarbonisation?
Krol: At ING, we focus on the top shipowners with a large balance sheet, but also those that are top class in terms of operations. Typically, we see that our owners are at the forefront of decarbonisation efforts.
One of the most important things is to have a dialogue with our owners and see where we can help, and how we can make the fleet more efficient together. One way is by financing very new and efficient vessels, but it’s also looking at how we can improve the existing fleet on the water. There is a lot that can be done in terms of retrofitting – shipowners can use silicone paint for the ship, they can change the bow shape, they can fit a propeller with things like boss caps, or ducts, and they can install other energy-saving devices.
The financial industry plays a very important role in creating the right incentives for shipowners. In that context, we also have to challenge ourselves. Are we ambitious enough? The Poseidon Principles association announced an ambition to be net zero by 2050. This goes further than the current goal of the IMO. In that context, we are curious to see where IMO is going. A 50% reduction in GHG emissions by 2050 is not good enough, but I fully appreciate that the IMO is a global organisation with a lot of different players, so it’s probably more difficult to make certain decisions fast.
Going forward, owners who achieve better decarbonisation outcomes and follow the relevant trajectories will have better and cheaper access to capital, which makes them more competitive.
GTR: At the moment, the green fuel of choice has yet to be determined. How can the sector prepare?
Krol: We have to move, but I do think that some of the parties with substantial muscle can afford to absorb the costs as first movers, if needed. It’s very important that all parties work together – shipowners, financiers, charterers as well, and that everybody does a little bit extra. But some parties are better positioned than others. They can create substantial demand that makes it worthwhile for suppliers of that fuel.
Very large shipowners can try certain fuels and even if it doesn’t work out exactly as planned, they can probably absorb the costs. But a lot of shipowners are medium-sized, and if you order a new ship, it’s a massive capital investment. You need to order that ship with future-proof technology.
At the moment, owners are more reluctant to order vessels than they used to be, and that means that the order book is very much under control as a percentage of the existing fleet on the water. That is actually a positive – the longer it takes to order more vessels, the better for the shipping market.
GTR: As a bank, how important are environmental considerations when deciding who to finance?
Krol: They’re very important. The Poseidon Principles are a way for us to measure the decarbonisation performance of our portfolio. It’s important to stress that that is a portfolio approach. We want to stay below the curve on an overall portfolio basis at the end of the year. But there will be ships that are well below the curve, and ships that are above the curve.
It does not mean that ING does not finance older ships. I think that’s often misunderstood in the market. What’s important for us is that the shipowner shows they have a strategy for improving their existing ships. If an owner doesn’t have a plan, then they’re probably not an ING client. But if an owner has a plan, and is prepared to share that with us to get some feedback from our side, and on that basis improve the fleet even further in terms of efficiency, then we can also finance an older ship.