ENGIE Impact’s expert joined Reuters’ Hydrogen North America 2021 Summit to shine a spotlight on the global shipping industry—and the barriers, challenges and opportunities to reducing maritime shipping emissions, accounting for an average of 2.5 percent of global GHGs annually.
As demand for shipping grows in line with the global economy, companies must mitigate maritime emissions to meet climate goals. Beyond energy efficiency measures, a shift to low-carbon fuels is the primary way to reduce emissions in the shipping sector. According to IHS, a downtrend in renewable power and electrolysis costs reduced green hydrogen production costs by nearly 50 percent since 2015, and much further drops are expected by 2030 and beyond, thanks to rising investment and government support. The maritime sector could benefit from these reductions as it begins to shift towards hydrogen and hydrogen-derived fuels like ammonia or methanol, but the process to scale requires a multi-step approach sharing costs and risk across the full value chain—including Scope 3 emitters.
Transcript has been edited for clarity.
Maritime shipping is a significant and growing hard-to-abate sector. If shipping were a country, it would be the sixth-largest emitter globally. And though 2-3 percent of global emissions may not sound like a lot—first, we really do need to get to zero, so we need to prioritize bringing those emissions down. Equally important, the demand for shipping is growing and is predicted to grow significantly. Shipping emissions could grow by 50 percent. Or they could grow by 250 percent, depending upon whether and when we all get our collective act together.
A word about why it's called a hard-to-abate sector, though there are significant gains to be had through enhancing the energy efficiency of shipping. And much of my time when I was at the IMO was focused on just getting ship captains to slow their ships down a bit or getting port's to design just-in-time arrival systems so that ships don't sit around the dock waiting once they arrive. Beyond efficiency, the only real answer to get to complete decarbonization is to switch roles. And unlike in the aviation sector, where dropping fuels exists in our real potential solution, in the shipping sector, we need not only change the fuels but also make adjustments to the ships and the bunkering facilities at the ports. These are significant and often very expensive changes that need to be made—and the maritime sector isn't prepared.
Even the companies that have been true leaders in the emission reduction space are nowhere near what's needed to hit a 50 percent by 2050 reduction goal, let alone the Net Zero goal. This isn't just my opinion; the Global Maritime Issues Monitor in 2019 is a survey conducted by senior maritime stakeholders from the global maritime forum. Respondents included board members, C-suite and functional decision-makers from the private sector, government officials and civil society representatives, representing a diverse network from 46 countries. They were asked, "What impact do you think the following issues will have on the maritime industry over the next 10 years?," "What is the likelihood of the following issues occurring within the next 10 years?," and "How prepared is the maritime industry to deal with those issues?" And as you can see in the graph below, availability of zero-carbon fuels, the competitiveness of zero-carbon fuels, and availability of zero-carbon vessels are all in the red zone. And the availability of finance for zero-carbon solutions isn't far behind. These are all significant problems, and the pressure is mounting. Member states of the IMO adopted an initial GHG strategy in April of 2018 to reduce at least 50 percent of GHG emissions from the global shipping sector by 2050. Compared to 2008 levels, I remain skeptical that countries will be able to align around a regulation with teeth to actually hit that target. But it certainly sends a signal as deregulatory moves are being made by the EU Commission and port authorities globally.
Where my attention has been turning is to the non-governmental pressure on sustainability. Sustainable finance requirements are already hitting the shipping sector, among other drivers. Along with deciding principles or a framework for assessing and disclosing the climate alignment of ship finance portfolios, there's also an increasing demand for clean shipping from shipping customers as part of their decarbonization strategy. I hear from a new company in search of a solution every day; they need to reduce the carbon footprint of the goods they're shipping because they've taken on stringent public climate goals that require them to reduce their Scope 3 Emissions Inventory. We'll come back to the role of customers later because they're really out of luck if the ships and the fuels that they need to transport those goods sustainably don't exist. On the flip side of those customers, I see two groups of shipping operators who are just starting to get their act together to build a carbon reduction plan that prioritizes energy efficiency—which is great, better now than ever. But then there are those that are further along with existing vessels and available fuels. For this group, a team of experts, as I have done before, do the math for them which in turn helps them realize that they need to start piloting zero-carbon ships now if they're going to have any hope of hitting targets in 2030.
Finally, we're jumping into the hydrogen space, the topic of our conversation here. To orient you in this space, there are a lot of applications in the maritime shipping sector for hydrogen or hydrogen carriers. Right now, I'm managing two different projects related to port decarbonization that are deep into the hydrogen space. Land mobility applications are going to be the first and the easiest to transfer to hydrogen because they're more cost-competitive today compared to traditional alternatives. I'll give you just a quick example of a study where we did a comprehensive total cost of ownership (TCO) study for a port to determine when and how they should switch to low carbon fuels for their ground mobility uses. One clear finding from that study was that the TCO for a new terminal tractor with a fuel cell system will be 60 percent lower than that particular client's diesel base case by 2030. So, it already makes sense for them to be planning to invest in those vehicles by that time because it's going to be cost-competitive.
We took a step deeper and asked the question of what the right transition for that company would look like. What we found is, in the long term, retrofitting existing vehicles to become a dual fuel system would be more expensive than simply switching out those vehicles for fuel cell power trains. But instead of just doing that one-to-one switch now, transition by retrofitting the current fleet to dual fuel and then replacing it at the end of life with a new fuel cell fleet was the best possible option for this particular client. Overall, taking that extra step can often provide a solution that is better economically and still gives you the emission savings you need.
Deep-sea shipping is a different case. We conducted a comprehensive TCO study for a large container ship, comparing the base case scenario with several alternative technologies: liquid hydrogen, ammonia, methanol, or methane. It was clear at the end of our study that ammonia, methane, solid oxide fuel cells, and/or methane into an internal combustion engine are the best alternative solutions, and a low CO2 tax of 100 US dollars per tonne of CO2 can make green fuels competitive marine gas fuels by 2040. Even the least expensive green fuels still require a 45 percent markup from the base case in 2040. Now, I say that, but I don't want to sound too negative; there's absolutely no reason that the base case should remain our frame of reference for any period of time. We can pull many levers to get costs down faster, from subsidies and regulations on the government side to effective organization and development in investment vehicles on the private sector side—you just have to change a few of the many assumptions in this study to change the outcome. And that's what I'll spend the rest of my time here on. But first, I want to note that what you're looking at here are just the costs, which are important, but not the only thing that matters. You also need to look at technology readiness, credibility, transport, energy density and safety issues when you're looking at switching over to alternative maritime fuels that are hydrogen-based. Once you have looked at all of those, most companies that we work with end up deciding that they want to focus on methanol or ammonia for their deep-sea shipping advanced technology pilots.
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Now that we have all that background, let's break down the challenge. It's pretty easy—at least to talk about. First, creating a new market, which must be done to drive down costs. These costs are high, so now, the real question becomes, who is able and willing to pay? And what are they paying for?
Three main pillars of the shipping ecosystem need to be reworked. You need to overcome the challenges:
To answer that first challenge (or at least to start to answer it), we need to create a new investment opportunity. A sustainable maritime transport certificate system that allows customers to pay the green premium for zero-carbon shipping and claim the emission reductions transparently will open up a significant investment into the maritime sector's alternative fuel space. This may seem kind of off the wall, however, environmental attributes certificates (EACs), which is what I'm talking about now, are not a new concept. The most common example which you may be familiar with is renewable energy certificates (RECs), or guarantees of origin (GOs), as they're known in many European countries. In the case of alternative maritime fuel, environmental attributes certificates decouple the physical fuel from the environmental benefit and then let anyone willing to pay the price buy and take credit for that attribute. This is made possible through what's called a 'booking claim chain of custody approach.' While developing it wouldn't be easy; it can definitely be done.
I'll give you a few more details of how I would see this process working out. First, we will need to collaborate with existing certification bodies and potentially governments and nonprofits on the development of preferably a global certification standard for alternative maritime fuel built on existing work. We would work with one or more of those certification bodies to develop a book and claim standard, basically a rulebook for how companies can register and claim those attributes. Then we would need to design and build a book and claim electronic registry, basically an electronic ledger for the certificates. Design functionality will be important—we want to be able to tag vessel and fuel type that would enable this registry to serve methanol, ammonia, and dual fuel vessels with multiple different types. We would also want to develop emissions accounting and reporting approaches for both the shipping companies that are using this stuff, the fuel providers and the shipping customers in coordination with the Science Based Targets Initiative and the GHG Protocol.
Our goal is to pilot this system as soon as possible. In the meantime, we want to develop an approach for aggregating the demand for alternative maritime fuel and environmental attributes certificates. We want to send a stronger signal to those companies that are willing to develop the solutions needed that they should get going, and the money will be there to pay the green premium when they do. We would want to develop standardized contracts for those maritime shipping customers when they go to buy those attributes, making it easy as possible for them to support a decarbonized solution. And finally, there's likely a need for education and support for the maritime shipping customers as they navigate this space, where ongoing support would be helpful. I know many companies who do not own or operate ships or buy marine fuel, so they cannot take action to decarbonize the maritime shipping sector today, but they would jump at the chance to pay for somebody else's ship to decarbonize. If there were a standardized and bite-sized way to do it, we would need to create that system for the maritime sector. My team at ENGIE Impact is already helping the aviation sector do this right now through the Sustainable Aviation Buyers Alliance (SABA). You can learn more about SABA by going to flysaba.org.
Step one—creating the investment opportunity—is a critical piece of the solution. Step two is equally daunting and important. We need to develop a model to decarbonize the shipping ecosystem. Basically, two or more operational green shipping corridors that pave the way for more through the development of replicable and shared solutions.
What's a green shipping corridor? Two ports that can serve low or zero-carbon vessels, because that's your customer from point A to point B and back again.
Developing a model decarbonization shipping ecosystem encompassing those three big pillars of work that we talked about: developing the vessel concepts, the fuel production sites, and an approach for filling the infrastructure needs of the project at the port, and also what's needed to transport the fuel from its production site to the port. This is much too much work to go over now in detail, but it would include collective assessment and decision making about which vessel and fuel options and ports to take forward to implementation and how through which partnership options, a single organization could coordinate the project, but many stakeholders will be involved. Many people have been talking about something like this. During COP26 in Glasgow, several governments effectively pledged to create green corridors. I believe they will help with the funding, but my experience tells me that a government-led initiative is going to flounder.
Shipping owners and operators should come together with the help of seasoned experts to dive into this work and take their ideas for funding to governments, rather than doing it separately, tentatively and expensively. As many shipping companies I know are doing now, working together would save everyone many costs and help a lot more companies decarbonize faster.
If you're a decision-maker in this space and are interested in learning more, please reach out.