Sailing through change: charting the shipping sector's nascent decarbonization journey

The shipping industry is the bedrock of global commerce. It plays a vital role in keeping the wheels of world economy turning, with over 90% of traded goods carried by ships.

Ships are widely regarded as one of the most cost and carbon-efficient means of transport, yet more needs to be done to reduce shipping's carbon footprint as it accounts for about 3% of global greenhouse gas (GHG) emissions. With global trade expected to grow ahead of the global economy, the associated emissions are also expected to rise.

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An intense spotlight has been thrown on shipping's global role in emissions in the past few years and the industry faces a multitude of challenges in the years ahead as it moves toward net zero.

The International Maritime Organization, shipping's governing body, has set ambitious targets to reduce GHG emissions from ships and there is a strong political will to phase them out as soon as possible.

The most ambitious of these targets is having member states adopt the 2023 IMO Strategy on Reduction of GHG Emissions from Ships, with enhanced targets to tackle harmful emissions. As pressure mounts to deliver measurable progress toward carbon neutrality, IMO is pledging to reach net zero by or around 2050.

Many types of alternative fuels are being explored for shipping, such as ammonia, methanol, biofuels, hydrogen and fuel cells, but there is no one clear frontrunner in the race.

Meanwhile, cargo owners are looking to decarbonize their supply chains while shipping companies are embarking on a major transition from conventional to climate-friendly carbon-neutral fuels, having placed early bets on green methanol and bio LNG, among others.

The industry, however, will need to understand the key drivers and implications of a new multifuel future.

2050: a multifuel future

Future fuel availability is also a focus in S&P Global Commodity Insights' latest Maritime Forecast to 2050 report, which outlines the conditions under which each new fuel type will proliferate. What will win -- ammonia vs methanol, biofuels, e-fuels or fossil fuels with carbon capture and storage -- remains uncertain, but we can say with confidence that the future fuel market will be more diverse than today and reliant on multiple primary energy sources.

In the envisioned maritime landscape of 2050, two contrasting scenarios present divergent trajectories for bunker consumption and alternative fuels utilization.

In the high-case scenario, the consumption split portrays a marked shift away from traditional fuels, with low sulfur fuel oil (LSFO) accounting for a reduced 13%, while distillates used directly and high sulfur fuel oil (HSFO) with scrubbers witness declines to 12% and 3%, respectively.

Meanwhile, LNG emerges as a dominant player, capturing a 32% share, indicative of a substantial embrace of cleaner energy sources. LPG/Ethane, previously negligible, makes a notable appearance, constituting 1% of the consumption split. However, a most striking transformation unfolds within the alternative fuels' domain, excluding LNG and LPG, which skyrockets to 39% of the consumption mix. Among these alternatives, ammonia claims the largest share at 38%, followed by methanol at 30%, demonstrating a decisive shift toward sustainable and diverse fuel options. Hydrogen and biofuels also play significant roles, commanding 15% and 9% of the market share, respectively. Battery propulsion as well as battery and diesel systems collectively contribute 9% to the alternative fuels landscape.

Conversely, in the low-case scenario, traditional fuels maintain a more substantial foothold, with LSFO representing 39% of the consumption split, followed by distillates used directly at 20% and HSFO with scrubbers at 15%. LNG retains its prominence but to a lesser extent, comprising 12% of bunker consumption. LPG/Ethane sees a marginal increase, reaching 0.03% of the split.

The most dramatic difference, however, lies in the alternative fuels segment, excluding LNG and LPG, which surges to 14% of the consumption mix. In this scenario, ammonia emerges as the predominant alternative fuel, commanding a significant 38% share, followed by methanol at 30%, highlighting the industry's ongoing transition towards cleaner energy sources. Hydrogen and biofuels also play substantial roles, accounting for 15% and 9% of the market share, respectively, while battery propulsion as well as battery and diesel systems collectively contribute 9% to the alternative fuels landscape.

The contrasting scenarios for 2050 underscore the pivotal choices facing the maritime industry in its journey towards sustainability. Whether through accelerated adoption of cleaner fuels or a more conservative approach, the industry's trajectory will significantly impact global efforts to mitigate climate change. These projections highlight the importance of proactive measures and strategic investments in fostering a greener, more sustainable maritime sector in the future.

Tech, short-term measures

Key to the maritime industry's decarbonization journey are regulatory frameworks, such as the IMO's Energy Efficiency Existing Ship Index requirements, which aim to reduce carbon intensity. Additionally, the operational Carbon Intensity Indicator rating scheme incentivizes energy efficiency improvements.

Technological innovations, including alternative fuels and energy-efficient propulsion systems, are pivotal in enabling sustainability. Measures like main engine power limitation and enhanced Ship Energy Efficiency Management Plans contribute to emissions reduction and overall efficiency improvement.

Marine geospatial data also supports decarbonization efforts by providing insights into the marine environment, enabling just-in-time arrivals and green shipping corridors.

Next-generation navigation technologies further enhance operational efficiencies, contributing to long-term carbon reduction goals. Initiatives like the UK Hydrographic Office's support for green shipping corridors underscore the importance of marine geospatial data in driving maritime decarbonization.

Carbon tax to level playing field

Transitioning the maritime industry to net-zero operations requires reliable and long-term investments, and will need a massive fleet upgrade. Certain segments have been seen accelerating orders of greener vessels while others are lagging. More innovation and investments are needed in an accelerated manner to drive down costs, so that the premium for green fuel could be reduced over time.

Apart from technological innovations, this journey also involves regulatory frameworks, global collaboration and inclusive policies for this hard-to abate sector, which has multiple stakeholders.

The shipping industry needs a global comprehensive policy regime, which will be the most effective in driving change while maintaining a level playing field. Regulations need to provide a strong and stable incentive for the industry to decarbonize given it is an international market that is highly competitive and plays a significant role in the economy.

The EU is leading the way with the EU Emissions Trading System and FuelEU Maritime regulations in accelerating industry's decarbonization efforts. But these regulations, being regional, have their limitations. The industry needs a singular and globally enforced regulation on emissions, such as a global carbon tax on shipping emissions.

At the 81st Marine Environment Protection Committee session in March, the IMO essentially committed to creating the world's first global carbon price. More details are expected to emerge in 2025, bringing the global shipping in sync with EU regulations.

A carbon tax or levy is the only scalable and enforceable mechanism that will provide the corpus to drive investments and tackle the challenges for a cleaner fuel or a mix of cleaner fuels of choice to become a real and viable option for industry.

There is a need for urgency to curb GHG emissions and combat climate change, propelling the industry toward a sustainable, low-carbon future. Achieving these goals demands united efforts from industry players, policymakers and international bodies.

This article was first published in the May 2024 issue of Commodity Insights Magazine (opens in a new tab)