ESG Economist - Decarbonizing international shipping
The drive to decarbonize the economy affects all sectors including shipping, but for the shipping industry it will be an enormous challenge. The International Maritime Organization (IMO) strategy currently targets a reduction of 50% by 2050 and 100% within the century, but it has signalled it is working on a more ambitious strategy. The IMO aims to agree on a revised strategy with more ambitious targets in spring 2023. According to IRENA a 1.5 degree scenario should see an 80% reduction by 2050. This is broadly in line with the IEA’s scenario. International shipping has various ways to reduce its carbon footprint, however all currently have significant drawbacks. A change in energy carrier is the most crucial step to take but the future shipping fuel of choice has not been defined yet resulting possibly in reluctance to replace old vessels.
Shipping is a capital-intensive industry characterized by large, long-life assets (vessels and bunkering infrastructure 20-30 years), thin margins and a high-dependence on a global supply of energy-dense fuels. Ship owners are cautiously watching developments on the regulation front (more on this below) regarding the direction of decarbonisation. They would like to avoid that they invest in a vessel with new technology and having the risk that this new technology is subsequently punished by a shift in regulation. So, it takes time to decide to change the shipping portfolio by investing in new vessels. The proportion of fuel costs in the operating costs of ships can range from around 35% of the freight rate of a small tanker to around 53% for container/bulk vessels. Moreover, the price differential between conventional marine fuels of fossil origin and renewable low-carbon fuels remains high. Furthermore, there are no commercially viable zero-emissions technologies especially for deep shipping that accounts for 85% of emissions. For short routes and smaller vessels, a battery may be an option. In this ESG economist we focus on the decarbonization ambitions for international shipping, the pathways for international shipping and the decarbonization options.