As a critical cornerstone of global commerce, maritime transport connects the world and facilitates economic growth and development. Recognising the importance of minimising its environmental impact, the industry is at the forefront of intensifying efforts to curb its carbon footprint. This paper provides an overview of the key themes to the maritime industry’s decarbonisation journey as well as the future advancements that are expected to significantly enhance the industry’s ‘green’ profile. Hayfin believes the initiatives discussed will positively shape the future trajectory of climate change and fundamentally impact why, and how, investors can and should take advantage of the unique opportunities emerging from this period of strategic innovation.

Recognising the importance of minimising its environmental impact, the maritime industry is at the forefront of intensifying efforts to reduce its carbon footprint.

Overview

The Net Zero Asset Owners Alliance (UN convened group of influential institutional asset owners and stakeholders) has identified shipping as a priority sector and has chosen to actively engage with the maritime industry to encourage thoughtful investment in the existing asset base, nascent technologies and operating practices, working towards the ultimate goal of a carbon neutral supply chain. The maritime industry is a vast opportunity set for investors and is the backbone of global commerce, which demands strategic engagement from the entire commercial eco-system – both industry stakeholders and financial investors seeking to contribute towards tackling these ambitious decarbonisation targets. The asset base consists of ~60,000 deep sea vessels with an estimated value of $1.4+ trillion. The industry is responsible for the transportation of ~90% of the world’s commodities and finished goods (with an annual value of ~$14 trillion) while producing ~3% of global greenhouse gas (‘GHG’) emissions (equivalent to ~1 billion tonnes of carbon dioxide (‘CO2’)). Transportation by sea is the most effective mode of scalable transport per carbon unit, however, substantial improvements are necessary. While there are significant challenges involved in the decarbonisation of the maritime industry, there are also opportunities to be gained from, and in many respects the maritime industry is leading other sectors in its ambitions.

The Importance of Decarbonising Maritime

As mentioned earlier, the maritime industry accounts for approximately 3% of global greenhouse gas emissions. As the world fleet continues to expand, emissions could grow significantly without meaningful mitigation efforts. Pressure is intensifying on the industry to reduce emissions and contribute to the international goal of net-zero carbon emissions by 2050, despite the unprecedented potential cost, and operational and technological complexities.

From 2012 to 2018, the seaborne fleet grew by 11% and CO2 emissions increased by just over 9% with annual consumption of marine fuel estimated at circa 300m tonnes. With the fleet expected to continue to grow, marginal changes to CO2 emissions will not be enough in the long term to ensure the sustainability of the industry, and in this context, the decarbonisation of shipping is both critical and incredibly complex.

Developing viable carbon neutral marine fuels and related propulsion technology, as well as the corresponding need for considerable investment in global supply chain infrastructure, requires coordination and collaboration from all market participants.

Risks of potential first mover disadvantage must be mitigated via appropriate regulatory and governmental incentives to ensure bold initial steps. In addition to asset owners, such action must ultimately come from both regulatory bodies and end users of the goods and commodities transported including energy majors, national energy and mining firms, steel and finished goods manufacturers. End users, such as Cargill, Glencore, Maersk and Shell, are ultimately the demand that drives vessel usage, and they must play a pivotal role in driving change by taking responsibility and supporting ambitious investments in nascent technologies.

From a regulatory perspective, the IMO is the UN body that, on a global basis, governs the shipping industry. It has set a target of reducing the industry’s total GHG emissions by at least 50% by 2050, whilst at the same time reducing the average carbon intensity (CO2 per tonne-mile) by at least 40% by 2030, and 70% before 2050. To support this target, it has introduced short-term asset efficiency measures (EEXI and CII further explained on page 6) to be implemented from 2023.

Success and actual change will require a realistic but ambitious approach (essentially a dual track process), meaning that whilst striving towards long term all-encompassing solutions, the industry must also focus on the current actionable solutions to ensure immediate improvements. Decarbonising the maritime industry requires substantial research to identify those zero-carbon initiatives with the greatest potential impact to address current key challenges such as operational efficiency, sustainability of resources, safety of life at sea, storage and bunkering infrastructure and the cost effectiveness of new technologies.

Practically speaking, the ultimate goal of zero-emission vessels that are built to a longer lifecycle model and that utilise “green” steel (steel produced with the lowest emissions currently possible) and engineering, needs to be balanced with immediate and sizeable investment programs focused on retrofitting existing assets, a process which makes existing assets more adaptable to evolving technologies. In addition, pilot projects to encourage research and development (R&D) towards future solutions such as bridge fuels, carbon tax and green corridors (explored below) are all needed to support the pioneers, and both encourage and reward risk taking.

As was seen at COP26, the November 2021 UN Climate Change Conference, despite good intentions, changing legislation can be incredibly challenging. On this basis, prominent visionaries within the shipping industry are taking the lead on several initiatives. One organisation driving such change is the Global Maritime Forum, which is the driving force behind the ‘Getting to Zero Coalition’ initiative, a powerful alliance of more than 160 companies within the maritime, energy, infrastructure, and finance sectors, supported by key governments and intergovernmental organisations. The coalition is committed to getting commercially viable deep sea, zero-emission vessels powered by zero-emission fuels into operation by 2030 – maritime’s moon-shot ambition.

Key Themes to Address in the Maritime Decarbonisation Journey

Like many other industries, much of what is required to de- carbonise vessels relies heavily on the speed and quality of research and development, in areas such as alternative fuel development and new technologies designed to improve a vessel’s operating performance. However, critical steps can be taken today to move closer towards longer-term ambitions. Operational changes within ports such as reducing the waiting time of ships can also have a positive impact on energy usage. These improvements, coupled with a regulatory push, such as the introduction of zero-emission maritime routes (so called ‘green corridors’) at COP26, means the maritime industry is moving towards a new future, presenting both opportunities and challenges alike.

Focus on Short-Term Progress

The transition towards a net zero supply chain will take decades and there is currently no single solution. In addition to embracing future technology and new operating models, optimising the existing asset base is a responsible and resourceful path towards reducing the carbon footprint now.

Bridge to the Future

As the transition to net zero occurs, there are meaningful further steps vessel owners can implement to reduce their GHG impact.

• Retrofitting assets to enhance performance is an actionable initiative with quantifiable results, reducing fuel consumption and lowering GHG emissions.

• It is estimated that the construction process of a Newbuild vessel has a 40-50% higher carbon footprint than an existing vessel’s annual emission footprint. Therefore, before viable new propulsion technologies are widely adopted, retrofitting existing vessels, in some instances is a more environmentally friendly approach.

• Further improved technologies include high specification silicon-based paint, propellor ducts, waste heat recovery systems, power caps and voyage optimisation technologies that can provide an immediate improvement in performance of between 2-8% with similar reductions in CO2 emissions.

• Back to the future – the use of modern sails and rotor sails to assist propulsion can be an effective method of reducing fuel consumption (predicted up to 15% improvement), although not applicable to certain vessels and sizes due to operational constraints.

• ‘Air lubrication’ systems can be installed on certain vessels, emitting a thin layer of bubbles from the hull of the vessel to minimise resistance and reduce fuel consumption. This was broadly seen as an ineffective technology a decade ago but has recently gained traction with larger assets and has been vetted and approved by some of the largest energy majors. Claims of up to 20% performance improvement are made by suppliers.

• In the short-term, realisable near-term gains can be achieved and can provide savings in CO2 emissions: voyage optimisation (~5%); waste heat recovery (~2%); propellor modification (~5-8%) or hull coatings/lubrication (~5-8%).

• Vessel operational improvements including satellite communications, live weather and routing data and systems available on vessels to base voyage routes on this data with the aim of achieving the most efficient and effective route/speed for vessels.
  

Operational Improvements and Automation

Further to the improvement that can be made on a bottoms-up (i.e., vessel by vessel) basis, the maritime industry can implement top- down improvements via adjustments to their operating model and automation.

• The current contractual framework for the transport of goods by sea encourages the ship owner to “sail fast then wait” (SFTW) to discharge, which results in reduced utilisation of ports, increased costs as well as higher emissions. Just-in-time delivery is an inventory management strategy that reduces materials held in stock by delivering items at the time they are needed for sale. It would be a cheap and a quick win to change to just-in-time, from current SFTW. Academic research suggests that eradicating SFTW and introducing just-in-time practices, which are widely adopted in supply chains, would result in emissions’ savings in the order of 20-25%. This is equivalent to ~200+ million tonnes of CO2 per year.

• Digitalisation has become a major topic within shipping with increased automation on ships supporting the optimised operation of vessels and equipment. The use of drones for physical inspections and digital communications between ships and shore enhancing efficiencies and response times while supporting decarbonisation.

• The use of onboard, strategically positioned monitoring equipment, and live transmission of these data points supports continuous analysis and optimisation of performance. In addition, use of big data (data sets too large are analysed through traditional data-process methods), artificial intelligence and machine learning is increasingly being piloted with cloud based predictive maintenance systems, providing real time insights – detecting failures, prescribing maintenance actions, supporting asset reliability and optimisation of maintenance costs and reduction of total cost of ownership – optimising asset performance and reducing fuel consumption.

Future Advancement Hinges Upon R&D, New Manufacturing Processes and Technologies

As the sector focuses on how to address decarbonisation, As the sector focuses on how to address decarbonisation, it is concentrating efforts into the advancement of fuel and technology offerings in order to reduce emissions – ‘thinking big, starting small and scaling fast’ in areas such as hydrogen and ammonia research and development, as well as renewable technologies. This new phase of transition will require significant upgrades and modifications to the entire supply chain infrastructure for maritime assets – vessels, ports and operations.

Dual Fuel Technology:

• The use of liquified natural gas (‘LNG’) and liquified petroleum gas (‘LPG’) in so called “dual fuel” new build vessels is seen as an intermediate step as LNG emits 25% less CO2 and near zero sulphur oxides and nitrogen oxides, the two main pollutants from a ship’s emissions, compared to conventional fuels. A significant portion (32%) of the current shipyard orderbook is set to use dual fuel technologies.

• Technology is key in the decarbonisation journey and apart from having an immediate impact, some of these bridge fuels can help prepare for permanent solutions both based on increased knowledge and vessels being prepared for other ways to store fuel.

• As an example, the LNG fleet has experienced a technology revolution since 2010. Up to 2009, the vast majority of the fleet used a steam propulsion system. However, new technology on LNG vessels has seen the development of modern engines and propulsion systems, representing now 11% of the total fleet and majority of the shipyard orderbook (132 vessels). These modern engines are more efficient, consuming 44% the fuel of previous engines while complying with current emission regulations.

• Longer term, LNG is not deemed to be a conclusive solution since it is still a fossil fuel and methane emissions are still a major concern. Indeed the “Global Methane Pledge”, recently signed by 100+ nations during COP26, aims to reduce methane emissions by 30% (from 2020 levels) by 2030.

• Shipping propulsion technology has evolved over the last several hundred years from the use of wind power originally, to coal and most recently, combustion and diesel engines. The changes required to decarbonise the industry over the coming decades are a fourth propulsion revolution.
  

Alternative Fuels:

• An industry financed $5 billion programme, to be conducted by a new International Maritime Research and Development Board (IMRB), is currently being considered by governments aimed at accelerating the introduction of zero-emission technologies for maritime transport.

• Methanol, ammonia and hydrogen may be deployed as either fuel for use in an internal combustion engine or in fuel cells. Sustainable biofuel is available for deep-sea shipping with potential to reduce GHG emissions. Batteries have also been considered although these are only feasible for ferries and short-sea shipping. Currently, 1.8% of the global orderbook uses other alternative fuels.

• Test pilot schemes are ongoing with a focus mainly on green ammonia (CO2 emission-free ammonia from renewable electricity) and green hydrogen (hydrogen produced by splitting water using electricity generated from renewable sources) fuel cells, which are seen as the most promising technologies that achieve net zero GHG emissions.

• Currently, the majority of hydrogen produced globally is derived from fossil fuels and is not considered ‘green’. It is expected that the cost of green hydrogen production will fall to a third of the cost by 2025 . However, hydrogen requires large storage volumes, which make it an unlikely option for long haul ship- ping.

• Ammonia is one of the best and most realistic options for emission-free marine fuel. Ammonia has the key benefit of being easier to store than hydrogen. Hence, the cost of storage is significantly cheaper than either hydrogen, electric batteries or LNG. The difficulties with ammonia are centred around its toxicity and limited experience as a fuel in combustion engines and low energy utilisation rates. With a lower energy conversion efficiency compared to fuel oil, energy density is half that of diesel, hence ammonia producers would need to provide twice as much liquid ammonia. Current production can only cover a moderate fraction of the demand for marine fuels. Current renewable ammonia price ranges from 1.2 to 1.5 times other, more emissions-intensive options.

• Prices for renewable electricity are expected to decrease over time to some extent, allowing ammonia to become more competitive.

• Of the future potential green fuels, ammonia and hydrogen address emissions challenges. However, for ammonia, fuel quality and safety standards need to be developed further, whilst hydrogen storage constraints may be an inhibitor for long-haul shipping.

Carbon Capture (CC) and Renewable Assets:

• Carbon capture is a process whereby CO2 is captured and stored before it enters the atmosphere, avoiding environmental damage. This concept can be adapted to the maritime environment, for example through recycling of wasted energy within vessels and using this to capture the CO2 from the emissions of a vessel. A critical topic under research is the storage of CO2 on board (feasibility, volume required, safety considerations) and the eventual removal of the captured CO2 (shore-based supply chain and infrastructure in ports).

• Projects around transportation of captured carbon are being assessed and purpose-built vessels are being designed for bringing the waste carbon to locations for rock face injection, a process by which carbon is captured and turned into rock. While this process has yet to be proven at scale and is an expensive solution, it is a step in the right direction.

• There is also a general opportunity for the maritime sector to support the growing offshore wind industry. Global offshore wind capacity has a potential compound annual growth rate of 18% from 2021-2026. The type of vessels needed, and operational know-how include wind turbine installation vessels and vessels servicing the offshore wind farms. It is likely that currently available assets will be replaced, or retrofitted, with technology that can utilise the energy source of the offshore wind farm to refuel/recharge.

Circular Economy, Modular Ship Design & Engine Leasing

• A circular economy is a production model which reduces waste by recovering resources at the end of a product’s life, feeding them back into production while creating an environmental benefit. The shipping industry has unique forms of circularity that can support the decarbonisation journey. Long life assets with regulated maintenance practices ensure key vessel components can be reused and their life cycle extended.

• Reuse and recycle concepts can be integrated into the design of future vessels, reducing the overall carbon impact of ship-building and operations.

• The industry has ambitious goals for modular vessels. The hull and other parts of the vessel are expected to last much longer than the current 25 years life expectancy. Certain sections of the vessel could then be replaced with new modules but reduce the need for the entire vessel being recycled or becoming obsolete. The engine room is one of the obvious ‘modules’.

• Engine leasing is a concept widely adopted in the aviation sector. This results in easier and faster incorporation of new technology with manufacturers leasing out equipment. Efficiency is improved by accumulating engine knowledge and expertise in certain entities that can improve overall operating efficiencies and lower costs. It would require the complete re-design of ships to improve engine accessibility.

• Circularity also means enhanced collaboration: the green corridor initiative is a good example of getting all stakeholders involved with everyone from the exchange of knowledge, shared costs and agreed goals.

The Regulatory Push Driving Change

Heightened focus on decarbonisation will dramatically impact global regulation and policies. Along with accords such as the Paris Agreement of 2015 and recent announcements by the world’s largest economies pledging carbon neutrality by 2050, there are significant implications across sectors and geographies – including maritime.

Green Corridors:

• The November 2021 COP26 conference saw over 20 nations agree to the establishment of green shipping corridors, zero-emission maritime routes between two or more ports, and importantly the development of infrastructure designed to enable use of alternative fuels and green operating practices around port networks within these trading zones.

• The ambition is to have at least six green corridors by 2025 with the first Zero Emission Vessel operating in the corridors by this date and achieving 5% clean fuels used in shipping by 2030. This is expected to lay the foundation for the scale-up required beyond 2030.

• Viewed as a springboard from ambition to action, green corridors will create environments in which to test emerging technologies and lower development costs. Investments in fuel infrastructure on one corridor could remove uncertainty around zero-emission fuel supply availability on others and facilitating decarbonisation in other industry sectors.

• Studies have been commissioned on trade specific routes across 1) the Australia-Japan iron ore corridor, 2) the Asia-Europe container route, and 3) the Korea-Japan-US pure car carrier corridor. Altered supply chains based on specific corridor logic, political issues or shorter distances travelled could lead to a change in optimal size of vessels.

• Reducing the global scale of the challenge and applying logic to specific trade routes is seen as an efficient way to engage directly with key stakeholders across the value chain and to align on corridor-level consensus on fuel pathways, policy support to help close the cost-gap for higher-cost, zero-emission fuels and value-chain initiatives to pool end user demand.

Carbon Pricing and Tax

• Leading ship owners and charterers are becoming increasingly vocal in support of a carbon tax as the clear financial incentive that is needed to encourage meaningful investment in maritime assets with alternative propulsion.

• The IMO has moved a step closer to creating a market-based measure, a financial mechanism to force shipping companies to make their vessels emit less GHG while providing potential funds for technology research and mitigation measures. The IMO also called for impact assessments to be done to show any possible effect of a carbon price on the shipping industry, one of the prerequisites for a measure.

• A number of discussions are underway on how to best apply and regulate the global carbon tax credit (IMO, US and EU) and pricing of this tax. A global solution is the ideal outcome.

Regulatory Incentive

• The mounting regulatory demands across the industry act as an incentive to build sizeable shipping platforms better aligned with end users and optimally positioned to capitalise on environmental challenges.

• By 2023, approximately 80% of the existing global fleet will need to adopt one or more of these measures in order to comply with IMO regulations.

1. Energy Efficiency Existing Ship Index (EEXI) looks at the design of ships contracted prior to January 2013 and compares their energy efficiency to a benchmark. In terms of EEXI compliance, typical efficiency measures include propulsion and engine optimisation as well as energy efficient technologies and engine power limitation.
2. Carbon Intensity Index (CII) will be used to determine the annual reduction factor needed to ensure continuous improvement of the ship’s operational carbon in- tensity within a specific rating level. Unlike ship design requirements (EEXI), the CII focuses on tracking emissions during operations. Specifically, the CII creates a standard to measure how efficiently a ship transports goods or passengers calculated in grams of CO2 emit- ted per cargo-carrying capacity and nautical mile and hence requires a close collaboration between owners and charterers to optimise operations.