Decarbonization and development: Logistics network investments

The year 2023 was a milestone in container shipping. All ships ordered with a capacity greater than 5,000 twenty-foot equivalent units will be able to operate on alternative fuels such as ammonia and methanol, reflecting the growing momentum in the sector's decarbonization journey. Still, questions surrounding key aspects of the plan remain, starting with who will bear the cost of the massive bill that will come due in the next few decades.

Regulated for success: A pathway to decarbonization 

The shipping industry is working on reducing its carbon footprint. Though the process is underway, the outcome is uncertain in terms of timing and methods.

The container shipping sector presents multiple challenges. Container shipping transports about 45% of the value of international trade, with two-thirds of all seaborne trade by value being containerized, according to the UN Conference on Trade and Development. It is the primary mode of transport for consumer goods, manufactured goods, specialized agriculture and specialized chemicals. For decades, container shipping has absorbed cargo previously moved by other maritime transport modes, including bulk, breakbulk, refrigerated and roll-on/roll-off.

Approximately 3% of GHG emissions come from the maritime industry, while container ships account for 25% of maritime emissions, according to industry data. Maritime was not mentioned in the 2015 Paris Agreement on climate change, leaving the IMO with the responsibility of decarbonizing the sector.

Unique among hard-to-abate sectors, maritime is an inherently transnational industry regulated by a global agency that has long created and enforced safety, security, operations and emissions rules. This is seen as an advantage because it provides an opportunity to create a global pathway to decarbonization, which is not available in other sectors. In mid-2023, the 175 member states of the IMO unanimously agreed to more ambitious global decarbonization goals. The agreement replaced the prior goal of achieving a 50% reduction in carbon emissions by 2050 (versus 2008 levels) with a new goal of eliminating carbon emissions "by or around" 2050, in line with the Paris Agreement's objective of limiting global warming to 1.5 degrees C above preindustrial levels.

The agreement included waypoints, such as committing international shipping to zero or near-zero carbon energy sources for at least 5% of energy use by 2030 and reducing total GHG emissions by at least 20% by 2030 and 70% by 2040 compared with 2008 levels. To ensure these goals are met, the IMO launched a two-year process of writing and approving regulations to establish a pricing mechanism for carbon and implement measures like fuel requirements.

Technology available, payment wanted: Delivering decarbonization 

The process of decarbonizing maritime, as for all other sectors, comes with significant costs. It is unclear who will bear that cost, as pricing for such things as zero-carbon fuels is set by the market, not by regulation. Efforts to decarbonize have involved investments by container lines in eco-friendly ships where operation and fuel costs can be absorbed with marginal financial implications for the carriers. But as the carriers scale up, the cost will increase exponentially and would need to be shared with cargo owners and their customers.

The container industry's first step toward decarbonization was to use LNG, which emits 25% less CO₂ than traditional bunker fuel. However, the impact of LNG is still minimal; only 74 container ships run on LNG, representing just over 1% of all container ships in operation, based on S&P Global Market Intelligence data. Another 186 LNG ships are on order, meaning LNG will represent roughly 4% of container ships in operation once those ships are delivered. LNG ships on order are nearly a quarter of container ships under construction, which shows that ship owners are increasingly emphasizing orders for eco-friendly vessels.

Green ammonia and methanol are two potential zero-carbon fuels that could achieve scale. Both are chemicals produced from renewable energy sources. While batteries can operate on small vessels such as ferries, they are considered inadequate for deep-sea ocean shipping due to their weight and limited energy density compared with other energy sources.

Methanol has progressed faster as a zero-carbon fuel compared with ammonia, which is highly toxic and will require extensive safety precautions. As of late 2023, one methanol-powered container ship was in operation. Orders have been placed with shipyards for 125 container ships that can operate with methanol upon delivery and another 50 ships that can be retrofitted to use methanol later, according to S&P Global Market Intelligence.

There are no existing orders for ships that can be powered by ammonia upon delivery, but orders have been placed for 50 ships that can be converted to ammonia power post-delivery. Ammonia is moved today by ship as cargo and has influential advocates within the maritime industry. Less than 2% of container ships in operation are running on alternative fuel, nearly all of that LNG, but a rapid scaling-up is underway, with about 40% of all container ship orders being for ships that can run on reduced or zero-carbon fuels upon delivery. All container ships ordered in 2023 with a capacity greater than 5,000 twenty-foot equivalent units will be able to operate on alternative fuels either upon delivery or later.

As the industry scales up, the question of who pays for the conversion of the fleet and bunkering facilities is emerging as a key issue. A UN Conference on Trade and Development report said that up to $28 billion would be required annually to decarbonize ships by 2050, in addition to up to $90 billion to build the infrastructure to store, deliver and transfer zero-carbon fuels. Theoretically, the cost should be shared across the value chain, but in practice, accomplishing that is far from simple or assured.

There is limited evidence, at least so far, that retailers, manufacturers and other shippers are willing to pay higher-than-market prices to ship goods using alternative fuels, except for a few pioneers. Despite S&P Global Sustainable1 reporting that about 4,000 companies have publicly committed to reducing Scope 3 emissions, which includes outsourced maritime and other forms of transportation, only a few large container shippers have agreed to pay above-market rates for zero-carbon solutions. Among them are members of a buyers' association led by the Aspen Institute and including Nike, Levi Strauss, Tchibo and Schneider, which has pooled members' cargo and is seeking competitive bids from ocean carriers for zero-carbon transport.

For most cargo owners, the voluntary system alone will not achieve the IMO's revised targets. The IMO must introduce regulations within the next two years to bridge the gap between zero-carbon and traditional bunker fuels. A key question is whether IMO member states can agree to a carbon price that is high enough to neutralize or mitigate the significant cost differential between the fuels. As of October 2023, the effective price of methanol was more than six times that of low-sulfur fuel oil, while the effective price of ammonia was nearly nine times the price of low-sulfur fuel oil, according to one ocean carrier's analysis. Data from S&P Global Commodity Insights shows "bio-bunker" fuel prices are approximately 40% higher than crude oil-based products.