The shipping industry has sailed with the wind. With green alternatives at a significant premium over dirty bunker fuel, it has made precious little progress on decarbonization. The tide may now turn. A proposed carbon tax on shipping emissions, coupled with generous US subsidies for renewable energy, could close the cost gap. This would accelerate the green transformation of the sector,
Shipping needs a plan. It accounts for 2-3% of global emissions. Ships last a quarter of a century, so anything on the backlog today will still be around in 2050 net zero. Alternative fuels based on green hydrogen are in their infancy.
Green ammonia is the more competitive option, but the industry is still working on the safety implications. Green methanol, which reacts hydrogen with CO₂ taken from biomass or air, is a proven technology, as well as a likely starting point. In fact, 130 ships capable of using methanol as fuel have already been ordered.
Meanwhile, bunker fuel is significantly cheaper than both green alternatives. Let’s take last year’s price of $825 per ton as a benchmark. Even assuming green hydrogen is cheap at $2.5 per kg, ammonia would cost $1,239 per ton (fuel oil equivalent), according to Aparajit Pandey, head of shipping decarbonization at RMI think tank on clean energy . Methanol would push $1400/ton.
There are just over 3 tonnes of carbon in every tonne of fuel oil, so the levy would need to be set at $130-180/tonne CO2 to make the switch economical, before factoring in any infrastructure costs.
This is not an extravagant level. The EU ETS, which will be applied to shipping emissions from 2024, is currently around €90/tonne and is expected to increase in the coming years. And a lower carbon tax would help too, especially when coupled with US subsidies. These reduce the cost of hydrogen by $1.5/kg. This would reduce the required carbon tax to double-digits, or even below that for the cheapest hydrogen-based fuels.
Countries that export fossil fuels or goods over long distances may fear a levy at any level. They should reconsider. Even a tax higher than $100/ton adds cents to the cost of the goods transported. The shipping industry should take this opportunity to nail its colors to the mast and support the voice for a carbon tax.
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Benefits of Carbon Tax and Green Transformation in the Shipping Industry
The shipping industry has long struggled with the decarbonization of its operations due to the high cost of green alternatives compared to traditional bunker fuel. However, a proposed carbon tax on shipping emissions, combined with generous subsidies for renewable energy in the United States, could help close the cost gap and accelerate the industry’s green transformation.
Environmental Impact and Urgency for Change
The shipping industry is responsible for a significant portion, accounting for 2-3%, of global emissions. As ships have a lifespan of 25 years, any emissions produced today will still have a long-term impact on achieving net-zero emissions by 2050. Therefore, it is crucial for the industry to adopt sustainable practices and alternative fuels to reduce its carbon footprint. Currently, alternative fuels based on green hydrogen and green ammonia are being explored, with green methanol already proven as a viable option.
The Cost Gap and Economic Considerations
Despite their environmental benefits, green alternatives to bunker fuel are considerably more expensive. For example, assuming a benchmark price of $825 per ton for bunker fuel, green ammonia would cost $1,239 per ton (fuel oil equivalent), and methanol would reach $1,400 per ton. In order to make the switch economically viable, a carbon tax of $130-180 per tonne of CO2 would be necessary, excluding any infrastructure costs.
The Role of Carbon Tax and Subsidies
A carbon tax plays a crucial role in incentivizing the adoption of green alternatives in the shipping industry. The EU Emissions Trading System (ETS) is currently set at around €90 per tonne and is expected to increase over time. Additionally, US subsidies for renewable energy, which reduce the cost of hydrogen by $1.5 per kg, further contribute to closing the cost gap. A lower carbon tax, especially when coupled with these subsidies, can make green hydrogen-based fuels more economically viable.
Overcoming Resistance and Looking Towards the Future
Countries heavily dependent on exporting fossil fuels or goods over long distances may initially resist the implementation of a carbon tax. However, even a tax higher than $100 per tonne would only add marginal costs to the goods being transported. The shipping industry has an opportunity to support the introduction of a carbon tax and demonstrate its commitment to sustainability and reducing emissions.
Exploring the Future of Green Fuels in the Shipping Industry
The shift towards green fuels in the shipping industry not only contributes to decarbonization efforts but also opens up new possibilities and challenges. As the industry continues to evolve, it is essential to explore the potential of various alternative fuels and address key considerations.
Green Ammonia: Competitiveness and Safety
Green ammonia is seen as a competitive alternative to bunker fuel, but safety implications need to be addressed. As the industry works towards ensuring the safe use of green ammonia, further research and development are required to mitigate any potential risks and promote its widespread adoption.
Green Methanol: A Proven Technology
Green methanol, which involves the reaction of hydrogen with CO2 from biomass or air, is already a proven technology. In fact, there have been 130 ships ordered that are capable of using methanol as fuel. This shows the industry’s confidence in green methanol as a viable option for reducing emissions and transitioning towards sustainability.
Economic Viability and Infrastructure Costs
While green alternatives are more expensive than traditional bunker fuel, it is important to consider the long-term economic viability of these fuels. The implementation of a carbon tax, along with subsidies and advancements in infrastructure, can help bridge the cost gap and make sustainable fuels more economically attractive for the shipping industry.
The Need for Collaboration and Global Initiatives
The transition to green fuels in the shipping industry requires collaboration between governments, international organizations, and industry stakeholders. Incentives such as carbon taxes, subsidies, and supportive regulations can encourage the adoption of sustainable practices and drive innovation in the sector.
Summary
The shipping industry faces a pressing need to decarbonize and reduce its global emissions. With the introduction of a carbon tax and generous subsidies for renewable energy, the cost gap between traditional bunker fuel and green alternatives can be closed, driving the industry’s green transformation. Green hydrogen, green ammonia, and green methanol are among the alternative fuels being explored, with methanol already proven as a viable option with 130 ships on order. While green alternatives are more expensive, the economic viability can be enhanced through carbon taxes, subsidies, and infrastructure development. Countries exporting fossil fuels or long-distance goods should reconsider the impact of a carbon tax, as even higher tax rates add only marginal costs to the transportation of goods. The shipping industry has an opportunity to demonstrate its commitment to sustainability and support the introduction of a carbon tax. Collaboration and global initiatives are necessary to drive the transition to green fuels and achieve a more sustainable future in the shipping industry.+
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The shipping industry has sailed with the wind. With green alternatives at a significant premium over dirty bunker fuel, it has made precious little progress on decarbonization. The tide may now turn. A proposed carbon tax on shipping emissions, coupled with generous US subsidies for renewable energy, could close the cost gap. This would accelerate the green transformation of the sector,
Shipping needs a plan. It accounts for 2-3% of global emissions. Ships last a quarter of a century, so anything on the backlog today will still be around in 2050 net zero. Alternative fuels based on green hydrogen are in their infancy.
Green ammonia is the more competitive option, but the industry is still working on the safety implications. Green methanol, which reacts hydrogen with CO₂ taken from biomass or air, is a proven technology, as well as a likely starting point. In fact, 130 ships capable of using methanol as fuel have already been ordered.
Meanwhile, bunker fuel is significantly cheaper than both green alternatives. Let’s take last year’s price of $825 per ton as a benchmark. Even assuming green hydrogen is cheap at $2.5 per kg, ammonia would cost $1,239 per ton (fuel oil equivalent), according to Aparajit Pandey, head of shipping decarbonization at RMI think tank on clean energy . Methanol would push $1400/ton.
There are just over 3 tonnes of carbon in every tonne of fuel oil, so the levy would need to be set at $130-180/tonne CO2 to make the switch economical, before factoring in any infrastructure costs.
This is not an extravagant level. The EU ETS, which will be applied to shipping emissions from 2024, is currently around €90/tonne and is expected to increase in the coming years. And a lower carbon tax would help too, especially when coupled with US subsidies. These reduce the cost of hydrogen by $1.5/kg. This would reduce the required carbon tax to double-digits, or even below that for the cheapest hydrogen-based fuels.
Countries that export fossil fuels or goods over long distances may fear a levy at any level. They should reconsider. Even a tax higher than $100/ton adds cents to the cost of the goods transported. The shipping industry should take this opportunity to nail its colors to the mast and support the voice for a carbon tax.
Lex recommends the FT Due Diligence newsletter, a curated briefing on the world of M&A. Click Here to sign up.
https://www.ft.com/content/c7eafc18-4f0a-411f-8ebb-d9399b3ff86a
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