The extension of the EU’s carbon market to the maritime sector sends a strong regulatory signal in favour of decarbonisation. But unless a life cycle approach is taken, the Emissions Trading System (ETS) could unwittingly favour fuels from non-renewable sources, writes Jim Corbett.
Jim Corbett is the European environmental director for the World Shipping Council, a trade association representing the international liner shipping industry.
Innovators in the maritime sector are eager to decarbonise fleets. Liner carriers are already investing in greenhouse gas (GHG) reducing technology and fuels for their newbuilds, relying on a strong EU Green Deal to ensure the supply of these alternative fuels.
Including the maritime sector in the EU Emission Trading System (ETS) should help deliver an effective market signal to support the decarbonisation of the industry. But a key question remains: Will EU ETS deliver intended GHG reductions, or drive investments toward brown energy sources rather than truly renewable fuels?
Vessels cannot use low-GHG energy from renewable production that doesn’t exist. Globally, investment rates in renewable energy must triple before 2030 to meet climate goals, according to International Energy Agency’s World Energy Investment 2022 report.
For shipping to decarbonise, investments by governments and industries must connect fuel production centres, supply networks, ports, and trade lanes.
To achieve this, all policy instruments must work together to drive investment in and use of energy sources that are truly sustainable across their full life cycle. Otherwise, we run the very real risk of merely shifting emissions from one sector to another or one geography to another.
For shipping, this means taking a life cycle perspective on fuel GHG impact – a well-to-wake as opposed to a tank-to-wake perspective.
The EU Green Deal is critical for driving this change. Three of Europe’s “Fit for 55” proposals for shipping promote life-cycle investment in renewable energy production, infrastructure, and use in maritime fleets (FuelEU Maritime, the Renewable Energy Directive, and the Alternative Fuels Infrastructure Regulation).
The EU ETS, which would put a GHG price on fuel consumption, has no such mechanism.
For industries confined to a fixed location and operations within the EU, this approach works well enough. But for a global industry like shipping, and a regulatory scope that reaches outside of the EU, this could pose a dangerous trap.
How critical is a life cycle approach in setting maritime market signals for success?
Essential, and this is why: An EU ETS emissions pricing policy that is focused only on shipboard emissions would undermine market incentives to adopt renewably derived fuels.
Methanol, synthetic LNG, ammonia, and hydrogen are among the potential green fuels for shipping, all derived through processes that consume energy. Energy for producing fuels can be either green (from renewable sources) or brown (from fossil fuel sources) thus creating brown or green marine fuels.
If the EU ETS only considers onboard GHG emissions, brown and green fuels used by ships will get the same treatment even though the full climate impact of brown fuels is significantly worse.
Also, green energy is scarce, and refineries can produce brown fuels at a lower price than green fuels.
Shipping leaders may be able to secure sources for renewably derived marine fuels – or may co-invest to produce green fuels along first-mover corridors. But most shipping companies buy fuel on the global market, and both European and non-EU energy companies produce fossil-derived marine fuels.
When the same ETS price applies to ships using the “identical” fuels onboard, there is a market signal favouring less costly brown fuels over renewable fuels. This inverse incentive, a perverse incentive from a climate perspective, becomes amplified when global marine fuel production occurs outside the reach of a regional ETS market.
Sending the wrong market signals from the EU ETS could present a direct barrier to decarbonising shipping.
It would mean more GHG emissions than intended from the consumption of brown fuels, and risk delaying investment in the necessary renewably derived fuels, obstructing the energy transition, and jeopardising the EU’s 55% GHG reduction target.
Fleets trying to decarbonise are put at a competitive disadvantage. To correct this market failure the EU ETS needs a life cycle framework ensuring that all fleets transition to renewably produced fuel and that GHG emissions really are reduced.
How could the EU ETS be adjusted to deliver carbon reductions in the maritime sector?
The life cycle perspective for maritime can be incorporated into the EU ETS either by changing the number of allowances that need to be surrendered or by discounting the price of EU ETS allowances when fleets choose renewable fuels over less costly fossil-derived versions.
For example, life cycle adjustments may be implemented through revisions to the EU’s shipping emissions monitoring, reporting and verification (MRV) regulation.
In either case, a life cycle framework provides a rigorous approach that is consistent with the other EU Green Deal measures to reduce shipping GHGs.
Getting the EU ETS signal right also supports Europe’s potential to become a major producer of renewable marine fuels. Currently, the volume of marine fuels sold across Europe ranks second among bunkering regions, about 20% of global demand.
Investments in renewable energy production and supply infrastructure could help Europe transition from a dominant provider of fossil-derived ship fuels (bunkers) to a premier supplier of fuels for decarbonising shipping.
More broadly, Europe might help build out green shipping corridors where global supply networks connect centres of renewable production of marine fuels with global refuelling hubs.
Life cycle considerations are built into other EU Green Deal legislation to promote production, delivery, and onboard use of low-GHG ship fuels.
EU Green Deal goals are better supported if the EU ETS maritime also aligns with life cycle principles, supporting the necessary investments across the maritime energy value chain to deliver the needed GHG reductions while securing the EU position as a global maritime hub.
Innovation leaders in shipping are eager to build and operate innovative onboard power systems with energy-efficient technologies, using renewably derived marine fuels distributed through a sustainable supply network.
The EU ETS pricing signals need to incentivise maritime sector responses that reinforce, rather than contradict, other EU Green Deal measures built on the life cycle framework.