Fuels for climate goals, economic growth and energy security

Green options for transoceanic shipping

Tristan Smith calls on the government to act swiftly to ensure the necessary transition to zero-emission bunker fuels

There is an art to not wasting a good crisis, and the UK maritime sector is presenting a splendid opportunity to do just that.

This winter sees a particular combination of challenges, even cascading crises:

  • Gas prices are sky-high, driving inflation in the UK and abroad, so energy security is once again at the top of the political agenda.
  • Although the government’s 2050 net zero deadline is approaching fast, many key sectors – including UK domestic shipping – have yet to start their transitions.
  • The economy is weak, so the prospect for new public spending is poor.
Orkney’s Shapinsay ferry, powered by bottled ‘green’ hydrogen electrolysed with the aid of a local surplus of wind and tidal-generated electricity. While this solution may work well in short-range coastal vessels, fuel storage considerations make it unviable for transoceanic shipping. Photo: David Hibbert / Orkney Islands Council

Against this backdrop, UK shipping must start its transition to zero emissions. Ships play an important role moving people and goods into/out of the UK, but also around and within it. Domestic shipping services our ports and coastal and island communities, enables offshore activities, and moves large volumes of bulky items from where they’re produced to where they’re needed. In 2021 the UK was responsible for some 424.5 million tonnes of greenhouse gas (GHG) emissions resulting from its infrastructure and fleet of ageing ships.

The timescales now remaining to stabilise emissions in order to avoid global temperatures rising above 1.5 degrees are now very short: unless we succeed in approximately halving GHG emissions by 2030 (on 2010 levels), 2050 will be too late for emissions to reach zero. In which case the transition away from fossil fuels will need to be by 2040, entailing a wholesale change in energy supply chains and fleet technology within just 15–20 years from now.

Perhaps surprisingly, circumstances are in fact conspiring to make this feasible. Government has had a clear intent to decarbonise for some time, made stronger when it raised its targets to 100 per cent GHG reduction by 2050 (every sector needs to ‘do its bit’). But in domestic shipping although energy efficiency can always be increased, reaching zero emissions depends on building new energy supply chains and converting fleets. That means: importing or producing green hydrogen (made by using renewable energy) or hydrogen-derived commodities; converting to the appropriate molecule (hydrogen/ ammonia/ methanol); setting up new distribution, storage and bunkering; and creating new onboard storage and machinery. It also includes crew training, and developing safety and operational standards.

As a developed economy, the UK should be making a disproportionately higher effort than those of less developed ones. The COP champions have proposed that developed economies should achieve substitution in their current domestic shipping fossil use of ~30% to Scalable Zero Emission Fuels (SZEF) by 2030. For much of domestic shipping, that means electrification – either through shore power in port, or in many cases batteries. When the ship’s range is low enough to make batteries viable, battery-electric propulsion is the most efficient (therefore cheapest) way to use renewable electricity. But those whose range/operational profiles don’t suit batteries will need a liquid/gaseous fuel. For many, the cheapest options that can be produced with zero GHG emissions are ammonia and synthetic methanol. (Although hydrogen is the cheapest to make it’s much more expensive to store, impacting its competitiveness.)

The OPEC and Russia factors

One reason why this is such a compelling time to invest massively in SZEF/e-fuel production and use is because of current oil and gas prices. LNG has now clearly become a non-starter, closing off the option of its being seen as an alternative or ‘transition’ fuel. Whilst LNG can help reduce air pollution, it never offered a material GHG advantage. It was pushed on shipping by a few vested interests – mainly oil/gas majors. But there is now evidence that we can expect not only sustained high gas and LNG price in the near term, but also a sustained high oil price; OPEC is showing no interest in raising production to help lower prices. A decade ago, high oil prices triggered investment into non-OPEC production – OPEC could use their production rates to ‘control’ non-OPEC investment/production. But OPEC doesn’t need to do this any more – with decarbonising developed economies, new investment into oil production just creates stranding/stranded assets. This includes the risk of obsolescence and premature retirement in infrastructure and labour.

But the current UK administration is still misguidedly courting a certain tranche of ‘big business’ and the electorate by stimulating new oil and gas production. A longer-term perspective would – and should – modify the direction taken by their investment strategy.

The clear merits of green hydrogen production and use

Zero-carbon bunker fuel options for shipping. ‘Green’ hydrogen is produced by electrolysis, using renewable electricity. ‘Green’ ammonia combines ‘green’ hydrogen with nitrogen from the atmosphere. ’Blue’ hydrogen is produced from natural gas and requires carbon capture and storage. ‘Blue’ ammonia combines ‘blue’ hydrogen with nitrogen from the atmosphere. From Englert, Dominik; Losos, Andrew; Raucci, Carlo; Smith, Tristan. 2021. Volume 1: The Potential of Zero-Carbon Bunker Fuels in Developing Countries. World Bank, Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/35435. License: CC BY 3.0 IGO.

The obvious response to high oil and gas prices is to accelerate investment in renewable electricity and hydrogen. These investments are needed anyway to achieve the carbon budgets that are UK legislation through the Climate Change Act. The cost–benefit of those investments has significantly reduced; the gap between the current economy and a zero-emission one has narrowed. The high upfront CapEx in new assets and infrastructure has a much better payback time than 12 months ago.

The US government has already taken advantage of this synergy in their recently released Inflation Reduction Act. This unleashes $370bn of stimulation for renewables and hydrogen. Producers of green hydrogen will get a $3/kg tax credit for the first decade of green hydrogen production, a significant subsidy that brings the cost of hydrogen down from its current ~$3-6/kg, making it much more competitive with natural gas and oil. The UK has, at least, doubled its hydrogen production target (10GW) – but does not yet have the policy specifics to support or enable this. As these are detailed, they must help to unlock significant investment or we will be left behind the countries taking the bold steps.

But this isn’t just about economics – every MJ of clean energy reduces our demand for the oil and gas we import from Russia and other dictatorships, lowering the prices of those fuels and thus the revenues received by those regimes to finance their activities.

It is also about future GDP and trade; the skills and technology related to renewable energies are a critical and growing global need. The potential to export and monetise UK investment into these is huge. Unless government and industry line up for greater investment now, the benefits that should cascade from our being a front-runner in the global hydrogen economy will not be unlocked.

Who will pay for the transition to new fuels?

Many in the shipping industry have called for public spending to help shore up the adoption of new fuels. However, the treasury/budget situation is clear: we are unlikely to see spending lavished on shipping decarbonisation. Even before the current economic circumstances, despite evidence on the scale of decarbonising UK shipping, public spending was just £20m (2021–2) and now £60m (2022–3).

One solution is to use carbon pricing – that is, to tax domestic shipping fuels and use the revenues raised to finance shipping’s transition. But while this could be a good solution at the IMO, in the UK there is no obligation to specify what tax revenues are spent on. Whilst some of the revenues would hopefully be used as subsidies/support to the sector’s transition, it could also be the case that less than the full share of revenues raised might come back to the shipping sector.

For this reason, stakeholders should seriously consider the alternatives. Another solution is to apply policy and regulation to mandate a shift away from fossil fuels. This is often referred to as a fuel standard, and involves an obligation to produce and use energy with decreasing average GHG and carbon intensity. These policies reduce complexity relative to market-based measures like carbon pricing; you don’t need to collect revenues. A version of this that was already in place (the Renewable Transport Fuel Obligation, RTFO) has recently been extended from the road sector to include the supply of fuels to the maritime.

Either of these options is essentially fiscally neutral: either the shipping sector pays a new tax which generates revenues used to subsidise its transition, or it receives a mandate that provides the imperative to transition away from fossil fuel use, making a good business case for private-sector investment in electrification and SZEF production and use. The benefits of the market-based policy option are the flexibility enabled by its revenues and potential revenue uses. These can be particularly useful in addressing socio-economic unintended consequences and making sure that the communities around the UK dependent on shipping are not adversely impacted by its rising prices. So ultimately, it may well be a combination of these policies used to enable our transition.

What is unarguable is that we urgently need the government to give us clarification and specifications of whatever the combination will be, so that we can formulate strategies and decisions that enable us to build on the UK’s hydrogen and electrification opportunities, and to disassociate from imported fossil energy and everything that goes with it.

Dr Tristan Smith is Reader in Energy and Shipping at the Bartlett School Faculty of the Built Environment, UCL, and a joint author of the World Bank report The Potential of Zero Carbon Bunker Fuels in Developing Countries (2021).