The ultimate switch

by Delphine Gozillon, Shipping Officer, Transport & Environment (T&E) Making the switch from dirty to clean shipping fuels will be an uphill battle. It hasn’t started yet as the sector is still 99% reliant on fossil fuels and is responsible for about 3% of global anthropogenic emissions. But the clock is ticking; shipping is expected to contribute to the European Union’s goal of climate neutrality by 2050. Among the 14 legislative proposals of the Fitfor55 climate package discussed by policymakers, one has the potential to finally drive the uptake of sustainable marine fuels finally. But the draft law proposed by the European Commission (COM) risks the industry switching to another fossil fuel, shows one of our recent studies. The European Parliament and the EU Member States can fill the pitfalls by making crucial changes in the next few months.

In July 2021, COM proposed the firstever legislative initiative requiring ships to progressively switch to alternative marine fuels. It has a unique design: a goal-based greenhouse gas (GHG) intensity target, the stringency of which increases every five years, requiring ship operators to reduce the carbon footprint of the energy used onboard vessels. The target is expressed in Well-to-Wake (WTW) CO2 equivalent terms to account for all the lifecycle GHG emissions (CO2, CH4, and N2O) of the different fuels and engine technologies. Figure 1 shows how GHG intensive fuels progressively cease to comply with the proposed GHG targets (expressed as thresholds of gCO2e/MJ of energy used).

Technology-neutral – ostensibly

While adopting a life-cycle approach and accounting for all GHGes is undeniably an improvement compared to the existing legislations of the International Maritime Organization (IMO), a deeper analysis of the proposal raises serious concerns about the effects of a ‘technology-neutral’ target if introduced with no safeguards.

First, the FuelEU Maritime proposal has limited ambition in the first 15 years of its application. Half the fuel GHG intensity improvements will occur under normal market conditions and/or due to shore-side electrification.

Further, requiring only 13% fuel GHG improvements by 2039 as proposed by the draft law leaves the remaining 87% of the effort to the ensuing ten years if shipping is to decarbonise by 2050, as called for by the EU Climate Law, the block and its Member States’ declarations at the 2021 United Nations Climate Change Conference in Glasgow (COP26) and within IMO. This decarbonisation trajectory would be unrealistic for any sector.

As a result, fossil liquefied natural gas (LNG)-powered vessels with 2-stroke high-pressure dual-fuel engines comply with the GHG intensity target until 2039. They could even extend their compliance at no cost as far as 2046, with no need to even blend in bioLNG due to the possibility to indefinitely bank the compliance surpluses in the early years of implementation. This scenario would accelerate the uptake of fossil LNG in the European shipping fuel mix: from today’s 6% to 23% by 2030 (Fig. 2). Ultimately, the currently proposed ‘technology-neutral’ design favours fossil lower-carbon fuels over truly sustainable options.

Dirtier ships, cold houses?

Why is driving LNG in shipping a problem at all? Controversy is growing over the use of it as a marine fuel and its alleged environmental benefits. In a 2021 report,

Source for all figures and Tab. 1: Transport & Environment

Fig. 2. The COM’s proposal would drive huge quantities of fossil LNG and biofuels the World Bank explicitly called on regulators to avoid any policy support to LNG in the maritime sector, including labelled as a so-called transitional fuel, due to the risk of stranded assets it creates. Many other studies show that LNG has marginal GHG benefits over existing marine fuels. Moreover, depending on the engine, LNG can even have a worse climate impact than the bunker it is supposed to replace.

Secondly, incentivising demand for LNG use in shipping is a danger to the climate. It can put energy security at risk, as Europe is urgently trying to diversify its gas supplies. Increasing volumes of LNG shipped as cargo is different from driving demand for LNG as a fuel to power ships. The former contributes to energy security, whereas the latter undermines it. Today, LNG is crucially needed for replacing gas supplies from Russia and ensuring European homes are heated next winter and the following years. In the light of this new context, driving further demand for LNG in a sector that did not rely on it would be playing with fire. Policymakers must seriously reconsider this.

Although there is no simple solution to limit the excessive growth of fossil LNG under the current design, stricter GHG targets would undoubtedly help set the compass to zero-emission shipping by 2050.

Tab. 1. T&E’s recommendations for revising FuelEU Maritime’s GHG target levels

Target year Business as usual (BAU) reduction BaU reduction + effect of onshore power supply mandate COM’s proposal T&E’s recommendation

2020

2025

2030

2040

2045

2050 -0.4% (91.4 gCO2e/MJ) -1.2% (90.6 gCO2e/MJ) -2.6% (89.4 gCO2e/MJ) -4.2% (87.9 gCO2e/MJ) -5.4% (86.9 gCO2e/MJ) -5.8% (86.5 gCO2e/MJ) -0.9% (90.9 gCO2e/MJ) -2.9% (89.0 gCO2e/MJ) -4.3% (87.8 gCO2e/MJ) -5.8% (86.4 gCO2e/MJ) -6.9% (85.4 gCO2e/MJ) -7.3% (85.0 gCO2e/MJ) 91.7 gCO2e/MJ

-2% (89.9 CO2e/MJ) -6% 86.2 gCO2e/MJ) -13% (79.8 gCO2e/MJ) -26% (67.9 gCO2e/MJ) -59% (37.6 gCO2e/MJ) -75% (22.9 gCO2e/MJ) -6% (86.2 gCO2e/MJ) -13% (79.8 gCO2e/MJ) -26% (67.9 gCO2e/MJ) -59% (37.6 gCO2e/MJ) -75% (22.9 gCO2e/MJ) -100% (0 gCO2e/MJ)

Incentives for hydrogen-based energy carriers would ensure a minimum switch to truly sustainable fuels in this decade.

Pay-to-comply

Decisions being taken now by EU policymakers will reverberate throughout the next decade. Waiting for the sector to ‘choose’ the right fuel is no option if shipping is to become decarbonised by 2050. By the time of the next review, the window of opportunity to launch necessary investments runs the risk of closing.

There has probably never been a better moment for the shipping industry to invest in sustainable fuels and technologies. The prices of fossil fuels are skyrocketing, which should push companies to shift away from fossil. At the same time, shipping revenues climbed to record high levels in 2021 due to post-Covid demand. Yet, there was no boom of investments in e-fuels: renewable fuels produced from green hydrogen that deliver deep and long-lasting emission reductions. Many barriers stand in the way of e-fuel development in shipping. They will struggle to find their way into the sector without dedicated requirements and incentives to support their uptake.

The FuelEU Maritime proposal lacks the appropriate tools and even disincentivises their use. Compliance with the GHG target can be achieved with much cheaper fossil fuels despite their limited GHG savings – or with biofuels that are immediately available off the shelf but are not scalable for the entire industry. Furthermore, companies can be exempted from compliance with the GHG intensity targets against a simple penalty payment. Paying annual fees might be cheaper for shipowners than making real investments in zero-emission vessels – and much less risky. This pay-to-comply

Fig. 3. E-fuel uptake pathway for the EU1

1,600

1,400

1,200

-fuel in EU shipping (P J) e 1,000

800

600

400

6% by 2030

200

0

2022 2024 2026 2028 2030 2032 2034 2036 2038

e-fuel supply/demand balanced 2040 2042 2044 2046 2048 2050

1 T&E analysis which uses e-ammonia as a “placeholder” for calculations. This does not prejudge other e-fuels uptake by ships. Analysis assumes no regulatory-driven energy efficiency gains by the sector until 2050 and full shore-side electricity use by all vessels at berth. Energy density of e-ammonia: 18.6MJ/kg.

mechanism should be removed, or at least limited in time, especially since underperforming ships can use flexibilities (i.e. “pooling compliance”) before paying the fine. Raising the level of the penalty would also help reduce the risk of non-compliance.

The best chance

The FuelEU Maritime must mandate a clear pathway to zero-emission shipping by 2050. Advancing the GHG targets’ ambition by five years would have the advantage of starting the necessary fuel switch from the entry into force of the first target while setting a progressive and realistic trajectory for European shipping to achieve zero-emission by mid-century. Overall, it would increase GHG emission savings by 478mt CO2e over the 2025-2050 period, compared to the COM’s proposal (Tab. 1).

The EU’s best chance to set shipping on track to decarbonisation is likely to target a minimum percentage of green e-fuels. This solution has been the approach of the Renewable Energy Directive for years, and the EU’s aviation

fuel initiative proposed in the same climate package as the FuelEU Maritime also targets a minimum share of e-kerosene in the mix.

For shipping, T&E recommends a mandate of 6% of the energy demand used by ships by 2030. Volume-wise, this would represent 85PJ of e-fuels under the proposed geographical scope of the FuelEU Maritime, which the sector could absorb with natural tonnage renewal. According to its 2020 Hydrogen Strategy, the EU already plans to produce 10mt of green hydrogen by 2030. If a 6% e-fuel mandate was introduced, the shipping industry would need just 20% of Europe’s domestic production. It sounds reasonable for a sector identified in the EU Hydrogen Strategy as hard to decarbonise.

Setting an e-fuel mandate would not prejudge the propulsion technology ships should be using. E-fuels are typically produced from renewable hydrogen, and multiple derivatives exist beyond the direct use of e-hydrogen: e-ammonia, e-methanol, but also e-diesel or e-methane. In other words, the mandate would respect the principle of technological neutrality at the heart of the FuelEU Maritime regulation while promoting in the mix genuinely sustainable fuels. It would apply in parallel with the GHG intensity targets and be met by ships thanks to using the compliance pooling system at the fleet level.

Last but not least, companies investing in e-fuels should be generously rewarded whenever they overachieve the minimum 6% target. This is where incentives come in, such as applying a multiplier. Should policymakers choose to introduce one on e-fuels – as recommended by the COM’s impact assessment – any GHG saving unit from e-fuels use would be counted several times. T&E recommends a multiplier of five, whereby e-fuels would become about five times cheaper when complying with the GHG targets.

To further boost their cost-competitiveness, only vessels running on e-fuels should benefit from banking and pooling their compliance surplus with other companies instead of any fuel type in the draft legislation. This approach would allow progressive companies to immediately deploy zero life-cycle e-fuels and lend/sell their surplus credits to other vessels/companies.

Multiplier and pooling incentives can help e-fuels catch up with other alternatives, such as biofuels. They could even make overall compliance costs cheaper than the current COM’s proposal if GHG targets get stricter (Fig. 4).

Looking for the summer

When it comes to decarbonisation challenges, including the cost and availability of sustainable fuels, shipping probably stands today where the road transport sector was some years ago. Electric cars were emerging on the market, say nothing of their limited use as finding a charging point was like looking for a needle in a haystack. The game changed when European CO2 standards for car manufacturers were introduced in 2020. All of a sudden, electric cars started conquering Europe’s roads. Early movers such as Tesla reaped the benefits thanks to a multiplier and a pooling system while driving the whole sector towards electricity.

For such a switch to happen in shipping, FuelEU Maritime will have to be fixed and target the ultimate fuels. The EU Member States are already discussing this, intending to take a position on 2 June 2022. September will likely bring a vote to the EU Parliament. ‚

Created over 30 years ago, the Transport & Environment (T&E) NGO has shaped some of Europe’s most important environmental laws: we got the EU to set the world’s most ambitious CO2 standards for cars and trucks; campaigned successfully to end palm oil diesel, secure a global ban on dirty shipping fuels, create the world’s biggest carbon market for aviation, and make Uber commit to electrifying much of its European operations; we’ve also helped uncover the Dieselgate scandal. Head to www.transportenvironment.org to discover our vision of an affordable zero-emission mobility system with a minimal impact on our health, climate, and the environment.