The International Maritime Organization (IMO) is currently working hard to finalize historic regulations to achieve net-zero emissions for the hard-to-abate shipping industry.

At Maersk, we are encouraged by the good and productive progress of the negotiations to date, and we acknowledge that the IMO discussions circle around a levy. However, we cannot overlook the consequences of the fuel standard proposals. The mathematics of the proposals at hand do not add up to support the multiple fuel pathways that the industry needs. The result could be an unfortunate delay in the decarbonisation of shipping.

There are plenty of reasons why industry should power ahead towards its targets.  Importantly, the shipping industry accounts for up to 3% of global greenhouse gas emissions and heavily depends on fossil fuels. However, vessels capable of utilizing a multitude of alternative low-emission fuels such as bio- and e-methanol, bio- and e-methane, biodiesel, and ammonia, are on their way, and some are already in operation.

No fuels can do it alone

Ideally, the industry could identify “the best” of these alternative fuels. But none of these fuels have the scalability to propel the entire global merchant fleet alone. They tap into different feedstocks, and there are significant supply chain bottle necks in production. Demand signals for these fuels must increase immediately to stimulate the nascent supply.

Therefore, it is important that the future IMO regulation is fuel-agnostic and provides an equal financial incentive for each of the alternative pathways. With the latest IMO intersessional concluded, there are many promising developments, for example, related to a global fuel standard as well as on the overarching aim of closing the price gap between fossil and alternative low-emission fuels.

Yet, the math applied in current fuel standard proposals has an unintentional consequence; it is not fuel-agnostic and financially it heavily favors liquified natural gas (LNG, fossil methane).

LNG can reduce GHG reduction 10-20% compared to conventional fuel oil and must be acknowledged as a relevant part of the transition, as these vessels can also run on bio- and e-methane. However, bio- and e-methane cannot scale to supply the entire shipping industry, and there will be little to no financial incentive to run them on the lower emission alternatives for the next decade with the current proposals, hence the bottlenecks in the low-emission fuel supply would be exacerbated. It will not get the industry to net-zero.

Actually, the fuel standard math makes the principle of pay-to-pollute the financially most attractive strategy for most shipping companies the next decades.

Consequences of current proposals

If this element remains in otherwise promising fuel standard proposals, the financial business case for LNG is likely to be compelling in the boardroom of any shipping company.

This would have some unfortunate consequences for global shipping:

 

• Pay-to-pollute as financially most attractive fuel strategy: The limited potential of the bio-methane and e-methane pathway will not be able to decarbonize the huge fleet of LNG vessels incentivised by IMO regulation, hence burning fossil LNG and paying the fine will be most optimal strategy financially.

 

• Delayed low-emission fuel supply chains: There will be limited to no demand in the market for low emissions fuels such as blue and e-ammonia and bio- and e-methanol. Hence, these supply chains will be significantly delayed or even mothballed, further incentivizing the pay-to-pollute pathway based on fossil LNG.

Here is the math problem:

Looking into the mathematics of the IMO proposals with a Greenhouse Gas (GHG) Fuel Standard (GFS), compliance is based on the difference between a GHG fuel intensity target and the attained GHG Fuel Intensity (GFI). This focus on a subset of total emissions results in a significant discrepancy between the actual GHG emissions saved and the amount of so-called Deficit Units generated which have to be cancelled out by buying Remedial or Surplus Units for compliance. While LNG burned in the right engines can deliver a GHG emissions reduction of up to 19% vs traditional fuel oil, it will get a disproportionate financial benefit far exceeding what is merited by this reduction.

For example, consuming 1 tonne of low sulphur Heavy Fuel Oil (HFO) with an attained GFI of 95.5gCO2e/MJ generates 1.58 Deficit Unitss, while the LNG equivalent with an attained GFI of 77.2gCO2e/MJ generates only 0.83 Deficit Units. Despite a 19% emissions savings, the reduction in Deficit Units is 48%, creating a significant financial benefit for fossil LNG.

The issue can be illustrated by a concrete example for a container ship. For a trade lane between Asia and Europe, the regulatory cost advantage of fossil LNG versus conventional oil will be more than USD 300 per forty-foot container. This should be compared to a typical total fuel cost of USD 5-600 per container and a total cost of typically USD 2,000 per container. It is important to note that the financial incentives for the low emission fuels and related energy sources are not sufficient to make them more attractive than fossil LNG and the methane pathway. Even adding a reward on low emission energy sources will not change the highly beneficial business case for LNG versus low emission fuels.

Proposed Adjustments

Luckily, we still have time to get the right result. The IMO member states will meet again in early April to agree on a proposal.

To turn it into the landmark historical agreement that the industry needs, we need regulatory proportionality to ensure that the calculation of deficit units corresponds directly to actual emissions reductions.

We also need to limit the accumulation of surplus compliance units (so-called “banking”) to one year to maintain the incentive to transition to fuels that provide deep emissions reductions, instead of sticking to a fossil fuel.

A levy could mitigate the inherent fuel standard flaw, yet it would have to be substantial.

A multi-pathway future is essential for achieving the IMO’s climate targets. Addressing the inadvertently disproportional aspects of current proposals will prevent pay-to-pollute becoming the most financially attractive solution resulting in a single fuel type lock-in, and, most importantly; set global shipping on a course to net-zero.

By: Morten Bo Christiansen, Senior Vice President, Head of Energy Transition at A.P. Moller - Maersk

See - https://www.linkedin.com/pulse/do-math-how-steer-global-shipping-free-pay-to-pollute-christiansen-7xrnf/