Interview: Carbon insetting is applicable to all green fuels

As the maritime industry looks for ways to reduce CO2 emissions and reach its ultimate goal of net zero, carbon insetting is emerging as a promising strategy to tackle these challenges. While some shipping companies have already pioneered carbon insetting, others still perceive it as uncharted territory.

In short, carbon insetting is a term used to describe all initiatives that reduce emissions throughout a company’s own supply chains and operations. Such initiatives are directly related to the company’s business and may span from transitioning to alternative fuels to improving energy efficiency and collaborating with other stakeholders within the supply chain.

Earlier this year, a consortium of maritime organizations introduced ‘the world’s first’ carbon insetting program for zero-emission shipping. Initiated by Dutch shipping companies Future Proof Shipping (FPS) and Zero Emission Services (ZES), as well as 123Carbon, the one-stop platform for carbon insetting in multimodal transport, the program aims to develop, test, and validate methodologies for ships powered by swappable batteries and hydrogen, using the Smart Freight Centre’s Book and Claim framework, which separates emission reductions from the transportation of goods.

Some maritime companies including Stolt Tankers, Unifeeder, Stena Line, Mitsui O.S.K. Lines (MOL), Norden, HMM and others recently decided to voluntarily incorporate carbon insetting into their sustainability agendas. However, carbon insetting still lacks guidelines and regulatory framework at both the EU and global level.

Offshore Energy had the pleasure of speaking with Jeroen van Heiningen, Founder and Managing Director of 123Carbon, about the potential of carbon insetting and its applications in the shipping sector.

• OE: What is carbon insetting from the maritime industry’s perspective? How can maritime companies lower Scope 3 (and Scope 1) emissions with the help of carbon insetting?

van Heiningen: Carbon insetting is a process by which operators within the transportation sector, who wish to decarbonize their fleet, can share the cost of carbon reduction projects with supply chain partners that are willing to pay the green premium. These partners can include direct customers or the broader market. Alternatively, operators can pay for their decarbonized transport through verified carbon claims.

Based on a globally accepted book-and-claim methodology, and supported by low-carbon reduction measures, platforms such as 123Carbon enable organizations to verify, register and manage their low-carbon activities via a safe and fully encrypted process. Through the use of blockchain-backed environmental attribute certificates (EACs), 123Carbon can provide complete transparency regarding the sustainability credentials of a specific low-carbon project.

• OE: What are the benefits of carbon insetting compared to carbon offsetting?

van Heiningen: Unlike offsets, insets represent concrete reductions realised within the supply chain, which can be allocated to freight forwarders and shippers based on a globally developed book and claim methodology. This flexible allocation allows for an acceleration of low carbon initiatives, as opposed to the retrospective mitigation of carbon emissions through offsetting, via schemes such as reforestation.

As a result, insets improve the net environmental performance of the transportation industry as a whole.

• OE: Which segment within the maritime industry has the biggest potential for carbon insetting? Are there any limitations in this respect?

van Heiningen: Insetting is an essential instrument to reduce all scope 3 emissions, not just transport or marine. However, within the marine industry, insetting has taken off specifically within the container segment and we are now seeing a spill over to other maritime sectors that are looking at insetting to recover costs.

The critical limitation within insetting is that it needs to be done on a modality-per-modality basis. Unlike offsets, you need tailored insets to reduce these specific emissions per modality.

However, the advantage is that insetting is a truly global market and is applicable to all fuels, from biofuels and bio-LNG, to ammonia and hydrogen – all are available for insetting.

Freight forwarders are a key focus, as they sit between the carriers and shippers, and are vital in taking full advantage of the environmental benefits of insetting and passing these benefits on to their customers.

There are essentially two markets for insets, one is the business sector, where ship owners and operators directly allocate or sell insets to their customers. The other is more of an “over-the-counter” market, which will provide smaller players with a potential entry-point into the inset market by allowing them to set up their own insetting systems. Ultimately, insetting needs to be made available to everyone.

The strength of carbon insetting is in its multi-modal approach. To decarbonize the entire supply chain, it is vital that efforts are considered across all transportation modalities together, including air, road, rail and sea.

• OE: What is the role of carbon insetting in accelerating the uptake of low-carbon fuels?

van Heiningen: Insetting is primarily a financing instrument, providing a guarantee to a ship owner/operator that they can recover the costs of low-carbon activities, and spread this cost, not only across the physical cargo owners, but throughout its entire customer base, to any customer that is willing to pay.

There are a number of barriers that exist when it comes to the adoption of low-carbon fuels at scale. The significant cost compared to fossil fuel counterparts, limited availability versus significant demand, as well as a fragmented global supply chain.

In sharing the cost of low-carbon initiatives throughout the supply chain, insetting represents a proven and viable means of stimulating low-carbon fuel production, at scale. Furthermore, the use of sophisticated digital platforms to facilitate the creation and distribution of carbon insets connects fuel buyers and sellers from across the global value chain, removing the geographical barriers that arise from sourcing through physical supply chains.

• OE: How can carbon insetting help shipping companies meet the current and upcoming environmental regulations?

van Heiningen: Environmental regulations are forcing cargo owners to adopt low carbon solutions. However, they only provide limited support in recovering the costs of those solutions. Insetting can ensure that a cargo owner can remain (price) competitive by allocating this green premium to customers that are willing to pay.

However, there is one restriction to environmental regulations which may narrow the insetting market. Where the adoption of a fuel has been used to comply with an environmental regulation, the ship operator is not allowed to allocate the green premium to a customer that is located outside of its customer base.

The development of carbon insetting will help to significantly accelerate the adoption of low-carbon fuels, at scale, by addressing the two key barriers that inhibit its development, namely cost and a fragmented supply chain.

• OE: What are the major takeaways from 123Carbon’s recent carbon insetting projects in shipping?

van Heiningen: 123Carbon has executed insetting projects across all modalities, using a variety of alternative fuels, making it the most widely used insetting platform in the world. As all of these modalities have their own specific requirements, it is important that we provide a solution that is flexible enough to deal with all of these different projects. However, they also need to be tailored to their specific solution, whilst maintaining a standardised approach.

Many ship operators are interested in using insetting to decarbonize, but only the more advanced sustainability-driven customers are currently driving demand. We need stronger signals from institutes, such as SBTI, that demonstrate how powerful insetting is as an instrument to cargo owners in reducing their supply chain emissions.

• OE: Is there enough willingness among shipping stakeholders to incorporate carbon insetting in their decarbonization strategies?

van Heiningen: The concept of mass balancing is gaining visibility and ship operators are increasingly aware of carbon insetting – but knowledge and understanding remains low. Those that do know about it can see the potential, which shows that the willingness is absolutely there. We do, however, need a substantial amount of education to ensure that these operators understand the detailed requirements of building a powerful insetting programme, that complies with the globally-accepted methodologies.

• OE: What is needed for carbon insetting to scale within the maritime industry?

van Heiningen: There are two primary elements that we need to address for this market to be fully scalable. One, requires a better understanding of the interaction between insetting and the mandated markets, specifically with regards to the way that FuelEU Maritime can affect the insetting process of a ship owner.

The other key factor is that inset buyers (freight forwarders and cargo owners) need to be reassured by the GHG protocol and SBTI that well-executed transparent, high integrity insets, like the ones 123Carbon delivers, are an accepted instrument to reduce supply chain emissions. The first signals of this are very positive, however, the market is still waiting for final guidance from these authorities.