A PATHWAY TO DECARBONIZE THE SHIPPING SECTOR BY 2050: CHARTING FUEL CHOICES AS THE SHIPPING INDUSTRY SAILS TOWARD NET ZERO

A PATHWAY TO DECARBONIZE THE SHIPPING SECTOR BY 2050:?CHARTING FUEL CHOICES AS THE SHIPPING INDUSTRY SAILS TOWARD NET ZERO

?INTRODUCTION

??The shipping industry’s fuel choices journey to net zero with systematic support from Shipping companies—invigorated by regulation, customer demand, investor gravity, and internal goals—are probing for ways to decarbonize their fleets. More than 95 % of ships today are powered by internal-combustion engines (ICEs) that work on various petroleum products, such as heavy fuel oil (HFO), marine gas oil (MGO), and marine diesel oil (MDO). Any wide-ranging effort to reduce emissions will entail finding greener fuel to boost vessels across the water. Greener-fuel possibilities are available enough in the maritime world, and the industry is in a period of trialing and searching to know the insinuations of adopting such fuels. Because adoption at scale will require entirely new value chains to stick, ship owners and operators, ports, fuel providers, engine manufacturers, shipyards, and other players are looking to one another for clues about where the industry is gravitating. In the meantime, the lack of demand-side signals for greener shipping from policymakers, suppliers of goods, and consumers seeking greener products and services makes it difficult for the industry to move forward with confidence. Hesitations about the use of greener fuels—involving the potential for health, safety, and environmental concerns; higher costs; lower energy density; new capability needs for the crew; and limited disposal at ports of call—intensify these demand-side challenges.

?Other terms like low-sulfur fuel oil and very low-sulfur fuel oil are also used for these fuels. We use the term “fuel oil” ?of the above oil to represent all of these variants. Industry leaders know they must adopt greener fuels in order to decarbonize. Is a multifuel future in store? Future fuel choices Several fuels are in focus for the shipping industry. There is almost certainly no one-size-fits-all answer. Many, if not all, of these options, could achieve some level of adoption over the next 30 years: Fuel category Fuel ‘family’ Fuel(s) Ambient liquid fuels Fuel oil and diesel. HFO, MGO, and MDO: Fossil fuels that can only be decarbonized with the use of onboard carbon capture. Biodiesel: A “drop-in” fuel that burns in existing ICEs, biodiesel can provide up to 50 to 90 % decarbonization compared with HFO, MGO, and MDO (depending on the feedstock and production process); faces bio feedstock constraints (given that these feedstocks are also in demand for fuels in other sectors such as aviation); and has limited cost-reduction potential (because the production processes are mature). Second-generation biodiesels, which could boast stronger sustainability credentials than current biodiesels in the market, require further technological maturation (for example, hydrothermal liquefaction, and pyrolysis).

??E-diesel is also a potential fuel in this family. The shipping industry’s fuel choices on the path to net zero Future fuel choices (continued) Fuel category Fuel ‘family’ Fuel(s) Ambient liquid fuels (continued) Methanol Biomethanol: Derived from bio feedstocks, bioethanol can be a carbon-neutral fuel (on a “well to wake” basis). There are marine engines today that can burn methanol. It is liquid at room temperature, so it can be handled and stored (helping to counteract the cargo capacity loss from its volumetric energy density, which is lower than that of fuel oil). However, it has a limited cost reduction potential due to a mature production process. E-methanol: Derived from green hydrogen and captured CO2, e-methanol is more expensive than bio methanol today but will likely become cheaper in the long run (as the costs of renewables and green hydrogen come down). It will always be more expensive than e-ammonia, as the latter is manufactured from nitrogen, which is abundantly available in the air. CO2 is emitted during e-methanol’s combustion, but if sourced from captured biogenic CO2 or direct-air capture (DAC), e-methanol is generally considered carbon neutral on a well-to-wake basis. Cryogenic liquefied fuels Methane Liquefied natural gas (LNG): LNG, a fossil fuel, reduces CO2 emissions versus heavy-fuel oil by approximately 20 % on a “tank to wake” basis. However, on a well-to-wake basis, the CO2 emissions from the production and transportation of LNG—coupled with methane slip issues across the value chain—cause LNG to have, in some cases, a worse greenhouse-gas footprint than traditional fuel oil.

?Biomethane/bio-LNG: Derived from bio feedstocks and leveraging existing LNG infrastructure (such as storage, bunkering, and ships), biomethane/bio-LNG can be used to displace fossil-based LNG but can also face methane slip issues. Cost-reduction potential is comparatively limited because production processes are mature. E-methane/e-LNG: Derived from green hydrogen and captured CO2 and leveraging existing LNG infrastructure, e-methane has a similar cost structure to e-methanol (and is likewise more expensive than e-ammonia). CO2 is emitted during combustion, but if sourced from biogenic CO2 or DAC, e-methane is generally considered carbon neutral on a well-to-wake basis. It may face methane slip issues during the combustion process, especially in medium-speed four-stroke engines. Hydrogen4 Green/blue hydrogen: Given its disadvantaged volumetric energy density, pure hydrogen— probably in liquefied form—seems most likely to find a market only in short-sea segments such as tugs, ferries, offshore supply vessels, and potentially cruise ships. Hydrogen fuel cells are one possible use case, but they have yet to be stress-tested at scale in a marine environment. Refrigerated fuels Ammonia

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E-ammonia: Derived from green hydrogen and nitrogen pulled from the atmosphere, e-ammonia is a truly zero-carbon fuel and has the most attractive costs of any of the “e-fuels” (plus an attractive cost-reduction trajectory as the costs of renewables and green hydrogen come down). However, ammonia is toxic, so leaks and safety are a major concern, and an ammonia engine won’t be commercially available until the mid-2020s. Ammonia needs to be stored in refrigerated tanks, which can reduce ships’ cargo capacity. Combusting ammonia can create nitrous oxide (N2O), a greenhouse gas more potent than CO2, which can be addressed with the use of engine tuning and scrubbers. Blue ammonia: Produced via blue hydrogen (auto thermal or steam-methane reforming with carbon capture and storage) and nitrogen pulled from the atmosphere, blue ammonia is considered a low-carbon fuel based on the effectiveness of the carbon capture and the fugitive methane emissions in upstream natural-gas production. Its economics are driven by its ability to capture economies of scale, the cost of natural gas, and the cost of carbon capture and storage. Onboard the vessel, it faces the same challenges as e-ammonia (for example, toxicity, engine availability, storage, and potential nitrous oxide emissions). Other Nuclear: The closest thing to zero-carbon shipping on the water today (used in navies and by ice-breaking vessels), nuclear still needs to overcome environmental, regulatory, economic, and societal acceptance issues to be adopted at scale in commercial shipping.?Grey methanol is also a fuel in this family. Especially when measured on a CO2-equivalent (CO2e) basis over 20 years.?Other versions of hydrogen also exist including pink (derived from nuclear power) and turquoise (derived from pyrolysis). Grey ammonia is also a fuel in this family. The shipping industry’s fuel choices on the path to net zero. To understand how industry leaders are thinking about future fuels, the Global Centre for Maritime Decarbonisation, the Global Maritime Forum, and the Mirsky Mc-Kinney M?ller Center for Zero Carbon Shipping recently conducted a survey (with analytical support provided by McKinsey) of 29 shipping companies. Collectively, these companies own and operate fleets—including container ships, tankers, dry bulkers, gas carriers, car carriers, cruise ships, tugs, and offshore vessels—comprising roughly 20 % of the world’s total capacity. Respondents, professionals responsible for the decarbonization efforts of these organizations, were asked about their plans and projections to adopt cleaner fuels and efficiency-boosting technologies. Many explorations of the green-fuel conundrum take an outside-in approach, using techno-economic modeling to point to future scenarios. This survey takes an inside-out approach by asking industry leaders to state their intentions and expectations. The survey participants are primarily companies formally affiliated with three large maritime decarbonization entities. These shipping companies tend to harbor more ambitious decarbonization goals than their industry peers, with about half targeting net-zero emissions by 2050. They are, on average, larger than most shipping companies, and their fleets are, on average, younger. Notably, respondents’ survey answers indicate that they are planning for decarbonization at a faster pace than the current targets established by the IIMO, which is the industry’s global regulatory body. Given these facts, respondents’ views—and eventual choices—about decarbonization are likely to exert significant influence over the industry. The snapshot that emerges from respondents’ answers portrays a world with many fuels in the mix through 2050. Many respondents expect their fleets to run on multiple types of fuel well into the future. This suggests that shipping’s route to decarbonization could be complex—especially given the knotty interdependence between ship owners and operators, ports, engine manufacturers, and fuel providers. How the industry builds out and manages multiple fuel supply chains over the next decades will have a decisive effect on the speed at which it decarbonizes. But companies that are currently plotting investment strategies might consider viewing this inchoate moment as an opportunity for bold decision-making. Multiple fuel pathways continue to be viable, and advantages for first movers are there for the taking. It’s worth noting that many companies are already piloting green-fuel alternatives, and an increasing number are beginning to make sizeable orders for vessels that can consume lower-carbon fuels. The prospect of multifuel fleets Presently, 46 % of surveyed companies (12 respondents) say that they’ve already run pilot programs involving one or more low-carbon fuels (for instance, operating ship engines on biodiesel instead of traditional. ?The survey was sent to 63 companies, of which 29 responded, and was in the field from October to November 2022.?Measured by deadweight tonnage for cargo vessels and compensated gross tonnage for cruise ships.?Some survey participants are shipping companies not formally affiliated with the three maritime decarbonization entities (Global Centre for Maritime Decarbonisation, the Global Maritime Forum, and the M?rsk Mc-Kinney M?ller Center for Zero Carbon Shipping). Fifty-two % (15 out of 29 respondents) have net-zero by 2050 (or earlier) targets, whereas previous work by the M?rsk Mc-Kinney M?ller Center for Zero Carbon Shipping found that approximately 17 % of the top 30 companies in the container, dry bulk, tanker, and roll-on/roll-off segments have set net-zero targets. M?rsk Mc-Kinney M?ller Center for Zero Carbon Shipping, December 8, 2022.?The average survey respondent owns 80 vessels and operates 200 vessels. The global maritime consultancy Clarkson estimates there are about 100,000 vessels, 26,000 owners, and 27,000 operators (many companies are both owners and operators) in the shipping industry as a whole, meaning the average owner or operator has about four vessels in its fleet. The average age of respondents owned vessels is 6.4 years and operated vessels are 10.4 years, versus a global fleet average of 22.3 years.

?PATHWAY TO DECARBONISE

?Market dynamics and energy demand: ?Rising energy demand is a key issue for the shipping sector, with increasing trade leading to increasing demand. Factors such as global GDP, as well as trade and manufacturing sector activity, have been the key drivers shaping energy demand in the international shipping sector to date. As the adoption of energy efficiency (EE) measures in international shipping increases, the nexus of GDP, trade, and energy demand may decouple progressively. However, given the pivotal role of international shipping in the global economy, the role of EE has limitations in terms of carbon reduction potential; hence the key role renewable energies will play in decarbonizing this sector by mid-century. Energy efficiency In the near term, emission reductions in the sector will mainly depend on the rapid implementation of EE design and operational measures across the vessel fleet. During low oil price periods, the shipping sector pays less attention to its energy usage. However, during high oil price periods, the shipping sector adapts, increasing its activity while using energy resources more efficiently, without the need for external market regulations. This finding reveals the dormant EE potential in the shipping sector. Further considerations need to be made in regard to bunkering and strategic port locations to optimize route efficiency. In the near term, it will be critical to deploy monitoring and enforcing mechanisms to ensure compliance with the IMO mandates focused on improving EE across vessels: i.e. EEDI (Energy Efficiency Design Index), SEEMP (Ship Energy Efficiency Management Plan), EEXI (Energy Efficiency Existing Ship Index), EEOI (Energy Efficiency Operational Indicator) and CII (Carbon Intensity indicator). Each renewable energy fuel varies in terms of benefits and challenges. The choice of fuel depends on factors such as the supply chain, engine technology, environmental impacts, and production costs. The production costs of these alternative fuels and their availability will ultimately dictate the eventual deployment of renewable energy fuels. The cost of each fuel is determined by the cost and availability of feedstock, the process used for production, and the maturity of the production technology. The energy density of the various fuels and the implications in terms of onboard storage are elements that require further analysis. Depending on the fuel of choice and the type and size of a given vessel, cargo capacity and thus cargo revenue could be affected. From an economic perspective, if compared against LNG; this latter fossil fuel is subjected to very high market price volatility. A clear example is the very high price of natural gas that is currently troubling many countries across the world, particularly in Europe. While renewable fuel production costs are currently high, in the next decades renewable fuels will become competitive, therefore, renewable fuels can shield the shipping sector from the volatility that characterizes the fossil fuels market.???????Advanced biofuels: These are a viable short-term option for the shipping industry because current rules allow for fuel blends of up to 20% without engine modifications, and tests have been conducted utilizing a maximum blend of 30%. In addition, important to note that 100% methanol engines are a proven technology; hence, new ships can easily rely 100% on biofuels. Production cost ranges for advanced biofuels are similar to the various alternatives, i.e. USD?72-238 per megawatt-hour (MWh). The sustainability of the biomass feedstocks used is a critical factor. The current focus is therefore on the use of waste fats, oils and greases (FOGs) to produce fatty acid methyl ester (FAME) biodiesel, hydrotreated vegetable?oil (HVOs) that do not impact food security, and land availability. Other production routes using other feedstocks are possible but are not yet mature. The shipping sector will face competition for suitable?feedstocks and fuels from other sectors, including road vehicles and aviation.

??Biomethane could play a role but is likely limited. Production costs are highly dependent on feedstock availability and feedstock market price, which leads to wide cost rages, i.e. USD?25-176/MWh. Biogas produced via anaerobic digestion for the subsequent production of liquid biogas and compressed biogas has a high technological maturity and is, therefore, an attractive option for displacing LNG. However, due to scalability and logistical issues, the role of renewable gaseous fuel may be limited, and biogas may be more effective in end-use applications other than fueling the shipping sector. Hydrogen: The direct use of green hydrogen (H2 ) via fuel cells (FCs) and internal combustion engines (ICEs) is an option, but mainly for short sailings, e.g. domestic navigation. However, the indirect use of green H2, i.e. for the subsequent production of e-fuels, will be critical for the decarbonization of international shipping. Current green H2 production costs vary between USD?66/MWh and USD?154/MWh, but as the costs of both electrolyze and renewable energies fall, green H2 costs will become cost competitive in some contexts from around 2030, eventually achieving 2050 costs of around USD?32-100/MWh. Renewable methanol, i.e. bio-methanol and renewable e-methanol: These renewable fuels require little to no engine modification and can provide significant carbon emission reductions in comparison to conventional fuels. Renewable e-methanol is of particular interest in the shipping sector. The key constraint on the production of renewable e-methanol is the availability and cost of a CO2 supply not sourced from fossil fuels. Renewable e-fuels, methanol, and ammonia: These e-fuels are the most promising fuels for decarbonizing the sector. Of the two options, ammonia is more attractive due to its null carbon content. This characteristic excludes it from the cost of capturing CO2, which significantly adds to the final cost of e-methanol. The falling costs of green H2 coupled with the cost reduction of CO2 capture technologies should enable 2050 production costs to reach around USD?107-145/MWh for renewable e-methanol.

??E-ammonia looks set to be the backbone for decarbonizing international shipping in the medium and long term. By 2050, the production costs of e-ammonia are expected to be between USD?67-114/MWh. The validation of ammonia engine designs by 2023 will be a key milestone in unlocking the use of renewable ammonia. While ammonia is corrosive and highly toxic if inhaled in high concentrations, ammonia has been handled safely for over a century. Hence, ammonia’s toxicity and its safe handling should not be considered major barriers. Decarbonization Pathways to 2050 The International Renewable Energy Agency’s (IRENA’s) decarbonization analysis for 2050 builds on the agency’s Renewable Energy Roadmap methodological approach. The analysis for shipping is aligned with IRENA’s World energy transitions outlook (2021), which sets out a pathway to limit global temperature rise to 1.5°C. In the medium to long term, green H2-based fuels will be the foundation of a decarbonized international shipping sector. By 2050, shipping will require a total of 46?million tones (Mt) of green H2. Of this total, 73% will be needed for the production of e-ammonia, 17% for e-methanol, and 10% will be used directly as liquid hydrogen through FCs or combusted through ICEs. Renewable ammonia will be the backbone of the decarbonization of the sector. Renewable ammonia could represent as much as 43% of the mix in 2050, which would imply the use of about 183 Mt of renewable ammonia for international shipping alone – a comparable amount to today’s ammonia global production. Due to insufficient supply, the immediate utilization of renewable ammonia may be challenging. It is therefore likely that blue ammonia will play a transitional role; hence the relevance of analyzing the value chain dynamics and market status of ammonia as an energy carrier. A forthcoming report from IRENA and the Ammonia Energy Association will analyze the whole spectrum of the ammonia production value chain, the market status and future prospects of renewable ammonia, as well as the current and future competitiveness of renewable ammonia versus fossil-based ammonia.

??Engagement needs to go beyond the obvious players; acceptance by civil society is also needed. Civil society needs to be aware of the environmental and economic impacts and benefits associated with this transition, and ultimately be supportive. B. Policy-driven actions a. Enable a level playing field by establishing a realistic carbon levy. Each fuel must have a carbon price implied that may be adjustable?over time as the market becomes more favorable for renewable energy fuels. Taking early action will not only foster the deployment of renewable fuels but also prevent investments in fossil fuel infrastructure that risk becoming stranded. b. Immediately tighten EE mandates and develop suitable?mechanisms for monitoring and enforcing the adoption of EE measures. Mandates and policies should be comprehensive, of high technical level, and provide minimum standards in terms of vessel design and operation. c. Promote strict local regulations to limit airborne emissions at ports and inland waterways, and make cold-ironing at ports compulsory whenever available. Accordingly, enforce turning off vessels’ auxiliary engines during shore-side operations in port areas by plugging the vessels into an electricity source offered by the port authority, thus reducing the emission of airborne pollutants and GHG during docking periods. d. Establish a mandate comprising the progressive increase of renewable fuels within bunkering fuel blends starting immediately with advanced liquid biofuels and biomethane, followed by the institution of effective incentives to encourage vessel fleets to shift to green H2-based fuels. The high technological readiness of liquid biofuels produced from second-generation feedstock coupled with compressed biomethane can be immediately harnessed as drop-in fuel. In parallel, as the development of the ammonia engine is completed by 2023, establishing effective incentives such as excise tax reductions for renewable energy fuels will be key to scaling-up the production of ammonia. e. Develop sustainability certifications and suitable schemes such as guarantees of origin (GO) to guarantee ship operators of the renewability index of a given fuel and its sustainable origin. Such efforts must go together with fit-for-purpose regulatory systems focused on ensuring that increased power fuel production is aligned with renewable power capacity additions and/or suitable?schemes harnessing renewable power curtailed by the grid for green H2-based fuel production. f. Anticipate the upcoming demand from end-consumers by implementing a labeling system for sustainably shipped goods. This should be driven by the shipping sector with the successful engagement of civil society and suitable?instruments. Such a labeling system will enable end-consumers to make well-informed purchase decisions on a daily basis.

??The International Maritime Organization (IMO) indicates that by 2050 maritime trade could increase between 40% and 115% in comparison to 2020 levels. At present, about 99% of the energy demand from the international shipping sector is met by fossil fuels, with fuel oil and MGO comprising as much as 95% of the total demand. If no actions are taken, IMO has flagged that GHG emissions associated with the shipping sector could grow between 50% and 250% by 2050 in comparison to 2008 emission levels. Clearly, this broad range of projected GHG emissions flags a level of uncertainty in terms of how will the sector evolve over the next 30 years. Nonetheless, even the lower-level band of GHG emissions increase is an area of great concern in terms of global warming. Another area of concern is that international shipping emissions fall outside national GHG emission accounting frameworks. To address these concerns, a path to a decarbonized maritime shipping sector. Its primary focus is the analysis of a pathway to a mitigation structure that will limit global temperature rise to 1.5?degrees Celsius (°C) and bring CO2 emissions closer to net zero by mid-century. In support of the global efforts to decarbonize the shipping sector, this report includes an update on IRENA’s previous work in the field of shipping. To this end, this report analyses the market dynamics of the shipping sector and the latest trends regarding trade volumes, associated energy demand, and carbon emissions. Additionally, the report evaluates the technology readiness of the renewable fuels suitable?to the shipping sector followed by an analysis of long-term energy scenarios in which a pathway towards the deep decarbonization of the shipping sector by 2050 is examined and tailored recommendations to accelerate the decarbonization of the shipping sector are proposed.

??Global gross domestic product (GDP), trade, and manufacturing sector activity are key drivers shaping energy demand in the international shipping sector. As the adoption of energy efficiency (EE) measures in international shipping increases, the nexus of GDP, trade, and energy demand may decouple progressively. However, given the pivotal role of international shipping within the global economy, EE has limitations in terms of carbon reduction potential; hence the key role of renewable energies in decarbonizing this sector by mid-century. ? During low oil price periods, the shipping sector pays less attention to its energy usage. However, during high oil price periods, the shipping sector adapts, increasing its activity while using energy resources more efficiently without the need for external market regulations. This finding uncovers the dormant EE potential in the shipping sector. Indeed, in the immediate future, the decarbonization of the sector depends on the rapid implementation of EE design and operational measures. ? Between 80% and 90% of international trade by volume is enabled through maritime means, i.e. bulk and container carriers, as well as oil and chemical tankers. Together, these types of vessels account for 20% of the global fleet, but they are responsible for 85% of the net GHG emissions associated with the shipping sector. The 2018 fuel mix for international shipping comprised 79% heavy fuel oil (HFO), 16% marine diesel oil (MDO), 4% liquefied natural gas (LNG), and less than 0.1% methanol. ? Considering the average age of the existing vessel fleet and the technical lifetime of large and very large vessels, i.e. 25-30?years, the development of new vessel designs and engines needs to happen between 2025 and 2030. Indeed, the vessels to be deployed in the next five to ten?years will characterize energy demand and carbon emissions by 2050. This illustrates the urgency of enabling an environment focused on the deployment of zero-carbon vessels fueled by renewables. ? In the task of decarbonizing the international shipping sector, it is crucial to properly identify the locations that could fast-forward the energy transition in this sector. This includes key trading and bunkering ports, key navigation routes, and choke points. The ports with the highest global bunkering relevance include Singapore (~22%), Fujairah (~8%), and Rotterdam (~6%). The most critical choke points are the Panama Canal, the economy with an annual GDP growth rate varying from 3.1% (2017) to 3.0% (2018) and 2.9% (2019). Over the same period, the economic slowdown was also evident in global industrial production, a key driver of maritime transport services, which registered a growth rate of 3.6% between 2016 and 2017 and then fell to 3.1% between 2017 and 2018. Not surprisingly, global merchandise trade growth (imports and exports) also dropped from 4.5% in 2017 to 2.8% in 2018 (UNCTAD, 2019).

?Charting fuel choices as the shipping industry sails toward net zero

?Industry leaders know they must adopt new fuels in order to decarbonize. Shipping companies—encouraged by regulation, customer demand, investor pressure, and internal goals—are searching for ways to decarbonize their fleets. Greener-fuel possibilities abound in the maritime world, and the industry is in a period of experimentation and exploration to understand the implications of adopting such fuels. To find out how industry leaders are thinking about future fuels, the Global Centre for Maritime Decarbonisation, the Global Maritime Forum, and the M?rsk Mc-Kinney M?ller Center for Zero Carbon Shipping recently conducted a survey (with analytical support provided by McKinsey) of shipping companies. Collectively, these companies own and operate fleets—including container ships, tankers, dry bulkers, gas carriers, car carriers, cruise ships, tugs, and offshore vessels—comprising roughly 20 % of the world’s total capacity. The snapshot that emerges from respondents’ answers portrays a world with a wide range of fuels in the mix through 2050. Many respondents expect their fleets to run on multiple types of fuel well into the future. This suggests that shipping’s route to decarbonization could be complex. But companies that are currently plotting investment strategies might consider viewing this inchoate moment as an opportunity for bold decision-making. Multiple fuel pathways continue to be viable, and advantages for first movers are there for the taking.

Among findings from the survey:

• Presently, 46 % of surveyed companies (12 respondents) say that they have already run pilot programs involving one or more low-carbon fuels (for instance, operating ship engines on biodiesel instead of traditional fuel oil) and have established plans for further implementation, whereas 35 % (nine respondents) have taken no action regarding greener fuels.
• One-third of respondents say that they “don’t know” which types of fuel they expect their fleets to run on in 2030 and 2050. The remaining two-thirds of respondents express diverging expectations about what their fuel usage will look like. Respondents’ projections for their fleets’ fuel consumption in 2050 are split evenly among a wide variety of options: green ammonia, biodiesel, and fuel oil lead the way with 16 to 17 % of the fuel mix each, followed by blue ammonia, liquefied natural gas (LNG), e-methanol, bioethanol, biomethane, and e-methane, each representing a 6 to 10 % share.
• Respondents also indicate that they expect to spread their own consumption across multiple fuel “families.” (The fuel families consist of fuels that ship engines can use interchangeably: for instance, one category comprises heavy fuel oil, marine gas oil, marine diesel oil, and biodiesel, while another category comprises LNG, biomethane/bio-LNG, and synthetic/e-methane/e-LNG.) By 2050, 49 % of respondents (weighted by fleet size) expect to adopt four or more fuel families within their own fleets, while another 43 % expect to adopt three families.
• Making the leap to a greener-fuel future will require decades of work, but our respondents are clear on what they will need to accelerate the transition. More than 80 % of respondents indicate that the following four developments would be most transformative: greater availability of alternative fuels, cost reductions for alternative fuels, customer willingness to pay a “green premium,” and regulatory change.

In the world suggested by these survey answers, the role of first movers—and of entities that can galvanize entire value chains, from fuel production to a vessel’s consumption—will be vital. Organizations that lead the way might provoke and shape others’ actions, catalyzing investments that create their own momentum and, over time, perhaps result in the inevitability of a specific fuel scenario.

?Zero-emission fuels and vessels will need to start being deployed at scale over the next decade to achieve full decarbonization of the shipping sector by 2050. This ambitious goal could be catalyzed by green corridors.

The shipping sector?is the lifeblood of global trade, accounting for approximately 80 % of all trade, with further growth expected. The sector also represents about 3 % of total CO2?emissions—an amount that, if unchecked, could rise by as much as half by 2050. Recognizing the need for climate action, the International Maritime Organization (IMO) has mandated emission reductions of 50 % for all vessels by 2050. A number of countries—including Japan, the United Kingdom, and the United States—have declared a target for net-zero shipping emissions in the same time frame. To reach these goals, because ships have a 20- to 25-year operating life, the sector would need to implement comprehensive zero-emission programs over the next decade. The necessary technologies are available, but they would need to be deployed at not only greater scale and speed but also at a lower cost. Zero-emission fuels cost significantly more than conventional fuels, increasing the total cost of vessel ownership by between 40 and 60 %, depending on the route.

Finding industry-wide solutions is challenging, given the varied and complex nature of the sector. One way to accelerate decarbonization is to?implement “green corridors”: specific trade routes between major port hubs where zero-emission solutions are supported. A new report,?The next wave: Green Corridors, produced by the Getting to Zero Coalition in collaboration with the Global Maritime Forum,?Mission Possible Partnership, and Energy Transitions Commission, with analytical support from McKinsey, probes the feasibility of two such selected corridors—with encouraging results.

Navigating to net zero via green corridors

Green corridors would establish favorable conditions for decarbonization, for they would allow policymakers to create an enabling ecosystem with targeted regulatory measures, financial incentives, and safety regulations. Policymakers could also consider regulations and incentives to lower the cost of green-fuel production, which could in turn help to mobilize demand for green shipping. Finally, green corridors could create secondary effects that reduce shipping emissions on other routes. For example, once the infrastructure to provide zero-emission fuel for one green corridor is in place, it can then be used for shipping on other, adjacent routes. These corridors would ideally be large enough to include all relevant value-chain actors, such as fuel producers, cargo owners, and regulatory authorities. They would provide offtake certainty to fuel producers and send strong signals to vessel operators, shipyards, and engine manufacturers to ramp up investment in zero-emission shipping—making the risks more acceptable for all involved. Zero-emission fuels have a major effect on the total cost of ownership (TCO) of vessels on the route. TCO includes all capital expenditures and operating expenses incurred during the lifetime of the ship. Elements include fuel cost, depreciation of the ship, cost of capital, daily running cost, voyage cost, and opportunity cost for lost cargo space if larger fuel tanks are needed for zero-emission fuels. TCO is an integral aspect of determining which routes, and which fuels, are viable for green shipping corridors. Sharing the burden and risk across the green corridor will be vital to bridging the “TCO gap” that comes from introducing zero-emission fuels.

What fuels will power green shipping?

The selection process for initial green corridors is crucial. Four critical building blocks are required for a potential green corridor: stakeholders that are committed to decarbonization and are willing to collaborate across the value chain; a viable fuel pathway (for more, see sidebar, “What fuels will power green shipping?”); customer demand for green shipping and initiatives to pool demand; and policy and regulation (for example, safety standards) that can narrow cost gaps and expedite adoption.

The report provides feasibility studies on two routes that have the potential to become green corridors: the Australia–Japan iron-ore route and the Asia–Europe containership route. These routes show that accelerated decarbonization for the shipping industry is feasible and would provide stakeholders with the confidence to invest, coordinate, and deliver solutions at scale by 2030.

Australia–Japan iron-ore route

In 2019, some 65 million metric tons of iron ore were exported from Australian mines to Japanese steelmakers, making this the third-largest dry-bulk trade route in the world. A total of 111 bulkers on the route burned approximately 550,000 metric tons of fuel oil in 2019—equal to 1.7 million metric tons of CO2?emissions. It would take 41 fully dedicated zero-emission vessels to decarbonize all iron-ore trade between Australia and Japan.

With the relative simplicity of the stakeholder environment, as well as strong existing political collaboration, the transformation of this route into a green corridor appears feasible. There is growing consensus among stakeholders on this route to decarbonize: already, 90 % of the Australian iron ore exported to Japan is mined by companies with net-zero commitments, and Japanese steelmakers are exploring options to introduce green steel and to decarbonize their supply chains—which should allow for collaboration among miners, vessel operators, steel mills, fuel producers, and policymakers.

Equally importantly, Australia has good conditions, as well as the planned capacity, for ample production of zero-emission fuel, especially green hydrogen, and green ammonia. However, given supply dynamics and long-term cost advantage, analysis suggests it is likely that green ammonia will be the zero-emission fuel of choice for the corridor.3?Ammonia engines are expected to be available in 2024, with the first vessel operational in 2025; safety standards and bunkering infrastructure must be in place on this route by then.

Even so, analysis suggests that by 2030, an iron-ore bulk carrier that runs on green ammonia will still cost 65 % more, in terms of the annualized end-to-end TCO, than an iron-ore bulk carrier that runs on fossil-heavy fuel oil. Most of the difference can be attributed to the higher cost of zero-carbon fuels such as green ammonia and green hydrogen. For shipping companies serving the Australia–Japan iron-ore route to switch to zero-carbon fuels and vessels, this cost gap would need to be narrowed. Stakeholders across the value chain can work together to pool demand, bridge the cost gap of fuel, and share the risk of building new zero-emission vessels. Partnerships between shipowners, steelmakers, and miners will be particularly significant, as such partnerships could help derris stakeholders’ investments, such as the capital expenditure required to build new zero-emission vessels.

An “insetting” mechanism is an example of a way to mobilize demand. In setting refers to the process by which a company offsets emissions or other environmental or social impacts of another company within its own supply chain. Under this mechanism, vessel operators could buy green fuel from producers and in turn receive carbon credits compliant with the Science Based Targets initiative (SBTi). Other value-chain players could buy these carbon credits from the vessel operators to cover the iron ore shipped on this corridor.

The Asia–Europe container route

This route is the largest of the three major East–West containership routes and offers the greatest potential to reduce emissions. In 2019, approximately 24 million twenty-foot equivalent units (TEUs) were traded on the route, on 365 vessels. The ships burned approximately 11 million metric tons of fuel, accounting for roughly 3 % of global shipping emissions—more than any other global trading route. The Asia–Europe container route has a complex stakeholder environment, involving many vessel operators. The nature of container shipping, where one vessel might carry cargo from multiple owners, creates additional complexity. Nonetheless, the low cost of fuel and an enabling regulatory environment on the European leg of the route means that this is a viable green corridor. Shipping decarbonization is a growing priority for policymakers, especially in the European Union, and European policy interventions affect the entire route. For instance, under the European Union’s “Fit for 55” legislative package, the Emissions Trading Scheme would apply to 50 % of the shipping into and out of the European Union, which is a substantial part of the global market. In addition, there is growing demand for decarbonization throughout the value chain, from diverse end-consumers to freight forwarders and shipping lines. As much as 70 % of the total TEU capacity on the route is covered by five shipping lines—all committed to reducing GHG emissions by half (or more) by 2050.

Our analysis shows that the pipeline of announced green-fuel projects is more than sufficient to supply the 50 zero-emission new-build vessels that would be required to replace aging vessels on this corridor, factoring in economic growth on the route. These vessels could provide 1.2 million TEUs of green-container shipping by 2030: 17 % of capacity on the route. Sustainable fuels could be made available on the route at several bunkering locations, including Europe, the Middle East, North Africa, and Singapore. Still, a gap of 45 % on TCO for this route is predicted to remain by 2030, with fuel cost again being the primary driver. This means that it will be important to strengthen the demand for zero-emission shipping. Multiyear offtake agreements could help to derisk investment in green fuels, as suppliers would be certain that the fuels they produce would be bought. Such agreements can be complemented by demand coalitions, allowing cargo owners to aggregate their commitments to buy green. Additionally, a corridor-based book-and-claim system would allow participants to ensure system boundaries and conditions for booking and claiming that meet their thresholds for quality and credibility. For instance, the system could exclude near-shore shipping or limit which fuels qualify. In general, changes required to promote zero-emission container shipping include setting major milestones (such as a commitment among stakeholders to a green-corridor road map), aligning on a common fuel pathway, and mobilizing demand. Policymakers can also consider regulations and incentives that would further support the shift to green shipping. Establishing them in this corridor would send a clear demand signal through the supply chain and set the stage for the global adoption of green shipping practices. The feasibility studies of potential green corridors show how stakeholder collaboration can establish these corridors, helping the shipping industry to reach its goal of full decarbonization by 2050. Success will be built on credible fuel pathways, value-chain initiatives, and mobilized demand. Partnerships are crucial: the entire value chain—including cargo owners, fuel producers, and vessel operators—needs to come together, based on a shared commitment to zero-emission shipping. Policymakers can also consider various targeted changes that would encourage a transition to zero-emission shipping along particular corridors. If stakeholders agree on a credible, ambitious green-corridor plan and implement it together, the industry can contribute to the world’s progress toward net zero.

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CONCLUSION

Shipping, like all industries, needs to get to net-zero carbon emissions by 2050 if it is to do its bit in avoiding catastrophic climate change. This is not an easy task. Although ships used wind for propulsion over centuries, going back to sailboats would hardly be an option for today’s global supply chains.

Nevertheless, there is a viable pathway for the industry to cut its emissions thanks to a series of steps that could, hopefully, allow it to get to net zero within the next three decades. Some of these steps are dependent on the development of new propulsion systems and fuels. Marine Exhaust Gas Scrubbing technology uses a TurboHead to clean emissions produced when burning cheaper heavy fuel oil. Another way of improving efficiency could be to go back to sails after all—but not the kind that was used in galleons and longships. Instead, modern wind-assisted propulsion systems can pluck energy from the air to lessen the amount of fuel a ship needs to move along. Similarly, while batteries may not be able to completely power an ocean-going vessel, they can help ensure that engine output is optimized.. The sector is eyeing at least three types of low-carbon fuel to replace the?4 million barrels?of oil it uses every day.

Methane or liquified natural gas (LNG), methanol, and ammonia are seen as having the most potential, and engines for all three fuels are under development. LNG is the easiest of the three to use today but also has the most limited potential for decarbonization. Because of this, many see LNG as a transition fuel to more sustainable options, such as methanol. Methanol engines will enter serial production by around 2023, with A.P. Moller – Maersk, the world’s largest container shipping company, expected to take delivery of eight methanol-powered vessels the following year,?Bloomberg reported?last August. But it still releases carbon into the atmosphere when burnt, which has led many in the industry to assume that ammonia will become the fuel of choice for shipping in the long run. Wartsila is due to retrofit a supply vessel belonging to the Norwegian energy company Equinor with an ammonia engine in 2024. Man Energy Solutions is looking to have similar engines on the market at the same time. The increasing technical complexity and decarbonization potential of LNG, methanol, and ammonia suggest the shipping industry could move from one to the next in pursuit of its emissions reduction goals.

?that can operate with multiple fuels and can be retrofitted to current vessels. Having a range of options will be important for fleet owners because the economics of reducing emissions will vary greatly according to factors such as the type and age of a vessel, the cargo it carries, and so on. But at Pacific Green, we are with the industry every step of the way.