The “Green Transition” Brings Choices and Challenges

First, are the shipping lines Team Ammonia, Team LNG, Team Hydrogen or Team Methanol?

Judging by the diversity of liner order books it seems that the ocean carriers are trying to cover all possible options by placing small investments in each of the alternatives. Indeed, why invest exorbitant amounts of money in transforming your fleet to methanol when in less than 10 years ammonia could be dubbed the ‘fuel of the future’ instead and no ports can bunker the ships?

A good example of this uncertainty is CMA CGM’s switch back from Methanol to LNG fuels. At the same time, Maersk Line has 24 methanol powered ships on order, MSC is anticipating an Ammonia revolution with over 200,000 TEU of ammonia ready ships close to construction, and there are 40 other LNG ships preparing to join the cellular fleet by the end of 2024.

Another question - what is preventing carriers from making more of a collective effort to reduce their carbon footprint and switch completely to alternative fuels?

A lack of decisive research is one answer because there is not currently a right answer to the fuel debate. A few years ago, green hydrogen was heralded as the cleanest alternative due to the ease at which existing ships could be retrofitted with hydrogen fuel cells, however, is not feasible for deep sea shipping due its low energy density. Similarly, ammonia fuel is made using a natural gas and has potential for green shipping, but both are incredibly flammable and are lacking IMO international safety guidance. Methanol’s chemistry makes it relatively straightforward to transport and store however falls short of the requirements of a net zero alternative, producing methane as a bi product. If regulations were to become more stringent then methanol could be knocked out of the race. Liquified natural gas (LNG) ships currently comprise the largest segment of the alternative fuel market and are widely considered the ‘bridge fuel’ to other alternatives. In the short run LNG offers shippers the opportunity to reduce carbon emissions by 20% compared with very low sulphur oil products, in the long run this does not comply with the IMOs target to cut shipping carbon emissions by 40% by 2030, thus it is not an extensive solution.

Secondly, to source, reliably use, safely store, bunker, transport and combust alternative fuels, advanced and costly infrastructure is required. It is important to stress that to be branded a ‘green fuel’ every step of this supply chain must be sustainable, and that every fuel alternative requires its own complex infrastructure. Given the magnitude of required expenditure for just one fuel, investment is likely to only trickle through until a single fuel wins the race.

So, until one fuel is universally accepted as the best choice, it is hard to expect the liner industry to fully commit to decarbonising fleets as the risk of lost investment remains high.

There are other factors to be considered. Instead of adopting alternative fuels, ocean carriers overwhelmingly opted to install scrubbers. These industrial exhaust cleaning systems represent a cheaper substitute that meets the sulphur content criteria, helping to potentially meet greener requirements while limiting expenditures and meeting policy requirements. 

Yet fitting of these options or ordering new ships to meet the high cost of alternative fuels (estimated at five times the price of conventional bunker fuels) raises the second key question – who is going to pay for the transition?

Well, it will not be solely the carriers. It is unlikely that we can expect shipping lines to take on the burden of sustainability costs simply out of benevolence, especially when core EBIT margins for the container shipping operators has, for example, collectively fallen from 56.3% (Q3 2022) to just 1.5% (Q3 2023).

As such, the ocean carriers are already preparing to pass EU emission trading costs onto consumers, branded as “green surcharges.”

Unsurprisingly, many cargo owners and shippers are also reluctant to meet these costs, with a low desire to pay extra for “green” activities if it can be avoided by simply switching to a competitor. It is easy to see why demand is so low for low carbon services. Yet does this mean that without cargo demand the shipping supply will not follow?

At the same time, even with the interest in the green transition, maritime emissions are on the rise. For example, according to OECD statistics CO² emissions attributable to shipping were 3% higher in September 2023 than in September 2022.

There also needs to be a dose of reality too. While LNG ships make up 23% of vessels on order, this will simply take their share of the global fleet from 1% to 3%.

Fundamentally, shipping is a competitive industry and operators must make decisions based on profit maximisation and cost minimisation. Environmental concern is playing an increasingly significant role in consumer decision making, and thus to drive demand, carriers must be seen to be doing their part to achieve the UN sustainable development goals.

Progress is possible. The carrier industry has demonstrated that with the correct incentives and an organisational push, it can come together to cohesively lower their environmental footprint. In 2020 the IMO introduced limitations on the sulphur content of bunker fuel, resulting in an immediate 70% decline in sulphur dioxide emissions.

As we roll into COP 28, and the 12 days of talks in Dubai, maritime maintains an important presence, with the obligatory announcements coming thick and fast on a daily basis. For example, the CEOs of MSC, Maersk, CMA CGM, Hapag-Lloyd and Wallenius Wilhelmsen, issued a joint declaration for an end date for fossil-only powered newbuilds, stating that the International Maritime Organization (IMO) needs to create regulatory conditions to accelerate the transition to green fuels. At the same time, APM Terminals and DP World formed the Zero Emission Port Alliance (ZEPA) to make battery-electric container handling equipment affordable, accessible, and attractive through collective action. There are bound to be similar announcements forthcoming.

So, where on the priority list is decarbonisation for ocean carriers? It is an expensive commitment and comes at a time when the industry is already facing volatile geopolitics in multiple areas, extortionate canal transit costs in Panama, and plummeting profits.

There must also be a role here too for ports and beneficial cargo owners in making the green transition across the entire supply-chain, but ultimately there is a price that needs to be paid for going green and it remains a difficult balancing act as we go into 2024.