Decarbonization: Why are partnerships and coalitions so important?

The maritime industry’s mission to clamp down on emissions hasn’t been derailed by the COVID-19 pandemic as many feared could be the case.

Obviously, the pandemic has had a major impact on the short-term activities as numerous meetings at the International Maritime Organization (IMO) had to be postponed.

The impact on the trade and the supply chain has also been evident, however, decarbonization and sustainability remain on everybody’s minds.

Shipping needs to make a radical shift to zero-carbon energy sources in the coming three decades to reduce the sector’s total greenhouse gas emissions by at least 50% of 2008 levels by 2050 – a target set by the IMO.

A number of companies from the sector are even moving their ambitions further, announcing plans to become completely carbon-neutral by 2050.

Therefore, the willingness among industry stakeholders exists as they are fully aware of their responsibility to cut the sector’s carbon footprint, and that is the first and, maybe, the most important step, because where there is a will there is a way.

However, finding the way to do so might be a little trickier than we may think.

This transition requires significant infrastructure investments in new fuel production, supply chains, and a new or retrofitted fleet.

The endeavor is expected to cost the industry over $1 trillion.

There is a long way to go for companies to achieve these cuts in reality, especially since numerous technologies that are said to be those with the greatest potential are still in their early stages of development. Most notably new fuels like ammonia and hydrogen.

As a result, we have seen numerous companies forming coalitions and partnerships as they are aware they cannot do it alone.

One of such coalitions is the Getting to Zero Coalition, launched in September 2019 at the UN Climate Action Summit in New York.

The coalition gathers over 120 companies within the maritime, energy, infrastructure, and finance sectors, supported by key governments and IGOs. It is committed to having commercially viable zero-emission vessels operating along deep-sea trade routes by 2030.

Some of the most notable names include Maersk, HMM, Golden Ocean, Shell, Trafigura, BAE Systems, DSME, Eagle Bulk, DNB, Engie, Man Energy Solutions, Norden, ONE, Total, and many more.

The coalition is working on four different areas:

• Exploring fuels, technologies & transition pathways, by narrowing technology and fuel options as well as mapping out safety implications, guidelines and required regulations for scaling up new fuels.
• Motivating first movers to kickstart shipping’s zero-emission future, by exploring policies, demand drivers and funding mechanisms to motivate and de-risk first-mover investments.
• Closing the competitiveness gap for zero-emission shipping, by exploring policy instruments and market-based measures to close the competitiveness gap between conventional and zero-emission fuels and associated infrastructure to encourage mass uptake.
• Exploring global opportunities for zero-emission fuels exports, by mapping countries with the potential to generate and export zero-emission fuels.

In August, the coalition already released preliminary results of a mapping exercise of zero-emission pilots and demonstration projects underway in shipping.

Insights like these will prove to be invaluable as they provide an overview of what is the industry doing across the maritime spectrum, which can help to build shared confidence in pursuing new projects and create an opportunity to share learnings across the board.

Similarly, in June this year, industry majors led by shipping giant A.P. Møller – Mærsk have teamed up in an effort to develop new fuel types and technologies by launching the Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping.

Aside from Maersk, the founding members include ABS, Cargill, MAN Energy Solutions, Mitsubishi Heavy Industries, NYK Line, and Siemens Energy.

The initiative comes as the industry charts its path toward achieving the IMO 2050 target and vies to fully decarbonize operations. However, in order to be able to do so, new fuels and a systemic change in the industry are needed.

In anticipation of the final decarbonization strategy set to be adopted by the IMO in 2023, when more clarity about the way forward would be made available, companies have started to plan for the future.

Having said that, setting up baselines and benchmarks while identifying the pathway toward achieving IMO decarbonization targets is challenging.

Therefore, collaboration, open dialogue, and identifying synergies have opened up a way to accelerate the transition.

“Companies have not lowered their ambitions on decarbonization. However, a lot of companies have been struck really hard by the COVID-19 situation and it is fair to say that we are seeing increased interest in collaboration also driven by a lack of resources,” Bo Cerup-Simonsen, CEO of Maersk McKinney Moller Center for Zero Carbon Shipping said in a recent ABS webinar titled Trade Evolution and Partnership: Impact on Decarbonization.

“Based on the response we are receiving now in setting up our center, no-one has said that they decided to abandon their ambitions on sustainability. Instead, they are interested in collaboration to make it happen. We had that sentiment prior to COVID-19, but this has only been reinforced during this period.”

“That is why this Maersk McKinney center is all about, it is a collaboration platform, and we are seeing a lot of interest in joining this initiative.”

The first step shipping companies are focusing on in the energy transition process is increasing energy efficiency and optimization of operations.

Bolstering energy efficiency of the fleet goes hand in hand with cutting costs and as such, is excellent for the business. At the same time, it is also good for the environment.

There is a myriad of solutions to pick from the market which can help shipowners save fuel and cut GHG emissions from their vessels including wind-assisted ship propulsion, air bubbles, anti-fouling, and different software solutions for performance optimization.

Nevertheless, going beyond energy efficiency means is very difficult to achieve on an individual basis, Simonsen explains.

“We are seeing a huge interest from companies to get a grip on and strategize on decarbonization. It is really hard to understand what are the options on the table, scalability, cost levels, safety issues, and regulatory elements. So, there is a general understanding among companies that while energy efficiency can be handled by the existing technology and supply chain companies and consultancies, when going into the next phase of decarbonization we will need a new level of collaboration to really understand how all these different pieces of the supply chain play together,” he added.

“That’s actually a new development that we will see in the maritime sector over the next decade. I really believe that we will see a crystalization of what are the collaborative work processes and collaborative platforms, outcomes, and timelines. This is something all industry players in the maritime industry will add to their own in house decarbonization strategy.”

The biggest challenge for the industry will be building a completely new fuel industry in a rather short period of time, a couple of decades, Ole Graa Jakobsen, Head of Fleet Technology at A.P. Moller-Maersk, said during the webinar.

Overcoming barriers in developing technical solutions will be key.

As explained, producing a carbon-neutral fuel will also mean massive investment, which many companies are worried about making, especially having in mind the ongoing scenario.

Even once the new fuels become available, building the infrastructure and logistics tailored to different shipping sectors’ needs will require a colossal effort from across the supply chain.

What is more, many stakeholders are worried about returns on investment.

Cost is another major stumbling block for the industry players, driving the need to incentivize the transition to cleaner fuels and innovation in the sector.

One way of addressing this is by introducing a carbon levy on marine emissions.

Carbon pricing is only starting to be investigated as a potential way to go to fund the energy transition of the sector and create a level playing field on the market.

To remind, in December 2019 shipping associations across the maritime sector submitted a proposal to the IMO for the establishment of a $5 billion worth IMO GHG reduction research and development program.

Under the proposal, cosponsored by BIMCO, CLIA, ICS, INTERTANKO, INTERCARGO, INTERFERRY, IPTA and WSC, the core funding would be collected via a mandatory R&D contribution per tonne of fuel oil purchased for consumption.

It proposes $2 are collected per tonne of fuel over a period of ten years.

The discussion on the proposal has been delayed due to COVID-19 related restrictions.

Jakobsen believes another major challenge will be getting started with the supply chain.

“When we start moving to other options down the road, there will be much more expenses. We don’t expect our customers will be able to cover those costs, so we will need some kind of incentive to be put in place in order for the green fuels to be able to compete with fossil fuels. We need some sort of a mechanism to support the carbon-neutral solutions,” he pointed out.

“We are having discussions with fuel producers who want to get started with the production of new fuels. However, we cannot ensure them that we will take the fuel as there is still no economic business case in doing so. Therefore, this represents a big stumbling block and we need to get moving faster to remove such obstacles.“

According to Jakobsen, in order for the sustainability strategies to be implemented and become successful, they have to make business sense.

Therefore, the process should be taken out of the sustainability offices and include commercial and financial officers.

Speaking on Maersk McKinney Moller Center’s next steps, Simonsen said the center plans to develop its own positions both on the best energy and technology solutions and use the center’s technological insights to bring forward ideas and feedback to regulatory authorities as well.

“It is absolutely critical and central in our strategy to contribute to the development of regulations that are effective, creating value for society in a robust manner and promoting the maintaining or increasing of safety levels at sea, while ensuring the competitive landscape and playing field for commercial actors in the shipping industry are also robust and predictable,” Simonsen said.

“Altogether, regulation will play a very important role in this, and by using substantial resources on working on the technical, energy, and operational side, we will have a solid insight that we can bring forward to authorities in order to make sure that we get regulations that are really good.

“It is about innovating on the technological side and creating mechanisms that will enable those solutions to be implemented where regulations play a central role.

Regulatory certainty is key for building confidence between technological solutions emerging and new regulations being implemented paying the way for investments to be made with more confidence as well.

“Financial instruments are developing very quickly towards attractive financing of sustainable solutions. We would also help from our side to create confidence from the investment community that shipping has a lot to offer in terms of decarbonization achievements and that green funding is made available to shipping,” Simonsen added.

“We need to ensure that it is a good business to both help mature developed solutions and to also step ahead and take a lead in implementing those solutions, and scale up so you are not punished for investing in R&D but there is a good incentive for doing that as well.“

One of such instruments aimed at incentivizing energy transition by financing green initiatives are the Poseidon Principles, a regulatory framework launched in 2019 by eleven founding banks.

The founding banks included ABN AMRO, Amsterdam Trade Bank, Citi Bank, Credit Agricole, Nord/Lb, Danske Bank, Danish Ship Finance, DNB, ING, Nordea, and Societe Generale.

The principles now cover over $150 billion in loans to international shipping.

The general idea behind the framework is for the signatory banks, as capital providers, to support the objectives of the IMO on cutting GHG emissions by 50 percent by 2050 when compared to 2008 levels.

In January 2020, crude oil and petroleum tanker company International Seaways secured credit facilities worth $390 million, which included a sustainability-linked pricing mechanism.

The adjustment in pricing has been linked to the carbon efficiency of the INSW fleet as it relates to reductions in CO₂ emissions year-over-year, such that it aligns with the IMO’s 2050 GHG reduction target.

In July, Ardmore Shipping Corporation completed its first sustainability-linked finance facility with the Netherlands-based ABN AMRO.

The tanker owner said that the new $15 million receivables facility replaces its existing receivables facility and contains pricing adjustment feature linked to its performance on carbon emission reduction and other environmental and social initiatives.

In conclusion, as Simonsen pointed out, the industry has a good overview of what needs to be done on both the technical side as well as the regulatory side, which is a good start.

“We will be working in an existing ecosystem of activities and help to create the overviews so that individual players can understand where to release their creativity and resources,” he said.

“I think the momentum is there to push this agenda ahead and we have the wind in our back also from the global political scene. Another element that will be extremely important to the mix is a collaboration with the authorities and political systems across the globe.”