Energy Transition

Why closing the price gap for green fuels is key to decarbonizing the maritime sector

Scaling green fuels across sectors requires global regulation.

Scaling green fuels across sectors requires global regulation. Image: Unsplash

Vincent Clerc
Chief Executive Officer, A.P. Møller-Maersk
Takeshi Hashimoto
President and Chief Executive Officer, Mitsui O.S.K. Lines
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  • First Movers Coalition members, Mitsui O.S.K. Lines and Maersk, are actively sending a signal of readiness to procure alternative green fuels and drive economies of scale.
  • The price gap between green fuels and fossil fuels is very high today, estimated to be 3-4 times, and can critically hamper maritime decarbonization transition.
  • Government action and policy measures will continue to be crucial for closing the price gap, advancing and scaling supply of green fuels.

Achieving a zero-emission future for shipping is key to meeting Paris Agreement climate targets. The shipping industry facilitates global trade by moving over 11 billion tonnes of goods along deep-sea routes annually. But shipping also contributes to almost 3% of global greenhouse gas (GHG) emissions and is one of the hard-to-abate industries. The reason is simple. Ships that traverse the World's oceans cannot run on cheaper renewable energy directly as many land-based industries will be able to, instead the energy will need to be converted into a dense form that is light and easy to handle on ships.

This complicates the path to decarbonization for ships and makes the cost high. Further, while the industry is working with various technologies to reduce fuel consumptions and improve energy efficiency for any shipping journey, fuel is by far the largest expense, at around 30-50% of a vessel’s operating costs and currently bunker fuels, mainly Heavy Fuel Oil (HFO) and distillates make up 99% of shipping’s energy demand.


How is the World Economic Forum facilitating the transition to clean energy?

Recent years have seen progress on what we referred to as the “chicken and egg dilemma” in the early years of the shipping industry’s decarbonization journey. Today, over 180 ships capable to sail on green fuels are on order from many shipping companies across several segments and growing. A market is emerging. Maersk owned “Laura Maersk” entered into service this year – as the first container ship running on green methanol. Next year, several large ocean-going vessels will join the Maersk fleet and long-term they will be fuelled by a landmark green methanol offtake agreement. But only two years ago, Laura Maersk was the first methanol-enabled container vessel on the orderbook. Mitsui O.S.K. Lines operates a wide variety of ship types, including container ships, bulkers, tankers, gas carriers, and roll-on-roll-off ships with a mission to decarbonize across all these segments.

However, there is no singular zero-emission fuel alternative that can satisfy the volume of bunker fuel that is used today. The maritime industry is a melting pot of participants with an extreme diversity of attributes, and different solutions need to be nurtured with different partners for the decarbonization of all types of ships. To decarbonize, the industry is dependent on scaling the production of zero-emission (green) fuels like ammonia, methanol, hydrogen and also battery to deploy and power zero-emission vessels. But green fuel alternatives are significantly more expensive than traditional bunker fuels and a common denominator across all shipping segments is that support from both within and outside the industry is crucial to fuel this wave of progress. As we see orders for new dual-fuel vessels scaling up, the next step and admittedly a very difficult part, will be closing the price gap between bunker fuels and zero-emission fuels.


Cost of shipping must not be an impediment to transitioning the industry

Emerging datapoints indicate price of green fuels to be at least 3-4 times more expensive than traditional bunker fuel.The much higher price of zero-emission versus bunker fuel can have far reaching implications on freight rates. For example, shipping consultancy Drewry estimated that a switch to green methanol —produced from biomass or by other means to lower GHG footprint would increase fuel costs by 350%, equivalent to an additional cost of over $1,000 per 40 feet container shipped from Asia to Europe.

Given the higher price of green zero-emission fuels and its potential implications on overall freight costs in a tight margin industry, there is no clear pathway where in the value chain the green premium will be covered. Especially in the early adoption phase, the cost is high for all stakeholders involved and no single actor will be able to absorb the cost alone without a credible line of sight on how to pass down the costs to end customers. But even an apparent sign of willingness to pay from customers is by not yet strong enough to bridge the gap between the cost of bunker fuels and green fuels. In a 2022 BCG survey of 125 companies that ship cargo, 82% indicated that they are willing to pay a premium for zero-carbon shipping but with an average willingness to pay of about 3%, which will not be sufficient, however 65% of those surveyed also stated they were willing to pay an even higher premium in the future.

The price gap between bunker and green fuel can jeopardise the urgent need to accelerate the decarbonization of logistics. But the greening of global value chains is a collective effort and we must shoulder the responsibility across the industry and collaborate outside the traditional maritime stakeholders. Ship owners are ordering zero-emission fuel capable vessels and engaging in partnerships to guarantee the green fuel needed for these new builds, cargo owners are also committing to the sustainable zero-emission shipping products available in the market, but the engagement must increase significantly and rapidly to avoid stalling the momentum of the transition.

Have you read?

Scaling green fuels is a responsibility across sectors and will require firm global regulation

Methanol fuel technology is currently deployed with some scale as a more mature technology than ammonia, but even a market for green methanol is still in its infancy. It is growing fast, thanks to mobilization in China, US, Europe and elsewhere in the world. We can see a path emerging where the order book will be able to be powered by green fuels in time to meet the industry decarbonization targets, set by the International Maritime Organization in July 2023, of reaching net-zero by or around 2050. This is a true testament to the leadership of this industry and the commitment to being part of the solution.

The decisive action from regulators continues to be key. External action is essential to support those who are in favourable positions to make progress and the support must not unfairly benefit certain players but must ensure a level playing field. It is important to foster a non-exclusive environment that robustly backs the First Movers Coalition while stimulating healthy competition among the diverse participants.

Regulators can play a crucial role, introducing policies to remove barriers to scale the production of fossil free fuels, and incentivize the transition for cargo owners. It is critical that we continue to work together across all segments and with stakeholders outside the maritime value chain to ensure incentives that level the financial playing field of decarbonizing shipping. The transition early on and gradually is essential, so that we can mitigate cost of both the green transition and the future impact of natural disasters. The cost of climate change is far greater than the cost of the green transition.

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Related topics:
Energy TransitionSupply Chains and TransportationClimate Action
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