For decades, the global supply chain has been fueled by the dirtiest and cheapest fuel, a sludgy by-product of oil refineries called bunker fuel or marine oil. Black smoke rose from the world’s fleet of 50,000 cargo ships and accounted for 3% of annual global carbon emissions, a larger share than all but six countries. But cheap fuel meant cheap shipping, and there was little incentive to do anything about it.
In the last two years, the drumbeat for decarbonizing the shipping industry has intensified, and the path to zero-emissions shipping began to revolve around hydrogen-derived fuels – which emit no carbon when burned – and their carriers such as ammonia or methanol.
However, hydrogen production is an emerging industry and the fuel is currently being produced in small quantities at prices expected to be two to five times more expensive than marine fuel oil. For cargo ships refueling in excess of 1,000 tons at a time, these prices are unattractive, if not prohibitive.
As long as fossil fuels are cheap, carbon-free fuels will not catch on. A carbon tax changes the calculus of what fuel an industry uses by making fossil fuels more expensive.
Make bunker fuel as expensive as hydrogen
According to a report (pdf) released this week by the Getting to Zero Coalition, an industry group led by think tank Global Maritime Forum, to make zero-emission fuels competitive, every tonne of carbon emitted by burning marine fuel is saved , needs to be taxed at an average of $200 per tonne of carbon emitted to phase out emission-creating fuels between 2030 and 2050.
Burning a ton of ship oil releases 3.2 tons of CO2 into the atmosphere. A carbon tax of $200 per ton would therefore add $640 to the price of a ton of marine fuel, which is about $600 per ton today, for a total of $1240, more than doubling the fuel cost at the bunkering station for each ship. There are many market forces that will determine the future price of green ammonia fuel, but estimates are that it will be in the $1300-$2400 per tonne range once it is produced at scale.
Government measures such as tax credits per tonne of emissions reduced could help close the gap further.
The technology is there, but not the political will
The Forum’s report outlines several market and regulatory scenarios surrounding effective carbon pricing.
Currently, $200 is the median price based on starting at $11 and potentially increasing to as much as $360 depending on other mechanisms in place. Kasper Søgaard, head of institutional strategy at the Global Maritime Forum, says a carbon price below $200 could be effective, especially if the funds are used to expand and scale production of green hydrogen and ammonia, which is what lowers the price. Sometime, perhaps around 2040, when a global green hydrogen infrastructure is in place, banning fossil fuels could be more efficient than discouraging their use through carbon prices.
The question, according to Søgaard, is not whether the technology to decarbonize the shipping industry is there, but whether “the policy will be there to make this investable”.
The International Maritime Organization (IMO), the UN agency tasked with regulating the shipping industry, is expected to start talking about carbon pricing later this year. The Marshall Islands, a small country that will have an outsized impact at the IMO, has proposed a carbon price of $100 per tonne, rallying support from some countries and opposition from others. Maersk, one of the world’s largest container shipping companies, has proposed a carbon price of $150 per tonne. The International Chamber of Commerce, an industry group that represents shipowners, says they support a carbon tax, although they haven’t set a number they will support.
Passing a resolution at the IMO can take time and is fraught with competing interests that can slow or dilute progress, but a serious look at carbon prices would go a long way in establishing “a clear direction for capital,” he said Sogaard. “It removes that uncertainty that makes running businesses really, really difficult.”
Banks and corporations could start investing in green hydrogen and ammonia infrastructure and the ships that could use it, knowing this is the direction the industry is headed. There are some pilot projects (pdf) testing ammonia fuel on ships. Ammonia used as fertilizer is already transported by sea, and these ships will likely be the first to use their cargo as fuel.
The crisis in the supply chain shows that shipping can afford higher fuel prices
In the years leading up to the pandemic, the common wisdom in the shipping industry was that the market would not support prices above $3,000 per container. Industry resisted the cost of decarbonizing their ships, arguing that it was too expensive and would result in higher prices for consumers. A study published just before the pandemic by the Energy Transitions Commission, a London-based think tank, estimated that the cost of decarbonization increases the final cost of a finished product by about 1%, equivalent to a $1 increase in price $100 pair of sneakers.
Then the pandemic struck, triggering the supply chain crisis that sent container prices skyrocketing, up to $15,000. Turns out the market could afford to pay more to ship our stuff. Right now, most of the astronomical rise in container prices is going into sheer profit for shipping companies, the largest of which have each raked in billions of dollars during the pandemic. As the supply chain crisis eases, container prices could settle at a figure that takes into account the cost of decarbonizing shipping.