Over the last months, the pressure to decarbonise shipping has been significantly increased, with initiatives and relevant points been touched upon globally with COP26 or regionally with the “Fit for 55” legislation proposal.
However, what do all these developments really mean for the shipping industry?
The agreed Global Climate Change Summit COP26 last November has set the tone for the climate change debate with an outpouring of ‘calls to action’ and pledges for the industry. These essentially called for the IMO to demonstrate its commitment to the urgency of climate change by replacing its current target of halving ship- ping’s GHG emissions by 2050 (versus 2008 levels) with the goal of net-zero by the same date.
The nations attending MEPC 77 chose to defer any such deci- sion to the formal Review process for IMO’s GHG Strategy to be completed by 2023 – but at the same time failed to discuss the shipping industry’s parallel proposal for the immediate creation of a $5bn R&D fund into decarbonisation, to be funded by a mar- ket-based measure such as a carbon levy on marine fuel. While these decisions came as a disappointment to many, this was in part due to the very upscaling of ambition that COP26 had engendered.
Among the key developments in Glasgow was the signing of The Clydebank Declaration, whereby some 20 countries agreed to work together on establishing ‘green shipping corridors’ – demonstration projects routes on which to pilot the use of zero-emission vessels
– by 2025. The Declaration intends to provide positive incentives to encourage the uptake of green fuels and technologies, however the challenge is to put it in practice with governments agreeing on in- vestment and incentive schemes while tackling the ports infrastructure challenge. These green shipping lanes will help testing the available net zero technologies that will be in place, while building the commercial case for ships using the new fuels.
At the regional front, the European Union (EU) aims at steering the EU maritime sector towards decarbonisation, by putting forward the FuelEU maritime regulation within the “Fit for 55” package of legislative proposals published in July 2021, which represents the most comprehensive regulatory intervention in maritime to date. Aiming to ensure the success of the European Green Deal, with
the EU to become a climate neutral economy by 2050 while reducing by 55% the GHG emissions by 2030, the FuelEU proposed regulation augments the proposal for the extension of the EU Emissions Trading Scheme (ETS) in maritime as well as the revision of Energy Taxation Directive (ETD) which aims to remove tax exceptions for conventional fuels.
A specific mechanism has been designed to stimulate demand for sustainable power sources, by gradually reducing the acceptable GHG emissions target from 2025 to 2050, applying a full lifecycle approach of GHG intensity of energy. This means that the compliance cost increases as EU ETS applies a carbon price to GHG
emissions from shipping operations. Based on our estimates, as the majority of the current marine fuels will fail to meet the 2025 GHG limit, there will be significant penalties, as the regulation aims to remove any commercial benefit to use the existing fuels. For example, in case of VLSFO, the penalties are equivalent to an operational carbon price of around EUR 800 per CO2eg tonne.
However, the challenge doesn’t stop here. Given that the regulation considers not only the GHG emissions in operation, meaning how the energy is used, but also its production and distribution, which are defined by the characteristics of the energy carrier, convention- al energy efficiency solutions will not help achieving compliance, showing as the only way the switch to net zero energy sources . The effectiveness of this “switch or pay” approach remains to be seen, given the uncertainty on how the EU will provide vessels ac- cess to the rewarded, (by the FuelEU maritime regulation), net zero energy sources.
Another significant point is that the proposed regulation has included in the recitals charterers or other stakeholders who influence the ship operations, achieving an important balance between recognizing influence while avoiding direct interference in contractual agreements.
A new requirement for container and passenger vessels is pro- posed, making the use of On Shore Power Supply (OPS) at berth obligatory from 2030. Those that don’t do this face a penalty for non-compliance multiplying the amount of EUR 250 by the mega- watts of power installed on-board and by the number of completed hours spent at berth, with some exceptions linked to unscheduled port calls as well as to incompatibility or unavailability of OPS, which will be no longer valid after 2035. Greece has an operational, on-shore power installation at Killini port for the ferry Fior Di Levante, an outcome of the partnership between LR (Lloyd’s Register) and key stakeholders within the Elemed project, the first in the Eastern Mediterranean.
Overall, the COP26 meeting has offered the opportunity for progress with the private sector and governments. What remains to be seen is the consensus on the way forward, either at global level with the IMO agreeing the longer term GHG regulation or with the EU Parliament and Council to agree on the details of the regulation. Although all initiatives have a shared goal: to decarbonise shipping, regulatory uncertainty still remains, which is a growing risk for the shipping industry. The period ahead will require reliable guidance and expert insight to understand the impacts of the regulations and to valuate options and technologies that will achieve compliance with the regulations. Lloyd’s Register is well positioned to advise
on the tough decisions that must be made, with objective and evidence-based information deriving from the work of LR’s Maritime Decarbonisation Hub, and LR’s Athens Decarbonisaton Centre helping local clients to tackle current and future complexities, as we move towards zero-carbon.
* Greece, Cyprus and Israel Commercial Manager at Lloyd’s Register