Shipping and the transition to net zero

It will cost an estimated USD 1.65 trillion to decarbonise the shipping industry. What is the current state of the industry and what are some of the investable solutions that are enabling the transition?

The recent Net Zero Transition Forum, convened by Lombard Odier and the University of Oxford, gathered expert opinion for a panel event on the future of the shipping industry regarding the necessary transition to net zero.

 

Need to know Decarbonisation commitments are becoming more prevalent in the shipping industry. So is the technology required to enable tankers to cut emissions But the long lifespans of ships and requirement for dock infrastructure to also be overhauled present clear capex challenges Exciting innovations – from wind-propulsion to marine batteries and hydrogen generation at sea – can propel zero-emission shipping in the future, generating clear implications for investors

 

What needs to change?

The shipping industry is responsible for around 90% of global trade. While it has one of the lowest carbon footprints in terms of freight transport – roughly 1% of the emissions of air travel – the sheer size of the industry means that it ultimately balances out to be roughly equivalent in terms of global emissions. Maritime trade is on track to increase by as much as 150% between now and 2050, meaning this footprint will get considerably larger without rapid improvements to carbon efficiency.

There are a number of financing requirements when it comes to reforming the industry, according to the European Bank for Reconstruction and Development’s Green Economy and Climate Action Director, Gianpiero Nacci. Significant capex is required to replace an ageing fleet which had an average age of 21 years in 2019. Liquidity is needed to deal with the impact of the pandemic, while regulatory requirements, both existing and incoming, spell out additional costs for fleets.

The pace of these regulatory requirements in particular are ramping up, according to JS Global Advisory Managing Partner, Paul Stuart-Smith. The International Maritime Organisation (IMO) has mandated a reduction in carbon intensity as an average across international shipping by at least 40% by 2030, and is pursuing and absolute target reduction of at least 50% by 2050 compared to 2008. Next year, the body will decide whether to move forward with plans to revise that target to make it a 100% net zero goal by 2050.

 

What are the solutions?

How can the shipping industry meet the scale of the challenge presented to it? The panel discussed a number of technological innovations that are in the process of being rolled out that stand to revolutionise the sector. Stuart-Smith identified landside infrastructure as one of the most important developments that is required. For example, Rotterdam is developing a circular economy hub. The proposed hub would include the capacity to recover waste heat from a refinery to heat 16,000 homes, use offshore wind to generate electricity and trap 37 million tonnes of CO2 under the sea over a 15-year period.

Zero Emissions Ship Technology Association Secretary General, Madadh MacLaine gave some insight into the technological advancements that are already taking the shipping industry closer to net zero. Wind propulsion technologies, for example, harness energy to propel vessels, reducing power demand by 20% or even up to 63% with route optimisation. These solutions can be retrofitted and even folded away to ensure seamless and safe operations. Advancements in battery technology are also integral to the success of the transition. Marine batteries have now reached a stage where they are containerised, meaning they can be swapped out without the ships having to come into port. They deliver instant power up to multiple MWh and have the greatest energy efficiency of any fuel or energy storage system.

Hydrogen when used as a fuel in hydrogen fuel cells provides efficient, silent, zero emission power generation. Green hydrogen can power fuel cells to provide efficient, silent, zero emission power generation. Fuel cells convert hydrogen and oxygen into electricity and heat and emit only pure water.

Senior Sustainability Analyst Dominic Tighe outlined two phases necessary for shipping to reach net zero. The first is the energy efficiency stage, which encompasses innovations such as ship design, hull optimisation, route efficiency, wind power, and air lubrication to reduce friction. This alone is not enough to take the industry to net zero. It is estimated that innovations such as these could halve carbon intensity over the next 10 years. Further decarbonisation is possible through the development and utilisation of zero-emitting fuels, such as hydrogen and ammonia.

 

The investment opportunity

LOIM employs a thematic assessment in order to find best solution providers. This process works by selecting companies that are exposed to the themes that are central to the transition: decarbonising supply, managing supply and demand, enablers, as well as greening demand. Our proprietary approach - Climate Value Impact (CVI) - captures both the preparedness of companies for the climate transition ahead, as well as the financial impact on risk and return. This more granular understanding of the shipping value chain can help build up high conviction portfolios that give targeted exposure to the innovations required in the maritime sector.

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