Reduce shipping emissions with renewable fuels & efficiency

Shipping accounts for approximately 3% of global greenhouse gas emissions, and shipping activity is expected to increase overall with rising global trade (1). The International Maritime Organization (IMO) has a goal to reduce total industry emissions to Net Zero “by or around 2050,” with interim goals of at least 20% reduction by 2030 and at least 70% reduction by 2040 (both compared to 2008) (2).

Five important trends that make shipping decarbonization challenging are worth bearing in mind:

Ship lifetime: The average lifespan of a merchant vessel is ~30 years, which means that ships commissioned today should ideally be designed to comply with the goal of producing net-zero emissions by using zero-emission fuels, while also being more efficient. However, at the same time, shipping players face uncertainty regarding the feasibility and availability of different low-carbon fuels, leading to hesitation and inaction. This is compounded by the significant capital expenditures involved in increasing fleet efficiency, transitioning current fleets, and the expected high price of alternative fuels in the short and medium term.

Need for alternative fuels: Alternative fuels are a paramount concern, as the largest emissions reductions are expected to come from their use. Further, the majority of vessels that will run on alternative fuels are expected to be new ships, as opposed to existing ships that have been retrofitted.

Collective effort needed: Decarbonizing shipping will require a collective effort from all maritime stakeholders. This will involve investing and long-term planning regarding nascent fuels to expand existing low-carbon energy supply solutions and committing to long-term demand for these solutions through initiatives such as offtake agreements for zero-emission fuels.

Large shipping companies key: Regulation has not kept up with leading, larger shipping companies, which have put decarbonization at the top of their strategies. As such, it is these shipping companies that must take action to forge partnerships with cargo owners and fuel/technology providers to move in lockstep and build confidence in alternative fuels and technologies.

SME shippers may need financing mechanisms: Small- and medium-sized shipping companies do not have the same leverage to invest in technologies and fuels as their larger counterparts. Therefore, additional financing mechanisms are required to see acceleration in this sector.

By moving early to decarbonize, shipping companies can find competitive advantage, such as meeting growing customer demand; enhancing efficiency; improving sustainability ratings and investor perception; and ultimately ensuring they have a “right to play” in the shipping industry of the future.

From the perspective of a shipping company, for reasons described above, there are a few main categories of decarbonization levers that the industry can deploy (in collaboration with ports, regional governments, operators, and shipping manufacturers): operational efficiency, technological efficiency, transition fuels, and clean energy.

1. Operational efficiency: Through new operations enablers, such as machine learning and internet-connected sensors, companies can improve operational efficiency and optimize routing. These could reduce bunker fuel consumption, limit idling, reduce pollution, and save money (potentially with self-financing returns). Optimizing routes via coordinated multi-stakeholder action can also reduce the number of ton-miles without compromising product availability. See Read more section for further details.

2. Technological efficiency: New technologies can increase vessel efficiency and reduce emissions by reducing bunker consumption and potentially improving asset lifespan (i). A range of alternatives are available, such as new propulsion systems, drag minimization measures, power/propulsion optimization, and wind propulsion. See Read more.

3. Transition fuels: Some fuels are seen by many as transition measures ahead of true zero-emission fuels. These can provide emissions reductions but should not be considered destination fuels. type: asset-hyperlink id: 6g8MV5xhoXj8LbzEKBy1ek summarizes the applicability and characteristics of major transition fuels and clean energy/fuels.

• Liquified natural gas (LNG): LNG emits approximately 25% less carbon than conventional fuels (3). Dual-fuel engines, capable of using both conventional fuel and liquefied natural gas, can prove advantageous for long-haul vessels, especially as low-carbon fuel availability is limited, though retrofit costs can be steep (and may compound to effect switches to ammonia- or methanol-compatible engines).

• Biofuels: Many available biofuels can be sourced in ways that emit zero or near-zero carbon over their lifecycle (4). Biofuels currently serve as a viable option for blending with conventional fuels (e.g., 30% biodiesel and 70% conventional marine diesel fuel). However, there are limitations to supply due to production scalability issues, the availability of inputs, and demand from other hard-to-abate industries (e.g., aviation).

4. Clean energy/fuels: To meet the global Net Zero target by mid-century, commercially viable zero-emission vessels must be introduced into the global fleet by 2030. Efficiency can ease dependence on scarce alternative fuels:

• Methanol (biomethanol and e-methanol): Green methanol could have commercial viability in the near term (~2-5 years) due to its similarity to gasoline in terms of handling, density, and versatility and is viable for long-haul vessels (ii). In the case of e-methanol, this is the only viable option for achieving Net Zero.

• Ammonia: Clean ammonia could demonstrate commercial viability in the coming years. It holds the most favorable fundamentals as an alternative fuel (see Exhibit below) as it offers zero-emission potential, anticipated lower costs compared to methanol, and ease of scalability (5). It is viable for long-haul vessels, though there are concerns regarding its toxicity and flammability.

• Battery electric: Battery electricity is emerging as a viable alternative, particularly for ferries and other short-haul active fleets. To facilitate zero-emission transport, the electricity would need to come from renewables.

• Hydrogen: Hydrogen power is expected to be viable for short-haul ranges as a supportive fuel alongside batteries and fuel cells. It is expected to be commercially ready in 10 years or more, and is currently uncompetitive due to storage, distribution, and utilization difficulties due to the extreme low temperatures and high-pressure conditions needed.

It is also worth noting that shipboard carbon capture and storage, which is a technology in its early stages, may potentially allow for the use of fossil fuels on vessels while avoiding emissions. However, the viability of this option must be tested at scale.

To decide when and how to implement each of these levers, companies should consider (at least these) three important characteristics about each approach: its total decarbonization potential, the time horizon for competitiveness, and the capital investment needed (summarized in type: asset-hyperlink id: 6g8MV5xhoXj8LbzEKBy1ek).

Table 1: Illustrative list of shipping decarbonization approaches and key characteristics

Table 2: Preferred alternative fuels in the long run (2040) are dependent on use case*

*Hydrogen considered primarily as support for batteries/fuel cells

For the widespread adoption of these shipping decarbonization technologies and approaches, there will need to be significant industry-wide structural changes, including investments in alternative-fuel production facilities, mid-stream infrastructure, and landside power and/or bunkering infrastructure at ports. Companies can also develop local partnerships (e.g., EU's Hydrogen Valleys Partnership) (6) to co-fund the technology roll-out for alternative fuels with other end-users (e.g., fertilizer producers, transport vehicles, and other fuel users) and accelerate development.

Many major shipping players have started to announce their Net Zero ambitions and levers to achieve them (7):

Maersk: Committed to net-zero CO2 emissions from operations by 2040 (8). The company aims to have carbon neutral vessels commercially viable by 2030 and has ordered 25 methanol-enabled vessels (9) has forged strategic fuel partnerships to try to scale availability (10).

HMM: Committed to reducing carbon emissions by 50% by 2030 and achieving carbon neutrality by 2050 (11). So far, it is relying on optimizing sea routes and fuel efficiency, as well as retrofitting vessels for performance enhancements and fuel conversion, with nine methanol dual fuel vessels on order (12)(13).

CMA CGM: Committed to net-zero carbon by 2050 in its overall CO2 emissions (14). It uses LNG propulsion and is optimizing the performance of its vessels and operations (15). Moreover, it has 24 dual fuel methanol-powered vessels on order and one designed to run on biofuels (16).

DFDS: Committed to replacing fossil fuel with zero-emission fuels by 2050 (17) by making technical upgrades to vessel hulls and on-board systems, as well as investing in research and development of zero-emission fuels. It has joined a partnership to establish hydrogen production facilities, as well as a facility to increase production of e-methanol, and plans to power at least one route by e-methanol (though no vessels have been ordered or retrofitted yet) (18)(19).

Climate impact

Targeted emissions sources

Shipping decarbonization solutions facilitate emissions reductions, primarily in:

Scope 1 (for shipping operators/owners): Direct emissions from shipping operations

Scope 2 (for shipping operators/owners): Indirect emissions from the generation of purchased or acquired electricity, steam, heat, or cooling

Scope 3 (of most downstream purchasers of shipping services, e.g., retailers – shipping moves over 80% of total global trade) (20)

• Category 3 (Fuel- and energy-related activities not included in S1 or S2)

• Category 4 (Upstream transportation and distribution)

Decarbonization impact

According to the IMO, operational and technological efficiency improvements could cut carbon emissions by 20-50% by 2050. Mass adoption of zero-emissions fuels would be required to address any additional reductions needed to get to the target of net-zero emissions by close to 2050 (21).

100% adoption of clean energy/fuels would in theory result in Net Zero emissions, though technological progress would be necessary to enable the full adoption and use of said fuels, which will be difficult for all companies to achieve in the near term. However, in the long term, the rate of adoption of clean energy/fuels will be the essential driver in decarbonizing the industry (22).

Business impact

Benefits

• Demand growth: Meeting the needs of shipping customers, an increasing number of whom may be willing to pay a premium for zero-carbon shipping, could result in increased revenues and profits (e.g., 70% of customers are willing to pay a small premium of 5% for sustainable consumer products and an additional 10% are willing to pay higher premiums)(23)

• Operational benefits: More efficient operations (e.g., more efficient port cargo-loading scheduling, less spend on fuel) can reduce the total cost of vessel ownership

• Enhanced brand perception: Partnering with consumer-facing and industrial goods companies can result in improved brand perception for all parties

• Right to play: As demand for clean shipping increases, companies at the forefront of the industry – having adopted decarbonization processes, technologies, and fuels early – will be increasingly sought after

• Policy/regulatory advantage: Securing a competitive edge over industry rivals by avoiding current and future regulatory penalties and leveraging (limited) available governmental funding (e.g., for subsidized fuels). See examples of government action in Read more

• Increased financing opportunities: committing to Net Zero can lead to improved environmental, social, and governance (ESG) ratings, and therefore lower cost of capital

Costs

• Impact on operating costs: Clean ammonia and methanol are likely to face steep premiums in the short and medium term in comparison to LSHFO (low-sulphur heavy fuel oil, reference fuel). These costs need to fall for mass adoption. Large-scale demonstration projects are essential for proving economic viability and creating demand, thereby lowering adoption costs

• Investment required: Large development and infrastructure investments are required in areas like operational efficiency levers, technological efficiency levers (see Read more), low/zero-carbon fuels (e.g., future fuels, electrification), alternative energy converters (e.g., dual-fuel engines, fuel cells), and shipboard carbon capture (e.g., carbon capture, use and storage onboard vessels)

Indicative abatement cost

Please see Solution and Read more sections.

Impact beyond climate and business

Co-benefits

• Reduced air pollution: Renewable shipping fuels produce fewer emissions, such as sulfur dioxide, nitrogen oxides, and particulate matter. These pollutants can cause respiratory problems, heart disease, and cancer

• Increased energy security: Renewable shipping fuels, assuming worldwide production capabilities, may not be subject to similar price volatility pressures as fossil fuels (e.g., due to geopolitical reasons)

• Job creation: The development and deployment of renewable shipping fuels will likely create quality jobs in the shipping industry and the renewable energy sector (24)

Potential side-effects

• Safety: Some renewable shipping fuels, such as ammonia, can be hazardous. Additional safety protocols and regulations should be considered when these fuels are introduced

• Environmental impacts: The end-of-life disposal of decommissioned ships can be a significant source of environmental impact, and safely recycling decommissioned ships will be essential to reduce emissions and increase overall environmental sustainability. Importantly, the IMO Hong Kong Convention (HKC), which enters into effect in 2025, includes significant regulations for intentionally designing and operating ships to be recyclable, the safe and proper operation of ship recycling facilities, and enforcement of recycling with certification and reporting requirements (25)

Typical business profile

While all shipping companies are well-positioned to capitalize on decarbonization technologies, those that may be subject to emissions regulations or other government and public pressures (e.g., larger shipping companies) have the most incentive for adopting these technologies promptly. This includes companies such as freight/cargo or passenger ship operators, operating in shipping lanes and/or port cities, which may be subject to stricter government action on emissions (e.g., incentives, taxes, regulations) and vulnerable to the negative impacts of air pollution and community pressure.

Approach

Companies need to balance long-term decarbonization potential, commercial viability of available technologies, and capital investment need. With this in mind, there are various categories of decarbonization investments companies can consider making:

• No-regret actions: Implement low capital investments right away, even if they have a low-to-medium decarbonization benefit (e.g., operational efficiency), as they are likely to pay back in the short term

• Near-term investments in long-term tech: Considered “expensive, but safe” investments, i.e., high capital investments if there is a low risk of stranded assets, and a high chance of meaningful decarbonization benefits (e.g., partnerships with ammonia producers)

• Strategic upgrades: If making large capital investments over the next few years, fold in sustainability upgrades which would be expensive as retrofits (e.g., ship efficiency technologies when purchasing new ships)

• Future investments in long-term tech: Plan to include upgrades for longer-term, high decarbonization potential technologies when making large capital investments 5+ years down the line; keep a close eye on them now (e.g., H2 infrastructure at ports)

Stakeholders involved

Within shipping companies, an array of stakeholders must help facilitate shipping decarbonization, including:

• Executive Management: To set decarbonization goals and decide to invest in new technologies, as well as work with regulators and investors

• Fleet Management: To use data and analytics to identify new efficiencies in terms of routes and new technologies

• Finance & Accounting: To approve installations of new renewable solutions that may be capital-intensive, considering constrained budgets

• Engineering: To manage ship retrofits, as well as the implementation and maintenance of new technologies

• Crew Managers: To undergo major upskilling to properly handle sustainable fuels in ways that minimize injuries/accidents, and to ensure crews are committed to sustainability

• Procurement: To implement roadmaps for sourcing new suppliers and negotiating contracts for clean fuel providers

• Marketing & Sales: To develop a sales strategy that targets customer willingness to pay for clean shipping alternatives

Additionally, as shipping decarbonization will require an ecosystem-wide effort, there are many external stakeholders shipping companies can engage with, including:

• Ports/governments: To collaborate on undertaking emissions reduction plans through policies, regulations, and public-private partnerships

• Investors: To buy in to companies’ sustainability strategies and allocate capital for projects/priorities

• Cargo owners (e.g., companies engaging shippers to transport goods/merchandise): Tocommit to sustainability and be willing to pay for sustainability services

• Vessel owners: To purchase and provide green vessels and partner on sustainability initiatives

• Ship manufacturers: To make available shipping technology compatible with net-zero shipping

• Engine and Machinery OEMs: To develop new engines and fueling systems and assess usability of either technology on a case-by-case basis

• Fuel suppliers: To supply clean/green fuels and be part of long-term mutual sustainability commitments

• Industry Decarbonization Centers: To provide best practices and knowledge to adhere to and profit from, and to provide overall decarbonization support (e.g., Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping (26), Global Centre for Maritime Decarbonization)(27)

Key parameters to consider

Solution maturity & Technical constraints

Please see Solution section.

Implementation and operations tips

Below are some typical steps that a company aiming to decarbonize shipping can engage in:

1. Assess emissions: Conduct a comprehensive assessment to understand the emissions and environmental footprint of shipping operations, focusing on identifying routes, operational steps, and emissions at the vessel level for the entire fleet

2. Map a trajectory: Identify and prioritize the most important decarbonization levers based on market readiness, costs, feasibility, etc. Set ambitious emission reduction targets (e.g., aligned with SBTi guidelines) (28) and develop a plan to achieve them in line with the 2050 target

3. Implement solutions: Develop a long-term strategy and near-term plan (in line with suggestions in the Approach section) to start converting to low-carbon assets (e.g., investment in new low-carbon vessels, retrofitting of existing ships)

   1. Pilot feasible decarbonization approaches to test viability for company operations

   2. Invest in the research and development of alternative fuel technologies

   3. Work with suppliers to develop and adopt low- or zero-carbon fuels

4. Advocate widespread adoption: Partner with other industry players (e.g., ports, cargo owners) to stimulate conditions for decarbonized shipping

   1. Engage with customers and stakeholders to raise awareness of the need for decarbonization

   2. Work with other shipping companies or ports to establish “green corridors” (i.e., routes where only low-carbon vessels operate with ease)

   3. Support the development of international regulations, policies, subsidies, and investments that promote decarbonization

   4. Advocate for the removal of subsidies for fossil fuels

More information on decarbonization technologies

1. Operational Efficiency:

At ports, efficient operations, such as just-in-time (JIT) docking, loading, and unloading at docks, and minimizing wait times for a berth while near ports, can enable vast reductions across the shipping ecosystem. Data and digitization can have an important role to play here.

There may be options to optimize routes for distance traveled with a more coordinated effort across marine players. There may also be options to maximize traffic in emerging green shipping lanes (where ships must be using low-carbon fuels).

2. Technological efficiency:

More details on new propulsion systems, drag minimization measures, power/propulsion optimization, and wind propulsion.

• New propulsion systems: Entails retrofitting ships with new propellers designed for maximum speed and low cavitation. An upgrade to a high-efficiency propeller can reduce overall fuel consumption 2-5% (29)

• Measures to minimize drag: These can help improve a ship’s efficiency, reducing its energy consumption between 1% to 4%. The cost of drag measures varies by vessel size and product choice (30)

  • Air lubrication: Air lubrication is a method used to reduce the resistance between a ship’s hull and seawater by using air bubbles. The technology holds promise, and some systems claim to reduce fuel consumption by up to 10% with a 2-3% cost increase (31)

  • Aerodynamic vessel design: Adjusting the angle of a ship’s bow in the water can minimize drag and improve fuel efficiency

  • Hull coatings: Smooth, low-friction coating, can help minimize drag by reducing friction with water. Additionally, anti-fouling coating can help prevent the growth of drag-producing organisms on the hull

  • Bulbous bow retrofit: Installing a protruding, bulbous bow on ships reduces drag by interfering with bow waves, enabling reduced emissions and fuel efficiency

  • Ballast reduction: Reducing ballast can decrease the wetted surface of the hull, reducing drag. Additionally, reduced ballast can enable more aerodynamic vessel design (see above)

• Power and propulsion optimization tech: Propulsion optimization technology can help improve the efficiency of a ship’s propulsion system, leading to reduced fuel consumption between 0.5-5%. Retrofits vary by vessel types, with costs ranging (e.g., twisted rudder, pre-swirl, propellor boss cap fins) (32)

• Wind propulsion: Wind-propelled vessels (e.g., ships with fixed sails, flettner rotors, kites) are already being used to reduce fuel consumption (33)

Selected government regulations:

• IMO Energy Efficiency Existing Ship Index (EEXI) and carbon intensity indicator (CII): Beginning in 2023, the IMO will require a one-time certification of the efficiency of ships over 400 gross tons and a yearly assessment of the carbon intensity of all ships. If a ship is substandard, companies will be required to submit a corrective plan outlining how it will become more efficient/less carbon intensive to continue operation

• EU REPowerEU: A comprehensive framework to support the uptake of renewable and low-carbon hydrogen (34)

• FuelEU maritime initiative (takes effect in 2025): Contains incentives to support the uptake of low-emission renewable fuels of non-biological origin (RFNBO), and revenues generated from violations of fuel emissions restrictions (decrease GHG emissions 2% in 2025 to up to 80% by 2050) will go toward maritime decarbonization projects (35)

• EU Emissions Trading System (ETS) (takes effect for large ships in 2024): Cap and trade system using allowances applies to 50% of emissions from voyages starting or ending outside of EU and 100% of emissions that occur between two EU ports; ramps up starting with emissions from 2024 and takes full effect from 2027 onward (36)

• US Hydrogen Production Tax Credit (45V): Green hydrogen credits to significantly bring down the cost of production of hydrogen-based options like ammonia and methanol, as part of the Inflation Reduction Act (IRA) (37)

• US Clean Air Act: $2.25B in grants to reduce air pollution at ports (38)

• US International Maritime Pollution Accountability Act and Clean Shipping Act (proposed): The first act would levy a $150/ton fee on carbon emissions, as well as fees for other pollutants (e.g., nitrogen oxides, sulfur dioxide, particle pollution) (39). The second bill would require specific lifecycle emissions reductions for fuels starting in 2027 and ending with a 100% reduction by 2040. Additionally, it would require the elimination of in-port ship emissions by 2030

• Chinese ETS (projected start 2026): Would apply Chinese carbon tax to shipping industry, expected to be $45/tCO2

• Other prices on carbon/emissions penalties: Future policies may impose emissions penalties based on carbon emissions, resulting in the increased effective cost of LSHFO (reference fuel) relative to lower-carbon alternatives

Footnotes:

(i) Note: Cost estimates for all technological efficiency measures are from 2019

(ii) Note: Methanol (CH3OH) is water-soluble and readily biodegradable, and significantly reduces emissions of sulfur oxides, nitrogen oxides and particulate matter