Policy change needed to drive decarbonisation of shipping

Out-Law Analysis | 02 Aug 2021 | 9:02 am | 5 min. read

The shipping industry is under increased pressure to cut its carbon emissions, as part of a broader drive by governments and regulators to decarbonise the global economy and address the risks posed by climate change.

Cleaner, ‘greener’ fuels are emerging as alternatives to the “bunker fuel” currently relied on to power vessels across oceans, which is typically the ‘dirty’ remnants from the petroleum refining process. However, there is significant cost associated with their adoption. It is incumbent on policymakers to incentivise the industry’s investment in greener fuels to drive the speed of change necessary to deliver on climate targets.

Farquhar Gavin

Gavin Farquhar

Partner, Head of Office, Falkland Islands

The Global Maritime Forum has estimated that transitioning the industry to meet the IMO’s 2050 emissions target by using ammonia fuel would cost at least €1 trillion

The problem

In the landmark Paris Agreement agreed at the United Nations climate conference on 12 December 2015 (COP21), countries around the world agreed to work to substantially reduce global greenhouse gas emissions and to limit the global temperature increase in this century to two degrees Celsius while trying to limit the increase even further to 1.5 degrees. 

Since agreeing on those overarching objectives, many governments have set about outlining their own emissions reduction targets and fleshing out policy to underline them.

In the UK, for example, the government legislated in 2019 to reduce net emission of greenhouse gases in the UK by 100% back to 1990 levels by 2050 – a target colloquially defined as attaining ‘net zero’ emissions. It has since set a further interim target of reducing UK emissions by 78% by 2035 compared to 1990 levels. That 2035 target will, for the first time, cover international aviation and shipping.

According to a 2019 report by the Financial Times, shipping is responsible for between 2% and 3% of the world’s total greenhouse gas emissions, which puts the industry on a par with countries such as Germany, Korea, Iran and Canada in terms of the total CO2 emissions it is responsible for. The FT said ocean liners had also burnt through almost two billion barrels of ‘dirty’ fuel oil in 2018.

Amidst ever-more-frequent news of climate-related catastrophes, such as the recent flooding in continental Europe and wildfires in Australia and the US, there is growing scrutiny on the greenhouse gas emissions of specific industries and individual businesses, and this is no different with shipping.

The Italian government recently imposed a ban on large cruise ships entering Venice waters following concerns about their impact on the local environment, while a BBC report highlighted how cruise ships contribute to Southampton's air pollution, which also noted that “cruise ships have huge power demands, and to power on-board facilities such as lights and water treatment plants, they run their engines 24/7 whilst moored up in ports”. Nature reported in 2016 that “low-grade marine fuel oil contains 3,500 times more sulphur than road diesel” and that between a third and a half of all airborne pollutants in Hong Kong stems from large ships in ports.

Though there are existing rules on air pollution in shipping, the International Maritime Organization (IMO), an agency of the UN that adopts rules on shipping pollution and encourages governments around the world to implement those rules into national law, is seeking to drive further environmental standards.

In June, the IMO’s Marine Environment Protection Committee stiffened energy efficiency requirements for ships, building on an initial strategy the IMO had developed in 2018. The measures will begin to take effect from 1 November 2022. The IMO has set broader targets for reducing CO2 emissions as an average across international shipping, by at least 40% by 2030, working towards a 70% reduction by 2050, compared to 2008 levels. It hopes to reduce total annual greenhouse gas emissions from international shipping by at least 50% by 2050 compared to 2008. Those targets, it has said, are consistent with the aims of the Paris Agreement.

Individual companies have set their own targets too. Maersk, the world’s largest container shipping company, announced in 2019 “a new and ambitious target in 2018 of having net-zero CO2 emissions from operations by 2050”.

The transition to cleaner fuels

One way to reduce carbon emissions in shipping is for vessels to run on more environmentally-friendly fuels, such as ammonia and hydrogen.

Ammonia does not contain carbon, and so when it burns it does not emit carbon dioxide. However, the Global Maritime Forum has estimated that transitioning the industry to meet the IMO’s 2050 emissions target by using ammonia fuel would cost at least €1 trillion.

‘Green hydrogen’, which produces no CO2 and uses renewable energy combined with electrolysis, is another technology which has been identified as potentially pivotal to the global decarbonisation efforts. Producing green hydrogen at scale is complex and cost-prohibitive currently, though policymakers around the world, including in the EU, are exploring mechanisms for supporting investment in its development, with the aim of driving down the cost of adopting the technology over time for businesses.

A June 2021 report, published by the Smith School of Enterprise and the Environment, the Institute for New Economic Thinking at the Oxford Martin School, and Pinsent Masons, further highlighted the scale of the economic challenge associated with decarbonising shipping.

The report, ‘Zero-Emissions Shipping: Regulatory support for incentivising the decarbonisation of international shipping’, identified “several potentially viable technologies for decarbonising shipping”, including batteries, biofuels, hydrogen-based fuels, carbon-based synfuels, nuclear, and wind power, but flagged that “the costs of clean fuels, such as green hydrogen and green ammonia are more than double their fossil fuel counterparts, even with a modest carbon price of US$40 per tonne”.

However, the report  explored the feasibility of a ‘contract for difference’ (CfD) scheme for driving the decarbonisation of shipping, highlighting the role CfDs have already played in helping to increase the proportion of renewable electricity in the UK’s energy mix.

At its most basic, a contract for difference is essentially an agreement between two parties whereby one party – a public sector entity – agrees to pay the other party – the producer of the fuel or technology – the difference between  a higher actual value of a commodity at a point in time – the market price – and a value which the parties agreed at the point the CfD was entered into – the strike price.

Where the market price is less than the strike price, the producer pays back the difference to the scheme.

According to the report, a ‘fuel-only’ CfD could be used to encourage shippers to switch to zero-carbon emission fuels at the same price as marine gas oil, though it was conceded that the mechanism “may not cover 100% of the costs of switching from to zero-emission shipping or necessarily provide support for infrastructure and retrofitting costs”. A further ‘total cost of ownership’-based CfD, covering “all costs associated with building and running a zero-carbon emission ship”, was also advocated.

Ronan Lambe of Pinsent Masons assisted in the drafting of heads of agreement for both CfDs proposed, which lay out “how each CfD would work and under what terms it would operate” and are intended to “enable industry stakeholders to see the concrete details of a basic CfD contract, locate points of agreement, and uncover issues that may require further negotiation”.

Shore power

A further solution to drive the decarbonisation agenda could arise from the growing ‘shore power’ movement, which envisages that ships turn off their generators and plug into on-shore electricity supplies when in port to reduce their pollution of the marine environment in the local area.

However, the movement is caught in something of a ‘chicken-and-egg’ scenario, with many port operators of the view that there is limited demand for this from vessels and therefore reluctant to pay for the infrastructure needed to implement it, given their concern that may not make a return on that investment. 

Like with the transition to cleaner fuels, the onus is really on policymakers to act as catalysts of change. While the introduction of CfDs is an option for incentivising a switch to cleaner fuel sources, it may be that regulatory change is needed to force vessels to use port provided electricity supplies while they are in port.