De-carbonising the shipping industry: Who pays and how?
How much is the industry expected to pay for the transition to low-carbon shipping?
The International Maritime Organization has set a deadline of 2050 to cut the global merchant marine’s CO2 emissions by 50% from 2008 levels.1 Beyond that, however, little is clear. There is no consensus on the best zero-carbon fuel source for large cargo vessels, with hydrogen, methanol, ammonia and electrification vying for attention, each with its own advantages and drawbacks, and LNG now established as an important stepping stone – although high prices stoked by the conflict in Ukraine may make it less attractive. The industry is even considering a return to sail power as an option.2
Moreover, when it comes to who pays for the transition, ship owners, operators, investors and governments have different views. In the short term at least, it will be owners and investors. In the longer term, this burden will be shared with customers as the financial mechanisms evolve to accommodate this, with the support of governments and regulators.
“There is a long road ahead of us, and there is a lot of capex that’s going to be required to get us to that point,” says Audrey Cherbonnier, Director Shipping Finance, Standard Chartered.
The question of who can fund the decarbonisation of the industry is a particularly crucial one as the pace of the transition is tied to the cost of capital, and there is huge demand for funds to green the maritime fleet. The good news is that more and more capital is being allocated towards environmental, social and governance (ESG) goals.3 ESG assets under management could be in the region of US$53 trillion by 2025, or more than one third of the global total,4 and a significant chunk of this corpus is finding its way to the shipping industry.5
The role of the state
Another encouraging factor is that many governments have recognised that greening the maritime industry is a collective effort that requires both onshore infrastructure as well as state support. At the COP26 climate summit in Glasgow in April, 22 countries signed the Clydebank Declaration on Green Shipping Corridors, which is aimed at decarbonising specific shipping routes.6 Signatories included France, Germany, Japan, the UK and United States.
However, governments need to do more. Crafting clearer regulations that designate decarbonisation responsibilities to specific players in the supply chain would help to build confidence and create the sense of a level playing field, easing concerns that in a voluntary context, some market participants may be going beyond the call of duty while others shirk their responsibilities for short-term financial gain.
Meanwhile, shipping companies are increasingly committed to building a resilient business model based on decarbonisation because they realise that the gains will not be purely environmental, but also financial. Panelists noted that the transition will ultimately result in lower power consumption, and thus reduced fuel costs. And not all of these savings need investments in new or dual-fuel propulsion systems either: the use of sensors, advanced analytics, smarter propeller vortexes and ensuring that hulls are as frictionless as possible are all current technologies that can improve energy efficiency.
How banks can help
While banks frequently take on a key advisory role, it is not up to them to enforce the adoption of specific technologies or targets by their shipping clients. However, banks are themselves under pressure to decarbonise, for instance, to conform with Scope 3 of the Paris climate treaty, and they are seeking clients that help them green their own ecosystems while aiding the world’s transition to net zero. “From our standpoint, you would select clients that have a strong sustainability story,” adds Cherbonnier.
There are more direct ways that banks and other financial institutions can help, for instance by creating markets for carbon credits.7 Carbon credits are certificates issued by organisations that either remove CO2 (or CO2-equivalents) from the atmosphere, or prevent it from being emitted in the first place, with each credit representing one tonne of CO2.8 Shipping companies can purchase such credits to offset emissions that they have yet to eliminate from their direct activities, bringing them closer towards net zero.
Aligning the interests of ESG investors and the shipping industry can unlock significantly more capital for greening maritime and port operations. As funds flow in, they will help shipping to eventually transform into a resilient, sustainable industry over the long term with decarbonisation at the heart of its business model and externally verifiable metrics that withstand scrutiny. In this way, the industry can gain the confidence of lenders, investors, clients and regulators, and align itself with the world’s wider move towards net-zero and ESG compliance.
This article is based on themes discussed during a panel at the 2022 London Ship Finance Forum by Marine Money.
1 https://www.imo.org/en/MediaCentre/HotTopics/Pages/Reducing-greenhouse-gas-emissions-from-ships.aspx
2 https://www.nytimes.com/2021/06/24/magazine/cargo-ships-emissions.html
3 https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/
4 https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/
5 https://www.reuters.com/business/sustainable-business/shipping-industry-faces-esg-heat-lenders-2021-10-19/
6 https://www.gov.uk/government/publications/cop-26-clydebank-declaration-for-green-shipping-corridors/cop-26-clydebank-declaration-for-green-shipping-corridors
7 https://www.sc.com/uk/2021/11/09/standard-chartered-grows-its-energy-transition-desk/
8 https://www.sc.com/en/news/carbon-credits-a-viable-building-block-to-zero-emissions-3/
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